Can An Employee Assert State Law Wage Claims Based on Alleged Wrongful Tax Withholding?
No – a recent Sixth Circuit case makes clear that wage and hour plaintiffs cannot try to characterize alleged tax withholding violations as an alleged failure to pay wages or other state law claims.
In Ednacot v. Mesa Medical Group, PLLC, the plaintiff sued her employer and asserted a number of state law claims, including conversion, negligence, fraud, and failure to pay wages and overtime owed under state law. The theory of the plaintiff’s complaint was that the employer failed to pay her full salary because it wrongfully withheld money from her paycheck to cover the employer’s share of federal FICA and FUTA taxes.
Both the district court and the Sixth Circuit Court of Appeals agreed that the plaintiff’s claims in Ednacot were preempted and barred for failure to exhaust administrative remedies under 26 U.S.C. § 7422. Section 7422 is a provision of the federal tax code, which provides that:
No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected, or of any penalty claimed to have been collected without authority, or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with [the IRS] . . . .
The court explained that “Section 7422 was designed to funnel claims like Ednacot’s through the administrative machinery of the IRS rather than piecemeal through individual state and federal lawsuits.” Because the plaintiff had not filed a claim with the IRS and because her claims related to federal taxes that were allegedly withheld improperly, the court held that it lacked jurisdiction to decide the matter due to the plaintiff’s failure to exhaust administrative remedies.
Takeaway: Creative plaintiffs will sometimes try to characterize a tax withholding claim as a wage, contract, or tort claim. In other instances, they may seek to recover allegedly wrongful tax withholding as part of a broader claim for alleged failure to pay wages or overtime. The Ednacot case shows that employers have a strong defense to these kinds of claims when the employee fails to exhaust his or her administrative remedies with the IRS.