The opinion of the court was delivered by: Morrison C. England, Jr. United States District Judge
Presently before the Court is a Motion by Defendant Umpqua Bank ("Defendant") to Confirm Satisfaction of Judgment paid to Plaintiffs Stephen L. Swarbick and Elizabeth Festejo ("Plaintiffs") pursuant to the December 30, 2009 "Final Arbitration Opinion and Award" issued in favor of Plaintiffs, and subsequently confirmed by this Court on February 26, 2010.
A dispute has arisen between the parties as to whether federal and state payroll taxes should be withheld from the judgment to be paid to Plaintiffs.*fn1 The parties have stipulated that the issue be submitted to this Court for resolution. For the reasons set forth below, the Court finds that the judgment in favor of Plaintiffs is not subject to payroll tax, and resultantly Defendant's Motion to Confirm is denied.*fn2
In July 2003, Defendant*fn3 and Woodbury Financial Services ("Woodbury") entered into a Third-Party Brokerage Agreement whereby certain employees of Defendant would dually serve as Registered Representatives of Woodbury, selling financial products on their behalf. Woodbury is a registered securities broker-dealer that provides administrative and clearing functions for institutions and brokers who cannot handle securities sales directly under federal law.
Plaintiffs served as such "dual agents" meaning that they were simultaneously employed by Defendant while selling securities as representatives of Woodbury. Accordingly, Plaintiffs had an Employment Agreement contract with Defendant and a separate agreement with Woodbury. Securities sales were made either to customers of Defendant or through the dual agent's personal contacts.
As compensation for securities sold through Defendant and the dual agents, Woodbury paid a commission to Defendant on a semi-monthly basis. However, pursuant to the Third-Party Brokerage Agreement, Defendant was not entitled to commissions for sales generated through the dual agent's personal contacts. Instead, it was the responsibility of Defendant to forward the appropriate funds to Plaintiffs.
However, commissions were not forwarded to Plaintiffs, and in 2008 Plaintiffs filed suit against Defendant alleging breach of contract to third-party beneficiaries, breach of fiduciary duties, unjust enrichment, and breach of California Labor Code. Pursuant to Plaintiffs' Employment Agreements, the matter was then submitted to arbitration. On December 30, 2009, the Arbitrator issued a Final Award granting damages to Plaintiffs on the grounds of breach of fiduciary duty. Attorney's costs and fees were awarded to Swarbick and Festejo.
On February 26, 2010, The court confirmed the Arbitration Award issued in favor of Plaintiffs. Defendant subsequently submitted to Plaintiffs checks for payment of judgment from which it withheld state and federal payroll taxes.
Plaintiffs have refused to accept the checks as satisfaction of judgment, arguing that Defendant is not entitled to withhold payroll taxes. Plaintiffs assert that the damages awarded was not based on income owed by Defendant but rather on commissions paid to them by Woodbury which Defendant was required to dispense.
Under the Federal Insurance Contributions Act ("FICA"), both an employer and employee are liable for employment taxes on wages. See 26 U.S.C. § 3101 et seq. FICA defines "wages" as "all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash." 26 U.S.C. § 3121(a). FICA goes on to define employment as "any service, of whatever nature, performed...by an employee for the person employing him." 26 U.S.C. § 3121(b).
The Supreme Court and the Ninth Circuit have emphasized the broad nature of Section 3121(b)'s definition of "employment", holding that, "'Service' as used by Congress in this definitive phrase means not only work actually done but the entire employer-employee relationship for which compensation is paid to the employee by the employer." Rivera v. Baker West, Inc, 430 ...