Trouble on the Horizon – Severance Agreements and Recent Modifications to the Pennsylvania Unemployment Compensation Law
On June 17, 2011Pennsylvania Governor Tom Corbett signed into law the Legislature’s latest modifications to Pennsylvania Unemployment Compensation Law. The changes described below will take effect on January 1, 2012. Though presumably designed as a cost-cutting measure with regard to the Commonwealth’s budget issues, the modifications may have some unexpected consequences for attorneys and their clients when negotiating severance packages, and lawyers who practice in this area of the law should expect some interesting, and probably confusing, issues to arise in the future.
Generally speaking, the Pennsylvania Legislature revised 43 P.S. Section 804 to require Claimants to account for severance packages when applying for Unemployment Compensation Benefits. While it does not appear that the changes to Section 804(d) will require a potential Claimant to hold off on filing for unemployment benefits until after he has collected all of his severance payment, it does appear that they will adversely affect potential claimants’ eligibility for benefits. Although the new provisions may reduce eligibility for potential claimants, it seems likely that they could dramatically increase litigation as they appear to generate more questions than issues they allegedly resolve. Examples of the types of issues that may arise follow.
First Example: Very often the issues surrounding an employee’s Unemployment Compensation Benefits are handled within the context of a larger and more comprehensive employment matter between the employer and former employee. When the aforesaid employment matter is resolved in some way, it is not unusual for part of the settlement funds to be issued directly to the employee, with the remaining about issued directly to the employee’s attorney. It is not clear from the new Unemployment Compensation law whether the funds issued directly to the employee’s attorney would be considered as part of the employee’s severance.
Second Example: Sometimes an employer refuses to issue two (2) separate checks to the employee and his attorney. In this case, it is typical for the attorney to receive all of the funds, deduct any outstanding fees and costs, and issue a check for the difference to the employee. Although receiving an amount reduced by attorney fees and costs, the employer will generally issue the employee a 1099 or W-2 for the full amount. As above, it is not clear whether, in the context of Unemployment Compensation, the full amount, or the amount actually received by the employee would be considered as part of the employee’s severance.
Third Example: Sometimes an employer issues funds directly to the employee’s attorney in the same amount as the retainer already paid by the employee. The employer issues the attorney a 1099 for the funds remitted. The attorney, in turn, issues the employee a refund of the retainer paid. Would this refund be considered part of an employee’s severance package?
Fourth Example: Some employees’ settlements with employers include both a payment to an employee as severance and a sum for what is essentially punitive damages. The payment remitted for severance results in a W-2 issued to the employee by the employer while the payment remitted for “punitive damages” results in a 1099 from the employer, and is generally not subject to the standard taxes attached to salaries. In the alternative, some employers provide a lump sum without holding any amount for taxes and issue a 1099 for the lump sum. It is unclear how the Pennsylvania Department of Labor would deal with these situations. Would it consider the entire pre-tax-withholding amount to be an offset in terms of the employee’s severance package? If not, and it just considers the net amount paid, it could be to the detriment to the employee who got the lump sum as it would appear that the employee who got a pre-tax severance package got a larger amount and the Department of Labor may offset the larger amount.
As seen above, while the new additions toPennsylvania’s Unemployment Compensation could reduce potential claimant’s eligibility for benefits, they appear to raise more questions than the issues they resolve. It will be interesting to see how the issues raised above, and others like them, are dealt with by the Department of Labor and the Courts.
For the readers’ convenience, the additions to Pennsylvania Unemployment Compensation Law are as follows: 43 P.S. Section 804 of Pennsylvania’s Unemployment Compensation Law has been modified with an amendment to Subsection (4)(1) which now reads: “benefits shall be paid to each eligible employe who is unemployed with respect to such week, compensation in an amount equal to his weekly benefit rate less the total of (i) the remuneration, if any, paid or payable to him with respect to such weeks for services performed which is in excess of his partial benefit credit, and (ii) vacation pay, if any, which is in excess of his partial benefit credit, except when paid to an employe who is permanently or indefinitely separated from his employment and (iii) the amount of severance pay that is attributed to the week.”
43 P.S. Section 804(d)(1.1) has been added to the law and reads: “(i) ‘Severance pay’ means one or more payments made by an employer to an employe on account of separation from the service of the employer, regardless of whether the employer is legally bound by contract, statute or otherwise to make such payments. The term does not include payments for pension, retirement or accrued leave or payments of supplemental unemployment benefits. (ii) The amount of severance pay attributed pursuant to subclause (iii) shall be an amount not less than zero (0) determined by subtracting forty per centum (40%) of the average annual wage as calculated under subsection (e) as of June 30 immediately preceding the calendar year in which the claimant’s benefit year begins from the total amount of severance pay paid or payable to the claimant by the employer. (iii) Severance pay is attributed as follows: (A) Severance pay is attributed to the day, days, week or weeks immediately following the employe’s separation. (B) The number of days or weeks to which severance pay is attributed is determined by dividing the total amount of severance pay by the regular full-time daily or weekly wage of the claimant. (C) The amount of severance pay attributed to each day or week equals the regular full-time daily or weekly wage of the claimant. (D) When the attribution of severance pay is made on the basis of the number of days, the pay shall be attributed to the customary working days in the calendar week.”
Originally published on November 18, 2011 in The Legal Intelligencer and can be found here.