Claim No. 84-54115

The employer submitted a petition for Commission review alleging error in the Administrative Law Judge's Findings and Order issued on July 28, 1989. The applicant submitted an answer to the petition. At issue are whether the employer is liable for inexcusable delay in making payments of compensation, within the meaning of section 102.22, Stats.; and whether the employer is liable for a bad faith penalty, within the meaning of section 102.18 (1)(bp), Stats.

The Commission has reviewed the entire record in this matter and hereby reverses the Administrative Law Judge's Findings and Order. The Commission makes the following:


The Labor and Industry Review Commission issued an Order on September 15, 1988, whereby the employer was required to pay $9,984.00 to the applicant for unreasonable refusal to rehire, within the meaning of section 102.35 (3), Stats. Subsequent to the issuance of this order, the applicant agreed to accept $9,484.00 in return for the employer's promise not to appeal the Commission decision.

Based on advise from its legal counsel, the employer decided that it should withhold federal and state income taxes, as well as social security tax from the award. This decision was based on the employer's perceived liability to the state and the federal governments for these taxes. Therefore, the employer timely paid the applicant $6,377.50, withholding $3,106.50 for taxes. The applicant's attorney objected to this withholding, and the employer's attorney telephoned an Administrative Law Judge with the Department, who told him the Department's position was that there should be no withholding. It does not appear that the Department offered any explanation for this position, and the employer's attorney did not accept it. The employer refused to pay the $ 3,106.50 to the applicant, and on November 9, 1988, the applicant filed a claim for inexcusable delay and bad faith.

An individual from the employer named William Hanewall telephoned the Wisconsin Department of Revenue in January 1989, and asked whether the award under section 102.35 (3), Stats., was taxable. A "staff specialist" wrote back giving her opinion that it was taxable income for federal and state purposes, based on an excerpt from Internal Revenue Service Publication 17.

On April 17, 1989, a Notice of Hearing was sent to the parties concerning the bad faith and inexcusable delay issues. On April 21, 1989, the Department issued an Order which was intended to formally dismiss the insurer from the proceedings, because the claim stemmed from an alleged violation of section 102.35 (3), Stats., and therefore exclusive liability rested with the employer. Unfortunately, the Department's Order is worded so that one could understand it to dismiss the applicant's claim in its entirety. The employer's president, James Dooley, states in an affidavit that the Department's Order led him to believe the insurer had somehow managed to get the claim dismissed, so he did not inform his attorney and he did not appear at the hearing regarding bad faith and inexcusable delay. The hearing was held on June 26, 1989, and the Administrative Law Judge found that no withholding taxes were authorized, and that there had been inexcusable delay and bad faith. He assessed a ten percent penalty for inexcusable delay and $1,000.00 for bad faith, without explaining why he did not assess a larger penalty for bad faith.

The employer argues that the award in section 102.35 (3) of "wages lost . . . not exceeding one year's wages," constitutes a back pay award, and is therefore subject to withholding taxes. It is true that under federal tax law, back pay awards are not subject to taxation. See Freeman v. Blake Company, 84 F. Supp. 700, 704 (D. Mass. 1949); and Rev. Rul. 55-203, 1955-1, C. B. 114. However section 104 (a)(1) of the Internal Revenue Code provides that gross income does not include:

"Amounts received under Workmen's Compensation Acts as compensation for personal injuries or sickness."

The employer argues that an award under section 102.35 (3), Stats., does not constitute compensation for personal injury or sickness, and therefore does not come within the purview of that federal statute. However, the Commission disagrees. The Wisconsin Supreme Court has held that the award provided in section 102.35 (3), Stats., is an award of worker's compensation. See West Allis Allis School District v. DILHR, 116 Wis. 2d 410, 421-22, (1984). Furthermore, a personal injury arising out of the employment is a necessary prerequisite to receipt of any compensation under section 102.35 (3), Stats. In Cornejo v. Polycon Industries, Inc., 109 Wis. 2d 649, 654, 327 N.W. 2d 183 (1982), the Court held that the compensation available under section 102.35 (3), Stats., was the exclusive remedy for what could otherwise be considered tortious conduct by an employer, thus placing this remedy squarely within the negotiated framework of Wisconsin's Worker's Compensation Act. The Act is the result of a delicate balancing of the competing interests of labor and management, providing for certain but limited awards. See Mulder v. Acme-Cleveland Corporation, 95 Wis. 2d 173, 180-81, 290 N.W. 2d 276 (1980). The limited award provided by the statute in question does not pretend to compensate all injured employes for all the wages they may lose due to unreasonable refusal to rehire. Taxation of the award would greatly upset the balance struck in the creation of this statute.

Another indicator of the statute's purpose as an exclusive worker's compensation remedy is found in the fact that individuals may not file discrimination claims when a remedy is available under section 102.35 (3), Stats. See Schachtner v. DILHR, 144 Wis. 2d 1, 8, 422 N.W. 2d 906 (1988) and Norris v. DILHR, et al., 155 Wis. 2d 337, 342, 455 N.W. 2d 665 (1990). Evisceration of this worker's compensation statute through taxation of its remedy would plainly result in a fundamental disruption of the negotiated agreements underlining it. Avoidance of such disruption is clearly one of the primary purposes of section 104 (a)(1) of the Internal Revenue Code. Finally, for many years the Commission has issued awards for unreasonable refusal to rehire, but has never received any indication that the Federal or State Government has sought withholding taxes from such awards.

Although the Commission concludes that the employer should not have deducted withholding taxes from the applicant's award, it further concludes that the employer in this case was merely attempting to protect what it considered to be its legitimate interests, in the event governmental agencies subsequently required payment of such taxes. For this reason, it considers neither the penalty for inexcusable delay nor the penalty for bad faith to be proper in this case.



The Findings and Order of the Administrative Law Judge are reversed. The application for penalties for inexcusable delay and bad faith is dismissed. In accordance with the Commission's Order of September 15, 1988, the employer should make immediate payment of the unpaid balance due the applicant.

Dated and mailed November 20, 1990
185-CD1011   ND 7.34

/s/ Kevin C. Potter, Chairman

/s/ Carl W. Thompson, Commissioner

/s/ Pamela I. Anderson, Commissioner


Thomas M. Jacobson
Jacobson, O'Dess & Krings

F. Thomas Olson
Charney, Glassner, Tehan, Clancy & Taitelman, S.C.

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