Rev. Rul. 61-68

Advice has been requested relative to the treatment, for Federal employment tax purposes, of payments made by an employer to certain specifically designated employees pursuant to the provisions of a collective bargaining agreement.

Under the terms of the agreement, the employer guarantees to certain employees specifically named therein employment or an employment allowance for a number of hours of `straight time' equal to the number of hours in the company's normal work year. The normal work week for each regular employee is 37 1/2 hours. Thus, the normal work year of the employees would not exceed 52 times 37 1/2 hours, or 1,950 hours. Periods of absence due to any reason other than layoff by the employer or leave without pay are counted as time actually worked by the designated employee involved for purposes of computing the employer's liability under the guarantee of a full year of `straight time' employment. The agreement further provides that the employment allowances will be paid a specifically named employee only if:

(1) he is on layoff from the employer with respect to the week for which the allowance is claimed:

(2) he was not laid off for disciplinary reasons and such layoff was not the consequence of any strike or work stoppage, act of God, or other reason beyond the control of the employer;

(3) he has not refused to accept work when recalled;

(4) he has not quit or been discharged for cause and has not retired; and

(5) he is entitled to benefits under the State unemployment insurance laws, except as provided in A and C, below.

The employment allowances in question are based on the individual's job classification and weekly wage rate as set forth in the agreement. If an employee does not work the full 1,950 hours of the employer's work year and is entitled to employment allowances under the conditions set forth above, he is paid such allowances as follows:

A. For the first such week of unemployment, the employer will pay an amount equal to the employee's regular weekly were as shown in the agreement, less any statutory deduction or withholding. Thus, if an employee's regular weekly wage is $82 and he is not entitled to unemployment insurance benefits for that week, he would be paid by the employer $82, less any statutory withholding or contributions.

B. Thereafter, and during the period for which an employee is entitled to receive unemployment insurance benefits, the employer will pay the employee an amount equal to the difference between his regular weekly wage and the amount he receives in State unemployment benefits, less any necessary statutory withholding or contributions. Thus, if an employee's regular weekly wage is $82 and he receives $35 in unemployment insurance benefits, he would be paid by the employer $47, less any statutory withholding or contributions.

C. At the expiration of the State unemployment benefits' period, if the employee is still unemployed the employer will pay an amount equal to the employee's regular weekly wage, less any statutory withholding or deductions. Thus, if an employee's weekly wage is $82 and he is no longer receiving unemployment insurance benefits, he would be paid by the employer $82, less any statutory withholding or contributions.

The agreement further provides that layoffs shall be based upon seniority so that the employees with the highest seniority will have priority in electing to be placed in layoff status. Whenever an employee accepts a layoff his name is placed at the bottom of the list for this purpose. In this way all of the employees named in the collective bargaining agreement have an opportunity to receive, in rotation, the benefits set forth in the plan.

Under section 3121(a) of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954), the term `wages' means, with certain exceptions not here material, all remuneration for `employment.' The term `employment,' as defined in section 3121(b) of such Act, means any service performed by an employee for the person employing him, with certain exceptions and limitations.

The basic or fundamental purpose of the provisions of the collective bargaining agreement here under consideration is to provide certain designated employees with a guaranteed annual wage. Under the terms of the agreement, each employee so designated is assured of full pay during the year at his classification rate for the number of hours in his normal work year, less the amount of such pay for each hour that he may be in a leave-without-pay status.

Thus, the collective bargaining agreement, in effect, provides an annual salary for the employees concerned, measured by the employee's classification rate multiplied by the number of hours constituting the employee's normal work year. The fact that such employee's guaranteed annual wage may be reduced under certain prescribed circumstances, such as taking time off in excess of authorized vacation or sick leave, or being laid off as a disciplinary measure, in no way alters the basic or fundamental purpose of the agreement. The specified benefits are payable in any event to qualifying employees and are not based upon or limited by amounts set aside or contributed to a fund at a fixed amount per hour during periods of active employment. Accordingly, the guaranteed annual wage plan in question does not constitute a supplemental unemployment benefit plan similar in all material respects to the plan described in Revenue Ruling 56-249, C.B. 1956-1, 488. Furthermore, the provision of the agreement which, under specified conditions, reduces the employer's liability for the payment of such guaranteed annual wage by the amount of any benefits the employee may receive under the state unemployment insurance law does not convert any portion of such guaranteed amount into a supplemental unemployment benefit within the meaning of Revenue Ruling 56-249, supra .

In view of the foregoing, it is held that under the provisions of the collective bargaining agreement herein considered, the payments made by the employer to the individuals specifically designated as being entitled to the employment allowance are `wages' subject to the taxes imposed by the Federal Insurance Contributions Act.

This conclusion is also applicable for purposes of the Federal Unemployment Tax Act and the Collection of Income Tax at Source on Wages (chapters 23 and 24, respectively, subtitle C of the Code).

Revenue Ruling 56-249, C.B. 1956-1, 488, distinguished.