Terminating the Employment Relationship

can lead to tax penalties for an employer and the former employee if the money is actually compensation for wages.

If an employer needs advice regarding tax consequences of an agreement, the employer should consult a tax attorney. Tax advice from an attorney who does not practice tax law can jeopardize an attorney’s license to practice law and will not insulate an employer from adverse tax consequences or penalties if the IRS or Franchise Tax Board does not concur with how an employer has treated a payout in a settlement agreement. Nonetheless, the law clearly does not allow parties to subvert or circumvent tax laws via an agreement. Consequently, if an agreement requires payment of wages – whether they are back or front wages – parties should not attempt to characterize the wages as another form of damages to avoid deducting payroll taxes. An agreement involving payment to an employee/ex-employee can contain language that shifts the responsibility of the employee/ex-employee’s tax burden to the employee/ex-employee. In an effort to protect an employer from adverse tax consequences that result from an employee/ex- employee’s failure to pay tax on the money he/she has received, an employer should include a provision that puts the onus on the employee/ex-employee to determine the taxation of the payment issued to him or her. The following is sample language regarding shifting the responsibility of the tax burden to the employee/ex-employee:

Jones acknowledges and agrees that the City has made no representations to him regarding the tax consequences of any amounts received by him pursuant to this Agreement. Jones agrees to pay federal, state or local taxes, if any, which are required by law to be paid with respect to this settlement. Jones further agrees to indemnify and hold the City harmless from any claims, demands, deficiencies, levies, assessments, executions, judgments, or recoveries by any governmental entity against the City for any amounts claimed due from Jones related to the monies paid on account of this Agreement and for any costs, interest, expenses, fines, penalties, attorneys’ fees or damages incurred or sustained by the City by reason of Jones’ failure to pay such taxes.

F. D ISCUSSION OF A GREEMENTS AT P UBLIC M EETINGS Discussions at public meetings regarding settlement agreements are governed by the Brown Act. 358 The Brown Act generally requires that meetings of legislative bodies of local public agencies be open and public. While there are exceptions to the open meeting requirement, which allow legislative bodies to discuss certain matters in closed session, such exceptions are construed narrowly and there is a presumption that the public’s business must be conducted in public. 359

Terminating the Employment Relationship ©2019 (s) Liebert Cassidy Whitmore 118