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Date: March 6, 2015

Bulletin Number: 1217 UPDATED

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Subject

New Requirements and Procedures for Processing Salary Payments pursuant to Court Orders, Awards, and Settlement Agreements

Purpose

To provide clear and consistent requirements for processing salary payments made pursuant to Court Orders, Awards, and Settlement Agreements.

Affected Employees

Employees eligible for a payment of salary pursuant to a Court Order, Award or a Settlement Agreement.

Effective Date(s)

Immediately.

Definitions

A “Court Order” is a final decision issued by a federal or state court that directs a payment by the State.

An “Award” is a final decision directing payment by the State made by either (1) an administrative agency authorized to direct such payment or (2) an arbitrator or other entity (e.g., the Governor’s Office of Employee Relations) authorized under a collective bargaining agreement to direct such payment.   An example of an administrative agency that has authority to direct payments by the State is the Division of Human Rights under the Human Rights Law (Executive Law Art. 15).
 
A “Settlement Agreement” is an agreement requiring payment by the State that is voluntarily entered into by a State agency and another party to resolve a legal dispute.  For processing purposes, OSC  recognizes the following three types of settlement agreements, depending on the forum in which the legal claim is pending at the time it is resolved: 

  1. A “Judicial Settlement Agreement” is an agreement requiring a payment by the State that is voluntarily entered into by a State agency and another party to resolve a legal dispute after a federal or state court proceeding has begun, but before the court has issued a Court Order.

  2. An “Administrative Settlement Agreement” is an agreement requiring payment by the State voluntarily entered into by a State agency and another party to resolve a legal dispute while a proceeding is pending in front of either (1) an administrative agency authorized to direct such a payment or (2) an individual  authorized to resolve a grievance under a collective bargaining agreement  and to direct such payment (e.g., a director of labor relations) , but before a final decision has been made by the administrative agency or an arbitrator.

  3. A “Pre-Adjudicatory Settlement Agreement” is an agreement requiring payment by the State voluntarily entered into by a State agency and another party to resolve a legal dispute before any type of court or administrative agency, or proceeding under a collective bargaining agreement (i.e., grievance) has begun.   

For purposes of illustrating the difference between a payment pursuant to an “Award” and a payment pursuant to an “Administrative Settlement Agreement”, where a Step 1 or Step 2 grievance under a collective bargaining agreement is resolved at the agency level by an agreement between the agency and the employee, such resolution would be considered an ”Administrative Settlement Agreement.”  However, a Step 3 Out-of-Title Work grievance that is resolved by a determination by GOER would be considered an “Award”.


Types of Payments

Depending on the nature of the legal dispute resolved by a Court Order, Award, or any type of Settlement Agreement, the State can be required to make salary payments, non-salary payments, or both types of payments. 
                        
Salary payments to be made pursuant to Court Order, Award, or any type of Settlement Agreement are processed by the OSC Bureau of State Payroll Services.  This Payroll Bulletin provides the details for processing such salary payments.

Non-salary payments to be made pursuant to Court Order, Award, or any type of Settlement Agreement (such as contract damages, compensatory damages for personal injuries, punitive damages, interest, and attorney’s fees) are processed by the OSC Bureau of State Expenditures.  Agencies should consult the Guide to Financial Operations (GFO) section XII.6.U for further information on the processing of such payments.

 

New Procedures

To improve the transparency, accountability and tracking of Court Orders, Awards, and Settlement Agreements providing for salary payments, OSC has established the following new requirements and procedures:

  • Agencies must email the Payroll Services salary award mailbox at payrollsalaryawards@osc.state.ny.us an electronic copy of those provisions in the final Court Order, Award, or Settlement Agreement, signed by all the parties, that specify the payee, the amount to be paid, the specific beginning and ending dates for which the back salary is to be paid (or an explanation why the payment is being made as a lump sum), and the nature of the payment to be made.  In addition, the agency must provide an indication of whether the amounts to be paid (or portions thereof) are taxable or non-taxable.
  • If the Court Order, Award, or Settlement Agreement does not expressly identify the amount and nature of the payment to be made (e.g., back pay, front pay, interest, compensatory damages for mental anguish), the agency must submit a statement identifying these payment details, together with an indication of whether the agency considers the payments (or portions thereof) to be taxable or non-taxable based upon the criteria set forth below.

  • If any Settlement Agreement provides for front pay, the agency must include a statement explaining the rationale behind the use of front pay as a component of the settlement, and must identify the extraordinary circumstances that justify such a payment (See discussion of Tax Treatment below).

For Pre-Adjudicatory Settlement Agreements only, agencies must complete and submit a signed electronic copy of the attached Certification for Payment of Pre-Adjudicatory Settlement Agreements form (AC-3300-S), signed by the agency’s General Counsel or, in the absence of such person, the head of the State agency.  In addition, agencies must maintain the required back-up documentation on file and available for audit by OSC for a period of six years.

  • Agencies are advised that all documentation submitted to OSC in connection with the payment of salary pursuant to a Court Order, Award, or a Settlement Agreement is subject to the Freedom of Information Law (FOIL).
  • Agencies must NOT deduct Deficit Reduction Pay if the employee did not have the opportunity to use the time.
  • Agencies must submit all required information to the Payroll Services salary award mailbox at payrollsalaryawards@osc.state.ny.us prior to submitting the payment in the State Payroll System. Once the required information has been reviewed and payment has been authorized by OSC, the agency will be notified that the transactions may be entered into the State Payroll System. 

    OSC will reject handwritten settlement agreements, unless the agency supplies a formal typewritten cover letter on agency letterhead, signed by an executive level administrative officer, the director of human resources, or a person occupying an equivalent position, explaining why the agency was unable to submit a typed settlement agreement.

    OSC will also reject any payment transaction that does not:

    • Have prior authorization from OSC, and
    • Include specific beginning and ending dates identifying the time period for which back salary is to be paid.

  • In order to ensure accurate and timely payment of back salary that is payable pursuant to a Court Order, an Award, or a Settlement Agreement, it is critical that agencies provide the OSC Payroll Office with the precise beginning and ending dates for which the back salary is to be paid.  In unusual cases of lump sum payments that will not be allocated to any specific time period, agencies must identify the reason why payment in a lump sum is requested.   This is particularly critical where the payment or back salary provisions of the Court Order, Award, or Settlement Agreement are ambiguous and/or unclear. 

  • Because the agency payroll staff processing the back salary payment will typically not be familiar with the specifics of the case that gave rise to the requested payment, in many cases it will be necessary for agency payroll staff to seek guidance from the attorney, labor relations staff member or other agency representative who was involved directly in the dispute on behalf of the agency, and may even have signed the settlement agreement.  Such individual should be able to advise agency payroll staff as to the specific period for which payment is to be made.  In some cases, however, it may be necessary for the agency to request an explanation or clarification from the court or arbitrator.  In any such case, the agency should first advise any union that represents the employee of the agency’s intention to make such a request.  If an agency submits a transaction to pay back salary pursuant to a Court Order, Award, or Settlement Agreement without including specific beginning and ending dates, the back salary transaction will not be processed and will be returned to the agency for clarification, except where the terms of the Court Order, Award, or Settlement Agreement clearly describe the beginning and ending dates of the time period for which back salary is to be paid.  This will delay payment until the agency submits to OSC the required information described above.

  • Once authorized to submit payment, agencies must use the appropriate Reason and Time Entry codes (see below) so that salary payments can be processed and tracked in the State Payroll System.


OSC Actions

New Reason Codes

Specific reason codes are to be used for Job Data transactions. These codes help differentiate and to track payments made pursuant to Court Orders, Awards, and Settlement Agreements in the State Payroll System.

COU (Court Order) – To be used for all Job Data Actions (Pay, Position, DTA, LOA, RFL, Hire, Rehire, Termination, etc.) which are pursuant to the terms of a Court Order.

For example, for an employee who is being rehired pursuant to a Court Order, the agency must use the Action/Reason codes of REH (Rehire) and COU (Court Order).

AWD (Award) – To be used for all Job Data Actions (Pay, Position, DTA, LOA, RFL, Hire, Rehire, Termination, etc.) which are pursuant to the terms of an Award.

For example, for an employee who is being returned to the payroll from suspension pursuant to the terms of an Award, the agency must use the Action/Reason codes of RFL (Return from Leave) and AWD (Award).

JSA (Judicial Settlement Agreement) – To be used for all Job Data Actions, (Pay, Position, DTA, LOA, RFL, Hire, Rehire, Termination, etc.) which are pursuant to the terms of a Judicial Settlement Agreement.

For example, for an employee who is being rehired pursuant to a Judicial Settlement Agreement, the agency must use the Action/Reason codes of REH (Rehire) and JSA (Judicial Settlement Agreement).

ASA (Administrative Settlement Agreement) – To be used for all Job Data Actions (Pay, Position, DTA, LOA, RFL, Hire, Rehire, Termination, etc.) which are pursuant to the terms of an Administrative Settlement Agreement.

For example, for an employee who is being returned to the payroll from suspension pursuant to the terms of an Administrative Settlement Agreement, the agency must use the Action/Reason codes of RFL (Return from Leave) and ASA (Administrative Settlement Agreement).

PSA (Pre-Adjudicatory Settlement Agreement) – To be used for all Job Data Actions (Pay, Position, DTA, LOA, RFL, Hire, Rehire, Termination, etc.) which are pursuant to the terms of a Pre-Adjudicatory Settlement Agreement.

For example, for an employee who is being rehired pursuant to the terms of a Pre-Adjudicatory Settlement Agreement, the agency must use the Action/Reason codes of REH (Rehire) and PSA (Pre-Adjudicatory Settlement Agreement).

New Time Entry Codes

Specific Time Entry earnings codes are to be used to differentiate and track payments that are made due to Court Orders, Awards and Settlement Agreements.  The codes will also differentiate between back pay and front pay. These codes replaced the inactivated BSA (Back Salary Award).

Agencies must continue to use RGS wherever appropriate. The following codes are used to pay a predetermined lump sum amount.

BPO (Back Pay Court Order) – To be used for Court Orders providing for back pay.

BPA (Back Pay Award) – To be used for Awards providing for back pay, except for Step 3 grievances which will continue to be reported using Time Entry Earnings Code S3G.

BJS (Back Pay Judicial Settlement Agreements) – To be used for Judicial Settlement Agreements providing for back pay.

BAS (Back Pay Administrative Settlements) – To be used for Administrative Settlements providing for back pay.

BPS (Back Pay Pre-Adjudicatory Settlement Agreement) – To be for Pre-Adjudicatory Settlement Agreements providing for back pay.

FPO (Front Pay Court Order) – To be used for Court Orders providing for front pay.

FPA (Front Pay Award) – To be used for Awards providing for front pay, unless otherwise instructed by OSC.

FJS (Front Pay Judicial Settlement Agreement) - To be used for Judicial Settlement Agreements providing for front pay.

FAS (Front Pay Administrative Settlement Agreements) – To be used for Administrative Settlements providing for front pay.

FPS (Front Pay Pre-Adjudicatory Settlement Agreement) – To be for all Pre-Adjudicatory Settlement Agreements providing for front pay.

Enter the Beginning and Ending dates of the period covered by the Court Order, Award, or Settlement Agreement and the monetary amount due.

Please refer to the attached chart, Summary of Requirements for Salary Payments Pursuant to Court Orders, Awards, and Settlement Agreements, which summarizes the new requirements and appropriate earnings codes to be used.


Agency Actions

Payroll Officers should ensure that appropriate agency staff (General Counsel, Human Resources, etc.) is aware of these new requirements by providing them with a copy of this Bulletin.

Agencies must:

  • Submit by email the appropriate provisions (see Procedures section above) of the Court Order, Award, or Settlement Agreement and any additional documentation as requested by OSC, if applicable, to the salary award mailbox at payrollsalaryawards@osc.state.ny.us
  • Await approval from OSC prior to entering payroll transactions in the State Payroll System.

  • Enter OSC authorized transactions (this may include reinstating the employee on Job Data and updating subsequent rows), restart any Additional Pays and enter any applicable Additional Pay adjustments into the state payroll system.
  • Ensure that NYSTEP is properly updated to reflect the changes made in PayServ.

Court Orders, Awards, and Settlement Agreements providing for “back” or “front” pay are all processed through the Bureau of State Payroll Services.  As explained in more detail below, these payments are treated as wages for tax purposes.

Payments which are not considered wages (e.g., damages for emotional distress, punitive damages, interest, etc.) and which, as a result, are not subject to tax withholding (except in unusual cases) are not processed through the State Payroll System.  These payments are made on vouchers and processed through the Statewide Financial System by the Bureau of State Expenditures. 

If a Court Order, Award, or Settlement Agreement requires a payment for  “back” and/or “front” pay (which is subject to tax withholding), and also provides for other payments that are not subject to tax withholding (e.g., damages for emotional distress, punitive damages, interest or attorney’s fees),  agencies must submit the required documentation both to the Bureau of State Payroll Services (for the  portion of the payment  that is subject to tax withholding ) and the Bureau of State Expenditures (for the  portion of the payment  that is not subject to tax withholding)

Tax Treatment

Payments resulting from employment-related claims are, with very limited exceptions, taxable income to the employee.  However, depending on the nature of the claim to which the payment relates, as explained below, there may be different employment tax withholding requirements associated with the payment. 

Thus, proper categorization of each element of a payment made pursuant to a Court Order, Award, or Settlement Agreement is essential for purposes of satisfying the State’s tax withholding and reporting obligations under federal and state tax laws.
 
If the Court Order, Award, or Settlement Agreement does not describe the amount and nature of each payment to be made, then the agency must submit a statement identifying these payment details, together with an indication of whether the agency considers the payments (or portions thereof) to be taxable or non-taxable based upon the criteria set forth below.
 
Outlined below is a brief summary of the tax treatment relating to each type of payment. 

Back pay awards for current and former State employees are processed through the Bureau of State Payroll Services.  These payments are treated as wages for tax purposes, and are processed through the State Payroll System.

  • Federal, state and local income taxes, Social Security and Medicare taxes are withheld.
  • Back pay awards are reported on IRS Form W-2.

Front pay awards are also processed through the Bureau of State Payroll Services and are also treated as the payment of wages for tax purposes, and are also processed through the State Payroll System.  They are subject to the same tax withholding requirements that apply to back pay awards, and are also reported on IRS Form W-2.  Generally, front pay awards will be paid only where front pay is a remedy expressly available under an applicable statute (e.g., 42 U.S.C. §2000e-5), collective bargaining agreement, or in extraordinary situations where continuation of an individual as a State employee would present health or safety concerns for co-workers or others.

Back pay and front pay awards paid with Earnings Codes BPO, BJS, BPA, BAS, BPS, FPO, FJS, FPA, FAS, and FPS will have Federal taxes calculated using the flat supplemental rate. The flat supplemental rate for 2015 is 25%.

Compensatory damages are, as outlined below, generally, but not always, subject to taxation, and therefore must be reported to the IRS.  However, such payments are not subject to withholding, except in unusual cases (such as where the employee is subject to back-up withholding).  Such payments are not processed through the State Payroll System.  They are paid on vouchers through the OSC Bureau of State Expenditures.

  • Payments for non-physical injuries such as emotional distress, mental anguish, or defamation are taxable to the employee, and must be reported to the IRS on Form 1099-MISC, except to the extent that the payments are to reimburse the employee for actual medical expenses related to the claim that have not been deducted by the employee on his or her personal income tax return.
  • No taxes are withheld, except in unusual cases (such as where the claimant is subject to back-up withholding).
  • If the agency believes that some or all of an amount paid for mental anguish or emotional distress is exempt from taxation (and withholding) it must expressly identify the amount that is exempt and the basis for such assertion.
  • Payments to employees for personal physical injuries or physical sickness (including payments for pain and suffering) are not taxable, and are not reported on IRS Form 1099-MISC.  Such payments are rare in employment related cases, and the agency must expressly identify any amount that qualifies for such exemption, and the basis for the exemption.

Punitive damages as part of a settlement require an extraordinary justification.  Punitive damages are paid on vouchers through the OSC Bureau of State Expenditures.  Such damages are taxable to the employee, and are reported to the IRS on Form 1099-MISC.  Such payments are not subject to withholding, except in unusual cases (such as where the individual is subject to back-up withholding).

Attorney’s fees may be provided only where a statute expressly authorizes awards for attorney’s fees (for example, in federal Title VII cases).  Payments to the employee’s attorney are paid on vouchers through the OSC Bureau of State Expenditures. They are taxable to the attorney and are reported on Form 1099 – MISC.  Such payments are not subject to withholding, except in unusual cases (such as where the attorney is subject to back-up withholding).

Interest payments are paid on vouchers through the OSC Bureau of State Expenditures.  Such payments are taxable and are reported on a Form 1099 – INT.  Such payments are not subject to withholding, except in unusual cases (such as where the employee is subject to back-up withholding).

  • An employee files a grievance pursuant to a collective bargaining agreement, claiming that he was improperly terminated from his employment by a State agency.   The case is settled prior to the arbitration hearing on the basis that the employee will be restored to the payroll for a fixed period of time, at the expiration of which he will resign.  The entire payment is treated as back pay, reportable on Form W-2, and will be processed through the Bureau of State Payroll Services.
  • An employee claims to have been subjected to discrimination because of a disability, and files a lawsuit under the Americans with Disabilities Act following an agency’s termination of his employment.  The case is settled prior to trial on the basis that the employee be paid $100,000 (an amount equivalent to two years’ salary, which is two-thirds of what he would have earned had he remained on the payroll), plus $80,000 in damages for emotional distress.  Assuming the underlying nature of the claim supports the allocations made in the settlement agreement, $100,000 is treated as back pay from which employment taxes will be withheld, is reportable on Form W-2, and is processed through the Bureau of State Payroll Services.  The $80,000 allocated to damages for emotional distress is reported on Form 1099-MISC, with no withholding of employment taxes.  The $80,000 payment will be paid on a voucher through the OSC Bureau of State Expenditures.


Payroll
Register
and
Employee
Paycheck /
Advice

The Earnings Codes BPO, BJS, BPA, BAS, BPS, FPO, FJS, FPA, FAS, FPS, and the amount of the payment will be displayed on the payroll register. The appropriate earnings description and the amount will appear on the employee’s check or advice.

 

Questions

Questions about this bulletin may be directed to the payroll salary awards mailbox at payrollsalaryawards@osc.state.ny.us.