In August 2016, the Ventura County Auditor-Controller ignored decades of past practice and advised all County employees that, beginning in the tax year 2017, the County would change its current payroll policies and report as taxable income the maximum amount of paid leave that an employee is eligible to redeem in a year, regardless of whether she/he actually elects to cash-out that leave. The County sought to justify this change based on its newfound interpretation of a long-standing tax principle known as the constructive receipt doctrine.
The County’s interpretation of the constructive receipt doctrine was not based on any change in IRS law or regulations, nor did the County cite any decisional law to support its decision. Nevertheless, County Counsel opined that prudence dictates that the County act to reform its leave redemption (cash-out) plans.
County Counsel asserted that the annual leave/paid leave plans in the Memorandum of Agreement (MOA) between the labor organizations and the County triggered the County’s new interpretation of the constructive receipt doctrine, but acknowledged that the County could not unilaterally amend the collectively bargained plans. Nevertheless, County Counsel was confident that under the circumstances the labor organizations “are likely to agree to collective bargaining” on the subject.The arrogance reflected by County Counsel’s belief that the labor organizations would be obliged to bargain during the contract term to change their long-established paid leave plans pervaded the County’s ensuing bad faith conduct during subsequent collective bargaining with the Criminal Justice Attorneys Association of Ventura County (Association).
During the course of successor MOA negotiations, the County advised Association representatives that if it did not agree to amend its annual leave plan, the County would report, but not withhold, income taxes on reported constructively received income. Despite this representation, the County proceeded to treat accrued annual leave hours that are earned during a tax year as income and withhold taxes on such accrued leave as if the employee had actually received cash for the maximum cash-out allowed under the MOA. As a consequence, the County proceeded to garnish employees’ paychecks to withhold income tax on what the County regarded as constructively received income attributable to annual leave. This unilateral action significantly reduced paychecks for employees during the last three (3) payroll periods of the year. In some cases, leading to zero or near zero paychecks.
The Association filed Unfair Practice Charges with the California Public Employment Relations Board (PERB) alleging that that the County unlawfully engaged in bad faith bargaining while meeting and conferring over changes to the Association’s paid leave plan. Thereafter, PERB issued Unfair Practices Complaints against the County.
On February 28, 2020, following a 10 day hearing on the Unfair Practices Complaints, a PERB Administrative Law Judge issued a proposed decision finding that the County breached its duty to meet and confer in good faith and violated the Meyers-Milias-Brown Act, both by implementing its tax withholdings decision unilaterally without completing negotiations over the effects of that decision on mandatory subjects of bargaining and by its overall bargaining conduct during negotiations concerning proposed amendments to the paid leave plan.
The Administrative Law Judge not only ordered the County to resume bargaining with the Association over modifying the leave redemption plan to avoid constructive receipt taxation, but also ordered the County to compensate Association unit members for any financial losses incurred as a direct result of the County’s decision to implement its constructive receipt income tax withholding decision before completing negotiations over the effects of that decision.
Richard A. Levine is a partner at Rains Lucia Stern St. Phalle & Silver, PC. Richard frequently represents public employees in highly publicized civil and administrative proceedings with an emphasis on public safety employees. He represented the Criminal Justice Attorneys Association of Ventura County throughout the PERB hearing in the above case (Criminal Justice Attorneys Association of Ventura County v. County of Ventura, Unfair Practice Case Nos. LA-CE-1260-M and LA-CE-1268-M).