BILL ANALYSIS �
Senate Committee on Labor and Industrial Relations
Ted W. Lieu, Chair
Date of Hearing: April 10, 2013 2013-2014 Regular
Session
Consultant: Gideon L. Baum Fiscal:Yes
Urgency: No
Bill No: SB 390
Author: Wright
As Introduced/Amended: February 20, 2013
SUBJECT
Employee wage withholdings: failure to remit.
KEY ISSUE
Should the Legislature empower the Labor Commissioner or the
Commissioner's agents to pursue non-remitted payroll taxes from
employers?
ANALYSIS
Existing law provides that it is illegal for an employer to
willfully or with the intent to defraud fail to remit payments
to a health or welfare fund, pension fund or vacation plan, or
other similar plan for the benefit of the employees. (Labor
Code �227)
Existing law provides that if an employer fails to remit $500 or
more in payments to an above-described fund, the employer's
violation is a misdemeanor and shall be punishable by
imprisonment in a county jail for a period of not more than one
year, by a fine of not more than one thousand dollars ($1,000),
or both. (Labor Code �227)
Existing Federal law provides that any person who willfully
fails to collect or truthfully account for and pay over taxes
shall, in addition to other penalties provided by law, be guilty
of a felony and, upon conviction thereof, shall be fined not
more than $10,000, or imprisoned not more than 5 years, or both,
together with the costs of prosecution. (26 USC �7202)
Existing Federal law also provides that any person who willfully
fails to collect such tax, or truthfully account for and pay
over such tax, or willfully attempts in any manner to evade or
defeat any such tax or the payment thereof, shall, in addition
to other penalties provided by law, be liable to a penalty equal
to the total amount of the tax evaded, or not collected, or not
accounted for and paid over. (26 USC �6672)
Existing law provides that it is a violation of the law for any
employer or employing unit to willfully fail or refuse to make
any contributions which are due under the Unemployment Insurance
or Disability Insurance programs. (Unemployment Insurance Code
�2108)
Existing law provides that, after an employer has been
appropriately notified, any employer or person failing to
withhold the personal income tax (PIT) amount due from any
taxpayer and to transmit the same to the department is liable
for such amounts.
Existing law also requires any employer or person required to
withhold and transmit shall comply with the requirement without
resort to any legal or equitable action in a court of law or
equity. (Unemployment Insurance Code �� 13073 & 13074)
Existing law provides that any person or employer who, with or
without intent to evade ,
fails to withhold or fails to pay over any personal income tax
withheld, is guilty of a misdemeanor and, upon conviction, shall
be fined an amount not to exceed one thousand dollars ($1,000),
or imprisoned for not more than one year, or both the fine and
imprisonment, at the discretion of the court. (Unemployment
Insurance Code �2118)
Existing law provides that any person required to collect,
account for, and pay over any personal income tax or amount
required to be withheld who willfully fails to collect or
truthfully account for and pay over the tax or amount shall, in
addition to other penalties provided by law, be guilty of a
felony and, upon conviction thereof, shall be fined an amount
not more than twenty thousand dollars ($20,000), or imprisoned
Hearing Date: April 10, 2013 SB 390
Consultant: Gideon L. Baum Page 2
Senate Committee on Labor and Industrial Relations
16 months to 3 years, or both the fine and imprisonment, at the
discretion of the court. (Unemployment Insurance Code �2118.5)
This bill would provide that it is illegal for an employer to
willfully or with the intent to defraud fail to remit
withholding's from an employee's wages pursuant to local, state
or federal law to the proper agency.
This bill would also provide that if an employer fails to remit
$500 or more in wage withholdings, the employer's violation is a
misdemeanor and shall be punishable by imprisonment in a county
jail for a period of not more than one year, by a fine of not
more than one thousand dollars ($1,000), or both.
COMMENTS
1. Failure to Remit Taxes and Criminal Penalties:
Both federal and California law require certain taxes to be
withheld from an employee's wages. These include state
disability insurance (SDI), personal income taxes (PIT), and
Federal Insurance Contribution Act (FICA) taxes, which fund
Social Security and Medicare. These taxes are then remitted
to the appropriate authority, which then deposits those funds
into the appropriate trust fund. It is these payroll taxes
and wage remittances that allow these programs to function.
Noting the importance of these programs to workers, both
California law and federal law provide significant criminal
penalties, including both jail and civil penalties. For
example, the federal government has held the owners of a
business personally liable for unpaid FICA taxes since 1978
(see Slodov v. United States, 436 U.S. 238 (1978)). This
liability can also extend to members of a board of directors
(see Verret v. United States, 542 F.Supp.2d 526 (2008)). In
one recent case, an operator of a temporary healthcare
provider which provided nurses to hospitals was found guilty
of tax fraud and sentenced to 37 months in jail and nearly
$2.2 million in restitution.
Hearing Date: April 10, 2013 SB 390
Consultant: Gideon L. Baum Page 3
Senate Committee on Labor and Industrial Relations
2. Committee Comments:
As noted above, both California law and federal law contain
both criminal and civil penalties for failing to remit wages
that were withheld due to federal and state law. These can
include felony convictions, significant civil penalties, and
prison time. The Committee may wish to consider how this
requirement will impact existing statutory frameworks for
enforcing unremitted tax withholdings.
Additionally, as currently written, SB 390 does not require
that the tax remittances are remitted to the relevant
governmental entity. This creates the possibility that the
Labor Commissioner (or a private attorney) would pursue the
remittances from the employer, settle for less, and then the
funds would go to either the general fund or the impacted
parties. This creates several challenges.
For one, unlike wages, full restitution would not be the
return of the funds - it would be the ability to draw upon the
relevant program. Second, the federal government, as an
administrative policy, allows workers to draw Social Security
even if the employer didn't remit the funds. This creates a
significant problem for the Trust Fund: benefits are going
out, money didn't go in, but the employer already went through
an administrative process. Finally, due to double jeopardy
protections, this bill could prevent the Social Security
Administration and Employment Development Department from ever
collecting on the unpaid payroll taxes.
3. Proponent Arguments :
Proponents note that they are seeing a significant number of
cases where workers are having their payroll taxes removed
from their wages but then simply pocket the withholdings.
Proponents also note that employees find out about it after
they receive their W-2 Forms which show much lower wages than
they actually received or when they receive a 1099 Form,
illegally classifying them as independent contractors.
Proponents argue that it is difficult for to pursue these
cases, as the employers generally do not have any assets,
leaving the employers unpunished and not penalized for their
Hearing Date: April 10, 2013 SB 390
Consultant: Gideon L. Baum Page 4
Senate Committee on Labor and Industrial Relations
illegal conduct. Proponents believe that SB 390 is necessary
because it will create a criminal provision in the Labor Code,
allowing the Labor Commissioner to pursue a criminal
misdemeanor prosecution.
4. Prior Legislation :
AB 469 (Swanson), Statutes of 2011, Chapter 655, also known as
the Wage Theft Prevention Act of 2011, requires the provision
of a notice at the time of hiring that lists the relevant
details of a worker's employment.
SUPPORT
California Rural Legal Assistance Foundation (Sponsor)
California Employment Lawyers Association
Construction Employers' Association
United Farm Workers (UFW)
OPPOSITION
None on file.
Hearing Date: April 10, 2013 SB 390
Consultant: Gideon L. Baum Page 5
Senate Committee on Labor and Industrial Relations