United States District Court, M.D. Florida, Tampa Division
C. BUCKLEW JUDGE
cause comes before the Court on the following cross-motions:
(1) Plaintiffs' Motion for Partial Summary Judgment (Doc.
No. 43), which Defendant opposes (Doc. No. 46); and (2)
Defendant's Motion to Dismiss for Lack of Subject Matter
Jurisdiction, or in the Alternative, Motion for Summary
Judgment (Doc. No. 42), which Plaintiffs oppose (Doc. No.
47). As explained below, the Court grants Plaintiffs'
motion and denies Defendant's motion.
central issue before the Court is whether Plaintiffs are the
statutory employers, as defined in 26 U.S.C. §
3401(d)(1), of their clients' employees. The parties
filed cross-motions for summary judgment on this issue. The
Court has viewed the evidence in the light most favorable to
Defendant and concludes that Plaintiffs are the statutory
employers under § 3401(d)(1). As a result of that
conclusion, the Court finds that Defendant has waived
sovereign immunity for Plaintiffs' tax refund claims, and
as such, this Court has subject matter jurisdiction over this
Standard of Review
judgment is appropriate “if the movant shows that there
is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.”
Fed.R.Civ.P. 56(a). The Court must draw all inferences from
the evidence in the light most favorable to the non-movant
and resolve all reasonable doubts in that party's favor.
See Porter v. Ray, 461 F.3d 1315, 1320 (11th Cir.
2006)(citation omitted). The moving party bears the initial
burden of showing the Court, by reference to materials on
file, that there are no genuine issues of material fact that
should be decided at trial. See id. (citation
omitted). When a moving party has discharged its burden, the
non-moving party must then go beyond the pleadings, and by
its own affidavits, or by depositions, answers to
interrogatories, and admissions on file, designate specific
facts showing there is a genuine issue for trial. See
id. (citation omitted).
the relevant time period, Plaintiffs were professional
employer organizations (“PEOs”) headquartered in
Florida and licensed by the State of Florida. (Doc. No. 43-1,
¶ 6). As PEOs, Plaintiffs would enter into a client
service agreement (“CSA”) with each client
company customer in order to provide all employer payroll
functions and certain human resource functions. (Doc. No.
43-1, ¶ 7-8).
CSAs generally provide that Plaintiffs assumed responsibility
for the payment of wages to the clients' employees
(“worksite employees”) during the terms of the
CSAs without regard to whether the client companies first
paid such amounts to Plaintiffs. (Doc. No. 43-1, ¶ 11).
Additionally, the CSAs provide that Plaintiffs assumed full
responsibility for the reporting, collection, and payment of
payroll taxes to the IRS. (Doc. No. 43-1, ¶ 12). These
obligations also arise under Florida law, specifically
Florida Statute § 468.525(4). Section 468.525(4)
provides the following:
The employee leasing company's contractual arrangements
with its client companies shall satisfy the following
conditions, whereby the leasing company . . . (b) [a]ssumes
responsibility for the payment of wages to the leased
employees without regard to payments by the client to the
leasing company[; and ] (c) [a]ssumes full responsibility for
the payment of payroll taxes and collection of taxes from
payroll on leased employees.
Fla. Stat. § 468.525(4)(b)-(c).
respect to Plaintiffs' assumption of the responsibility
for the payment of wages to the worksite employees,
Plaintiffs describe the payroll process as follows:
Typically, two days prior to the date on which the worksite
employees were paid, Plaintiffs obtained certain payroll
information from the client companies. (Doc. No. 43-1, ¶
14). Specifically, the client companies would submit the
worksite employees' hours and rates of pay to Plaintiffs
for the pay period at issue. (Doc. No. 43-1, ¶ 15).
Plaintiffs had the worksite employees' Forms W-4 and
knowledge of their necessary payroll deductions for benefit
plans and garnishments. (Doc. No. 43-1, ¶ 26).
Plaintiffs then calculated the appropriate amount of wages
and payroll taxes. (Doc. No. 43-1, ¶ 17). Thereafter,
Plaintiffs would initiate a debit to the client
companies' bank accounts via automated clearing house
(“ACH”), which would include amounts for the
employees' compensation and FICA taxes. (Doc. No. 43-1,
¶ 22-23; Doc. No. 42-4, p. 11 of 18).
process did not ensure that Plaintiffs received payment from
the client companies prior to the issuance of payroll checks
or direct deposits to the worksite employees. (Doc. No. 42-4,
p. 11 of 18). There was a lag of at least three business days
between when Plaintiffs' debit was presented to each
client company's bank and when Plaintiffs could confirm
that the transfer of funds from each client company was
successful (or that one or more client companies had
insufficient funds). (Doc. No. 43-12, ¶ 19). On the same
date that Plaintiffs debited the client companies' bank
accounts, Plaintiffs arranged for the direct deposits or
checks for the worksite employees' wages. (Doc. No.
43-12, ¶ 11, 14-15). Thus, the initiation of wage
payments to the worksite employees occurred before Plaintiffs
had confirmation that the client companies had sufficient
funds to cover the corresponding debit to the client
companies' bank accounts. (Doc. No. 43-12, ¶ 21-24).
Once Plaintiffs initiated the direct deposits for the payment
of the employees' wages, the direct deposits could not be
changed. (Doc. No. 43-12, ¶ 17).
the many instances in which a client company did not have
sufficient funds in its bank account from which Plaintiffs
could debit the amount owed for that pay period, Plaintiffs
would not learn of the insufficiency of funds until after
Plaintiffs had made the wage payments to the worksite
employees. (Doc. No. 42-4, p. 11-12 of 18). In those
instances, Plaintiffs would have to seek payments from the
client companies through collection actions, which did not
guarantee payment from the client companies. (Doc. No. 42-4,
p. 12 of 18).
used their own bank accounts to make the wage payments to the
worksite employees, as well as to pay the payroll taxes to
the IRS. (Doc. No. 43-12, ¶ 9; Doc. No. 43-13, ¶
13; Doc. No. 47-1, ¶ 6; Doc. No. 47-2, ¶ 7). The
client companies had no authority over, or access to, these
bank accounts. (Doc. No. 43-12, ¶ 10; Doc. No. 43-13,
¶ 14; Doc. No. 47-1, ¶ 6; Doc. No. 47-2, ¶ 8).
respect to Plaintiffs' assumption of the responsibility
for the collection and payment of payroll taxes, the
component of the payroll taxes at issue in this case is the
FICA tax; more specifically, the employer's portion of
the Social Security tax. FICA taxes are comprised of Old-Age,
Survivors, and Disability Insurance (“Social
Security”) taxes and Hospital Insurance
(“Medicare”) taxes. (Doc. No. 43-1, ¶ 30).
During the periods at issue, the employer portion of Social
Security taxes equaled 6.2% of the worksite employees'
wages. (Doc. No. 43-1, ¶ 30). However, the Social
Security taxes are payable only up to a certain threshold
taxable wage base. (Doc. No. 43-1, ¶ 30).
time Plaintiffs entered into a CSA with a new client company,
Plaintiffs restarted the Social Security taxable wage base
for that client company's worksite employees. (Doc. No.
43-1, ¶ 31). The parties agree that Plaintiffs'
decision to restart the Social Security taxable wage base for
the client company's worksite employees was erroneous,
as such, it is undisputed that in some instances this led to
the overpayment of the employer's portion of the Social
Security tax. (Doc. No. 43-1, ¶ 31). Plaintiffs paid the
employer portion of the Social Security tax associated with
the restarting of the Social Security taxable wage base from
their own bank accounts. (Doc. No. 43-1, ¶ 32).
reported their payment of the employer portion of the Social
Security tax on Forms 941 using their own names, addresses,
and employer identification numbers (“EINs”).
(Doc. No. 43-1, ¶ 33; Doc. No. 43-13, ¶ 6, 12). The
client companies no longer filed these federal employment tax
returns after entering into CSAs with Plaintiffs, and
Plaintiffs did not file these federal employment tax returns
using the names, addresses, or EINs of the client companies.
(Doc. No. 43-13, ¶ 6). Plaintiffs did this because they
had assumed full responsibility for the reporting,
collection, and payment of payroll taxes with respect to the
worksite employees, and thus, Plaintiffs considered
themselves to be the statutory employers of the worksite
employees. (Doc. No. 43-13, ¶ 7, 10-12).
Plaintiffs realized that they had erroneously restarted the
Social Security taxable wage base for the client
companies' worksite employees, Plaintiffs filed Forms
941-X to claim refunds for the overpayments of the
employer's portion of the Social Security taxes for
several tax periods from 2009 through 2012. (Doc. No. 43-13,
¶ 16). The IRS denied Plaintiffs' claims for
refunds, and this lawsuit seeking the refunds followed. (Doc.
No. 43-13, ¶ 18).
Statutory Employer Under § 3401(d)(1)
central issue in these cross-motions is whether Plaintiffs
are the statutory employers of the worksite employees, as
defined by 26 U.S.C. § 3401(d)(1). Pursuant to 26 U.S.C.
§ 3111(a), the Social Security tax is imposed on every
employer equal to 6.2% of the wages paid by the employer.
Furthermore, 26 U.S.C. § 3401(d) defines
“employer” as follows:
[T]he term “employer” means the person for whom
[the worksite employee] performs or performed any service, .
. . except that . . . if the person for whom [the worksite
employee] performs or performed the services does not have
control of the payment of wages for such services, the term
“employer” . . . means the person having control
of the payment of such wages.
26 U.S.C. § 3401(d)(1). Thus, the issue before this Court
is who-Plaintiffs or the client companies-had control over
the payment of wages to the worksite employees. As explained
below, the Court finds that Plaintiffs had control over the
payment of wages to the worksite employees, and as such,
Plaintiffs are the § 3401(d)(1) statutory employers of
the worksite employees.
trend in the case law shows that the person or entity that
controls the bank account from which wages are paid is the
§ 3401(d)(1) statutory employer. For example, in
Educational Fund of the Electrical Industry v.
United States, 426 F.2d 1053, 1055-56 (2d Cir. 1970),
employers of electricians paid money into a vacation fund,
and excess money from the vacation fund was transferred into
an education trust fund. When an electrician satisfactorily
completed a week-long training course, the trustees of the
education trust fund paid the electricians $140 for wages
lost while attending the training. See id. The
education trust fund did not withhold income taxes from the
$140 distributions, and as a result, the IRS assessed a tax
deficiency against the education trust fund. See id.
education trust fund paid the assessment and then filed a
claim for refund, arguing that it was not the
electricians' employer. See id. at 1056-57. The
court rejected the education trust fund's argument,
finding that it was the statutory employer under §
3401(d)(1), because the education trust fund controlled the
payment of the $140 distributions to the electricians.
See id. at 1057. The court also rejected the
education trust fund's argument that it was a mere
conduit for the employers' money that was ultimately
transferred into the education trust fund and used to pay the
$140 distributions. See id. Specifically, the court
stated that “[t]he purpose of Section 3401(d)(1) is to
provide that the person actually paying the wages (instead of
the employer who makes a payment into a fund for the benefit
of all his employees) is obligated to withhold the
taxes.” Id. Because the education trust fund
was the payer of the $140 distributions, the court found that
the education trust fund was the statutory employer that had
legal control of the payment under § 3401(d)(1). See
in Matter of Southwest Restaurant Systems, Inc., 607
F.2d 1237, 1239 (9th Cir. 1979), the issue before the court
was the identity of the corporation(s) that controlled the
payment of wages. In Southwest Restaurants, the
debtor-corporation and three other corporations had similar
ownership. See id. at 1238. The wages of the
employees of all four corporations were paid from the
debtor-corporation's payroll account, with funds
transferred into it from all four corporations (depending on
which corporations had money in their accounts). See
id. The debtor-corporation reported (but did not pay)
the withholding taxes for all four corporations in the
debtor-corporation's name. See id.
the debtor-corporation filed for bankruptcy, and the
government filed a proof of claim for unpaid employment
taxes. See id. at 1239. The trustee objected to the
proof of claim, because part of it related to taxes due and
owing from the three other corporations. Seeid. The issue before the court was whether the
debtor-corporation or the ...