Argument report: Supplemental unemployment benefit payments are likely “wages” under FICA

Bradley W. Joondeph is the Inez Mabie Distinguished Professor and Associate Dean for Academic Affairs at the Santa Clara University School of Law.

Oral argument Tuesday afternoon in United States v. Quality Stores, Inc. was decidedly short. Perhaps the justices were ready to move on, having heard two arguments earlier that morning. Or perhaps the question presented—whether so-called “supplemental unemployment benefits” (SUB payments) qualify as “wages” for purposes of the Federal Insurance Contributions Act (FICA)—was not quite as scintillating as Monday’s debate over the President’s appointment powers under Article II. In all events, the hearing in Quality Stores ended after a scant 38 minutes, and the government appeared likely to prevail. Indeed, as the courtroom emptied, the real question seemed to be the precise rationale the Court would adopt in reversing the Sixth Circuit.

Assistant Solicitor General Eric Feigin began his presentation by repeating the essential contention contained in the government’s briefs: that FICA’s definition of “wages”—“all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash”—plainly includes the disputed severance payments made by Quality Stores. The Court “has construed the term ‘employment’ broadly to encompass the entire employer-employee relationship,” and the “payments here, which were paid only to Respondent’s employees and were keyed to the employees’ positions, salary levels, and length of service, clearly were part of the employer-employee relationship.”

In support of this basic claim, the government highlighted two points that had received less emphasis in its papers. First, it explained that “the basic definition of wages, both historically and currently, has been subject to specific exclusions for certain types of separation-related pay,” exclusions that “would be unnecessary if the basic definition of wages didn’t cover separation-related payments.” Second, the government noted that one of those historical exclusions (which appeared in the statute from 1939 to 1950) was for certain forms of “dismissal payments.” Congress’s repeal of that exception in 1950—both as a matter of statutory text and as evidenced by the legislative history—demonstrates that “payments on account of involuntary separation would from that point forward be covered as wages under FICA.” Feigin was barely questioned in his initial trip to the dais; he sat down after only 12 minutes.

In his turn at the lectern, Robert Hertzberg, counsel for Quality Stores, stressed that the government had conceded that some SUB payments are not “wages” for purposes of FICA—specifically, as spelled out in a series of revenue rulings, those tied to state unemployment compensation. And this concession, argued Quality Stores, fatally undermined the government’s position, for there is no plausible reading of the FICA statute that includes some types of SUB payments as “wages” but not others. Quality Stores also repeated (several times over) the essential rationale of the decision below: that Internal Revenue Code Section 3402(o)—a provision that directs employers to treat SUB payments “as if” they are wages for purposes of income-tax withholding—indicates that such payments are not, in fact, wages; that the Court has previously indicated that the term “wages” should have the same meaning for purposes of income-tax withholding and FICA; and therefore that SUB payments cannot be wages under FICA.

Quality Stores ran into real trouble, though, when Hertzberg was forced to concede that some forms of severance payments (those he termed “dismissal payments”) are uncontroversially classified as wages under FICA. This was a problem because the crux of Quality Stores’ textual argument was that an “unemployment benefit is not remuneration for services” because they “are provided to an individual to provide a safety net when they lose their job, to cover them during the period while they seek new employment.” But if that is what divides “wages” from “non-wages,” suggested Justice Ginsburg, it is difficult to see how any severance payments could qualify as wages.

Relatedly, Justice Scalia asked Hertzberg “[w]hy are they giving them the money, just out of love? I mean, [these employers] don’t give it to me when I retire.” In other words, Quality Stores would never have made any of these SUB payments but for the employer-employee relationship out of which they arose. This indicates that the payments, no matter their timing, were a form of compensation for the services the employees had previously rendered—that is, “remuneration for employment.”

In rebuttal, the government was forced to confront the weakest aspect of its position—namely, that if the disputed SUB payments made by Quality Stores were wages under the plain text of the FICA statute, there was no apparent basis for the IRS to treat other types of SUB payments (again, those tied to state employment benefits) as non-wages under FICA. Here, the government conceded that the revenue rulings adopting that position “are not consistent with the statutory text of FICA.” Instead, they “are a continuation of a practice that began in the 1950s and ’60s,” creatively described by the government as “a somewhat more freewheeling time in the history of statutory interpretation.” (Cue the Jimi Hendrix riffs.) Thus, if the government were forced to defend that position in a future case, it would do so not on the ground that it comports with the text of the statute, but “because Congress has taken the revenue rulings as a given and passed statutes that effectively assumed that the revenue rulings [were] effective.”

Justice Ginsburg then pursued a related point about the potential impact of the Court’s ruling: By holding that the payments made by Quality Stores constitute “wages,” would the Court be rendering recipients of these payments ineligible for state unemployment compensation? First, replied the government, there would be no such impact if the Court accepted the government’s position in this case. The IRS has long treated the type of SUB payments made by Quality Stores as wages, so accepting the government’s position would merely maintain the status quo. Second, though, the government conceded that if the Court were to rule in its favor by holding that all SUB payments constitute wages under FICA (and thus that the revenue rulings exempting certain SUB payments from the definition of wages were invalid), the decision “might have some effect on individuals’ eligibility for unemployment benefits under State law in those States that incorporate the Federal definition of wages as part of the calculation for eligibility for State unemployment benefits.” Nonetheless, said the government, the Court should not worry. If this caused any problems, the “States will be able to fix them.”

Through all of this, neither the Court nor the parties ever touched the larger issue that had excited several amici: the deference (if any) that courts owe positions taken by the government in the IRS’s revenue rulings.

At the end of the day, the justices seemed quite comfortable with the government’s reading of the FICA statute (and largely untroubled by its differential treatment of SUB payments). After all, if there is a problem in squaring the government’s overarching position on SUB payments with FICA’s text, it lies more with the exclusion of SUB payments tied to state unemployment benefits from “wages” than with the inclusion of payments like those made by Quality Stores. Moreover, if the IRS’s treatment of those other sorts of SUB payments indeed poses a problem, it is one for another day—and for a dispute few parties might have standing to litigate.

In Quality Stores itself, the Court is likely to say little more than this: SUB payments like those made by Quality Stores are wages under FICA because they plainly constitute “remuneration for employment.” And that is the only question the Court really needs to answer.