A Tax Season Cautionary Tale

Consequences of not paying payroll tax as per the EEOC consent decree

In EEOC v. Sherwood Food Distributors, Inc., No. 16-CV-2386, 2022 U.S. Dist. LEXIS 32921 (N.D. Ohio Feb. 24, 2022), a federal court in Ohio held an employer in contempt for failing to pay its payroll tax liabilities, as required by an EEOC consent decree that resolved a systemic discrimination lawsuit. In addition to paying the outstanding payroll tax, the court ordered the employer to pay an additional $46,858.55 resulting from the 3.8% tax rate increase during the time of the contempt dispute, as well as potential settlement administrator fees.

This ruling should serve as a cautionary tale for employers in regards to negotiating and timely satisfying financial obligations in EEOC consent decrees.

Case Background

On September 27, 2016, the U.S. Equal Employment Opportunity Commission (EEOC) filed a lawsuit against Sherwood, alleging that it engaged in discriminatory hiring practices that adversely impacted female applicants, in violation of Title VII of the Civil Rights Act of 1964 (“Title VII”). The parties subsequently settled the litigation and entered into a Consent Decree, whereby Sherwood agreed to place $3.6 million into a Qualified Settlement Fund (“QSF”) account administered by a third-party (the “Administrator”) within 30 days of entry of the Consent Decree. Id. at *2. These funds were to provide monetary relief to individuals that the EEOC determined were subjected to the alleged discrimination. Id. The monetary relief constituted both back pay and other monetary damages available under Title VII. Id. The EEOC was given the authority to determine what type of monetary relief would be paid to the eligible claimants (“Claimants”).
 

The EEOC alleged that Sherwood subsequently violated the Consent Decree by refusing to pay its payroll tax liability and therefore preventing the distribution of the $3.6 million to the Claimants by December 14, 2021. In relevant part, the Consent Decree stated that Sherwood was responsible for paying its share of all applicable pay roll taxes and that the Administrator would inform Sherwood, “of the amounts of back pay distributed to each person from the QSF and all other information necessary for [Sherwood] to satisfy its payroll tax liabilities.” Id. The Administrator notified Sherwood’s counsel on December 1, 2021, of the amount that it owed in payroll taxes and provided notice that payment of the payroll taxes must be received on December 10, 2021, for the award checks to be timely distributed. The EEOC’s counsel communicated with Sherwood’s counsel in an attempt to compel the payment of the payroll taxes, but Sherwood indicated it would not make the payroll tax payment.

On January 27, 2022, the Court held a hearing regarding the EEOC’s motion for civil contempt. Upon Sherwood’s request for a breakdown of the individual payments to be made to the Claimants, the Court continued the hearing until January 31, 2022. Prior to the start of the hearing on January 31, 2022, the Administrator notified Sherwood that its total payroll taxes owed had increased from $361,890.68 to $408,749.23 due to the Ohio Department of Jobs and Family Services’ increase in QSF state unemployment tax rate from 2.7% in 2021 to 6.5% in 2022.  At the hearing, the parties were ordered to submit proposed findings of fact and conclusion of law, which were subsequently submitted on February 10, 2022.  Id. at 2-3.

The Court’s Decision

The Court held Sherwood in civil contempt for violating the Consent Decree. First, the Court explained that in order to establish a finding of civil contempt, the EEOC must show that the other party violated a definite and specific order of the Court, through “clear and convincing evidence.” Id. at *4 (citations omitted). The Court noted that the Consent Decree explicitly stated numerous times that Sherwood was responsible for payroll tax liability, and that distribution of the settlement funds must be completed by December 14, 2021. Further, the EEOC produced email communications that Sherwood was informed of its payroll tax duties by the Administrator in accordance with the Consent Decree. Accordingly, the Court held there was, “clear and convincing evidence,” that Sherwood violated the Consent Decree. Id.

Second, the Court held that Sherwood did not meet its burden to demonstrate that it took all reasonable steps to comply. Sherwood claimed that it attempted to negotiate an extension of the deadline, but the Court rejected this approach, noting that its extension request ten days before the deadline was untimely. Id. The Court thus held that, “Upon [the EEOC’s] unwillingness to negotiate, [Sherwood] should have complied with the Decree and the Administrator’s request for payment.” Id.

Third, the Court held that Sherwood failed to satisfy its burden of giving a detailed explanation as to why it could not presently comply with the Consent Decree and pay the $408,749.23 in payroll taxes. Id. at *5. The court reasoned that Sherwood made no claim that it did not have the funds, nor did it offer any evidence of its financial situation. In lieu of offering such evidence, Sherwood proposed paying in installments. The Court rejected this proposal as untimely. It opined that Sherwood should have made the proposal during settlement negotiations. In addition, the Court dismissed Sherwood’s argument that the EEOC conducted its investigation too slowly.

Accordingly, the court held Sherwood in civil contempt for violating the Consent Decree. Sherwood argued it should only be responsible for paying the initial $361,890.68 and should not be required to pay the additional $46,858.55 resulting from the 3.8% tax increase. The Court rejected this argument on the grounds that the crease in taxes owed was a result of Sherwood’s delay. As such, the Court ordered Sherwood to pay the full amount of $408,749.23 within 30 days of its order, and to pay any additional costs incurred by the Administrator’s fulfillment of his duties that exceed the $35,000 amount set forth in the Consent Decree.

Impact for Employers

This ruling is an eye-opener for employers in terms of the potential implications for not satisfying obligations in any Consent Decree. Here, the employer’s delay was costly, as a change in the calendar year during the dispute led to an increased payroll tax debt. Accordingly, employers must be pragmatic when negotiating consent decree deadlines in EEOC-initiated litigation, and equally diligent in meeting those deadlines.

This article first appeared here.

	Gerald Maatman, Jr. is a Partner in the Wage & Hour Litigation Practice Group in Seyfarth Shaw. Gerald has a primary emphasis in his practice on defending employers sued in employment-related class actions and EEOC pattern and practice lawsuits brought in federal and state courts throughout the United States.  Visit www.seyfarth.com  Connect Gerald Maatman
	Alex W. Karasik is an Associate in the Wage & Hour Litigation Practice Group at Seyfarth Shaw. Alex's practice is centered in the Labor & Employment department, where he defends employers in a wide range of employment law matters, including class and collective actions, wage and hour collective actions, and single-plaintiff discrimination claims. Visit www.seyfarth.com