NAAG/NAGTRI/SABA
Bankruptcy From a Government Perspective Seminar
Worker’s Compensation and Unemployment Taxes
Jennifer E. Gauger
Office of the Indiana Attorney General
Worker’s Compensation Overview
A government-mandated insurance program designed to
compensate employees who suffer job-related injuries or illnesses
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Every state has adopted laws to administer worker’s compensation
Primary goal is to return the employee to work while providing
support when the employee is unable to work
Provides immediate benefits such as wage replacement and medical
treatment
Worker’s Compensation Overview
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Quid pro quo
Howard Delivery Service, Inc. v. Zurich American Ins. Co., 547 U.S.
651 (2006)
Common social trade-off: injured employee receives limited benefits
regardless of fault while giving up right to recover full tort damages
Employer-oriented thrust
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Policies protect employers from full tort liability and cover an
employer’s obligation to pay compensation
Often, if an employer is unable to pay, the employee may attain
benefits from the state’s fund
Foreseeable costs for worker’s compensation for employer
Unemployment Insurance
States usually allow employers to provide worker’s compensation
in three ways:
1.
Self-insurance
2.
State insurance fund
3.
Third-party insurance
How an employer chooses to pay workers’ compensation may
determine how those obligations are prioritized if the employer
files for bankruptcy
Worker’s Compensation in Bankruptcy
All worker’s compensation claims are treated as arising on date the
injury occurred, rather than the date on which the employee
actually receives compensation or medical benefits
Worker’s compensation obligations are pre-petition claims
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Receive unsecured status and may only be paid, if at all, at the end of
bankruptcy
Medical treatment is often withheld by health care providers who
know they will only be paid as an unsecured creditor
Wage replacement for the injured or ill employee may be severed
Problems with the Current Approach
Automatic Stay
Priority (lack thereof)
In re DPH Holdings Corp., 448 Fed. Appx. 134 (2nd Cir. 2012)
Subject Matter Jurisdiction
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Injured employees are forced to litigate their rights in a potentially remote
bankruptcy court
Sovereign Immunity
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States unable to defend and litigate their own worker’s compensation laws
Problems with the Current Approach
Cost Shifting to the States
State’s Claims for Excise Taxes
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Classification of Employers, e.g., non-profit entities
In re DeRoche, 287 F.3d 751 (9th Cir. 2002)
Discharged Upon Confirmation
Different Treatment for Ordinary Wages and Health Care Benefits in
Bankruptcy
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Unpaid wages and health care benefits accruing during bankruptcy are
administrative expenses
Different Treatment for Worker’s Compensation Benefits Based on the
Date of Injury
Case Law Updates
In re Cmty. Mem'l Hosp., 494 B.R. 906 (Bankr. E.D. Mich. 2013)
In re Irving Tanning Co., 2013 WL 4400254 (1st Cir. BAP Aug. 15,
2013)
In re Somerset, Inc., 2013 WL 3788510 (Bankr. D. Idaho July 19,
2013)
In re Wiebe, 485 B.R. 667 (Bankr. D. Kan. 2013)
Proposal
Treat obligations for wage replacement or medical benefit payments
as becoming a “claim” under the Bankruptcy Code only when the
amount is due and payable in the normal course of claims
administration
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Consistent with the definition of “claim” in 11 U.S.C. § 101(5)
Effects of Proposal
Only benefits already delinquent on petition date will be treated as
claims against the bankruptcy estate
New benefits accruing post-petition will be treated as administrative
expenses that must be paid in full for the debtor to receive plan
confirmation
Benefit obligations arising after confirmation will remain due and
owed since they will not be “claims” until such time as the expense
is incurred in the future
Effects of Proposal
Claims that arise during the 180-day pre-petition preference
period will be given the same priority as other wage and benefit
claims
Except determinations relating to worker’s compensation from the
automatic stay
Treats employees who suffered job-related injuries or illnesses to
be treated as working employees
Contributions v. Reimbursements
Employer contributions are considered taxes for 11 U.S.C. §
507(a)(8) priority
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What about reimbursements to employers who pay reimbursements in lieu of
state/third-party premiums?
Employer contributions meet the United States Supreme Court’s
definitions of “tax”
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Enforced contributions - United States v. La Franca, 282 U.S. 568, 572 (1931)
Pecuniary burdens” - City of New York v. Feiring, 313 U.S. 283, 285 (1941)
Lorber/Suburban II test - Ohio Bureau of Workers’ Comp. v. Yoder, 36
F.3d 484 (6th Cir. 1994); County Sanitation Dist. No. 2 v. Lorber Indus. of
Cal., Inc., 675 F.2d 1062 (9th Cir. 1982)
Contributions v. Reimbursements
Reimbursements paid by employers in lieu of contributions
are not taxes
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In re Suburban Motor Freight, Inc., 36 F.3d 484 (6th Cir. 1994)
In re Boston Reg’l Med. Ctr., Inc., 291 F.3d 111 (1st Cir. 2002)
In re United Healthcare System, Inc., 396 F.3d 247 (3rd Cir. 2005)
But see In re Albert Lindley Lee Memorial Hospital, 428 B.R. 283
(Bankr. N.D. N.Y. 2010)
More cost shifting to the states
Incentive to pay reimbursements in lieu contributions