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Cifuentes v. Costco Wholesale Corp.

California Court of Appeals, Second District, Third Division

June 26, 2015

CARLOS CIFUENTES, Plaintiff and Respondent,


Superior Court County of Santa Barbara, No. 1338554 Thomas P. Anderle, Judge

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Stradling Yocca Carlson & Rauth, Jeffrey A. Dinkin, Shahzad A. Malik, Gannon E. Johnson and Ryan C. Gaglio for Defendant and Appellant.

Edward Lowenschuss; and Diane M. Matsinger for Plaintiff and Respondent.



Carlos Cifuentes won a judgment for lost wages against his former employer, Costco Wholesale Corporation (Costco). Costco withheld federal and state payroll taxes from the award. Cifuentes claimed the judgment was not satisfied, citing the decision in Lisec v. United Airlines, Inc. (1992) 10 Cal.App.4th 1500, 1507 [11 Cal.Rptr.2d 689] (Lisec), that an employer is not required to withhold payroll taxes from an award of lost wages to a former employee. Believing it was bound by Lisec, the trial court ruled the withholding was improper and denied Costco's motion for acknowledgment of satisfaction of the judgment. We conclude this was error.

In the 23 years since Lisec, the Internal Revenue Service (IRS) and the vast majority of federal appellate courts have broadly interpreted the applicable Internal Revenue Code (IRC) provisions as requiring an employer to withhold payroll taxes for all "wages" arising from the employer-employee relationship, even after that relationship has terminated. Persuaded by these authorities, we adopt this prevailing view and conclude Costco properly withheld the payroll taxes. The judgment having been satisfied, we reverse the trial court's order and remand with instructions.


While employed by Costco, Cifuentes observed a front-end manager hugging a female employee outside the store. He reported the incident to a supervisor. Six months later, the front-end manager reported seeing Cifuentes surreptitiously sip three ounces of a beverage sold by Costco. Costco

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terminated Cifuentes's employment for violating its policy against "grazing, " i.e., consuming food merchandise without payment.

Cifuentes filed a wrongful termination complaint alleging contract claims against Costco and tort claims against Costco and three of its managers. The trial court summarily adjudicated the tort claims in the defendants' favor.

Cifuentes prevailed at trial on his breach of contract claim. The jury awarded him $28,125 in "past wage loss" and $273, 253 in "future wage loss." With costs and interest, the judgment totaled $325, 692.07. Cifuentes appealed the portion of the judgment summarily adjudicating the tort claims in favor of Costco and its managers. We affirmed. (Cifuentes v. Costco Wholesale Corp. (July 10, 2012, B231684) [nonpub. opn.].)

When Costco paid the judgment, it withheld $116, 150.84 in payroll taxes from the $301, 378 attributed to lost wages. The taxes included Federal Insurance Contributions Act (FICA; 26 U.S.C. § 3101 et seq.) contributions, federal and state income taxes and state disability insurance. Maintaining it was required by law to withhold the taxes, Costco informed Cifuentes it had fully satisfied the judgment.

Initially, Cifuentes claimed that postjudgment interest of $274.53 was still owed. Costco disputed this, but paid the $274.53 and demanded that Cifuentes acknowledge full satisfaction of the judgment. Cifuentes again declined, pointing to the Sixth Appellate District's decision in Lisec, supra, 10 Cal.App.4th at page 1507, that an award of lost wages to a former employee is not subject to withholding. He asserted Costco should have paid him the full judgment amount, issued a 1099 tax form for the lost wages and allowed him to pay any taxes due directly to the taxing authorities. Cifuentes filed an acknowledgment of partial satisfaction in the amount of $209, 898.15.

In a series of letters, the parties disputed whether Lisec was controlling. Costco cited a number of contrary IRS and federal case authorities and highlighted the admonishment in a respected California practice guide that "[e]mployers should not rely on Lisec, supra. The opinion does not cite or mention contrary federal cases on what is basically an issue of federal tax law." (Chin et al., Cal. Practice Guide: Employment Litigation (The Rutter Group 2014) ¶ 17:897, p. 17-169 (Cal. Rutter Employment Guide); accord, Rosen et al., Cal. Practice Guide: Federal Employment Litigation (The Rutter Group 2015) ¶ 11:897, p. 11-110 (Fed. Rutter Employment Guide).) Costco further noted that Cifuentes's own financial expert, Pamela Allman, testified that any compensation for "lost past or future wages" would be "subject to payroll taxes, " including "Social Security, Medicare, [and s]tate disability insurance."

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The impasse remained until Cifuentes received $69, 078 in tax refunds from the IRS and California's Franchise Tax Board. Costco again demanded he acknowledge satisfaction of the judgment. Cifuentes refused, claiming he was still owed $23, 764.95 plus interest. Costco moved for an acknowledgement of satisfaction of judgment pursuant ...

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