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Paychex Business Solutions, LLC v. United States

United States District Court, M.D. Florida, Tampa Division

June 22, 2017

PAYCHEX BUSINESS SOLUTIONS, LLC, ET AL., Plaintiffs,
v.
UNITED STATES OF AMERICA, Defendant.

          ORDER

          SUSAN C. BUCKLEW JUDGE

         This 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.

         The 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 matter.

         I. Standard of Review

         Summary 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).

         II. Background[1]

         During 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).

         The 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.[2] (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).

         With 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.[3] (Doc. No. 43-1, ¶ 22-23; Doc. No. 42-4, p. 11 of 18).

         The ACH 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).

         During 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).

         Plaintiffs 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).

         With 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).

         Each 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, [4] and 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).

         Plaintiffs 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).

         After 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).

         III. Statutory Employer Under § 3401(d)(1)

         The 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).[5] 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.

         The 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. at 1056.

         The 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 id.

         Likewise, 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.

         Thereafter, 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 ...


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