Rev. Rul. 57-55

The Internal Revenue Service has been requested to determine whether certain payments made to employees by their employer or by a labor organization, pursuant to `back pay orders' issued by the National Labor Relations Board, constitute `wages' for Federal employment tax purposes.

The National Labor Relations Act, 61 Stat. 136, 29 U.S.C. 160, as amended, empowers the National Labor Relations Board to remedy the illegal discharge of an employee by directing reinstatement and requiring the payment of back pay by the employer or labor organization, as the case may be, responsible for such improper discharge.

In a proceeding under the National Labor Relations Act, an employer and a labor organization may be made joint respondents by a complainant employee with respect to particular discriminatory acts alleged in the complaint. In some instances, however, a labor organization may be the sole respondent in an action designed to obtain redress for the alleged misconduct of the labor organization in causing an employer to discriminate against employees in violation of section 8(b)(2) of the Act. In other cases, the sole respondent may be the employer, who is charged with discriminatory conduct against an employee or employees in violation of section 8(a)(3) of the Act. In any event, the Board's jurisdiction in a particular case is limited to the particular party or parties against whom a complaint has been brought.

Where an employer and a labor union are joint respondents, the Board makes them jointly and severally liable for the payment of any award of back pay. Where the order with respect to back pay is issued in a case involving both the employer and a labor organization, the Board is not concerned under a joint and several order as to who might make the back payment. The parties may make the payment to the employee under any arrangements they might see fit. The Board's sole concern is that the employee receive the proper amount. Accordingly, payment might be made in various ways. For example, the employer or the labor organization might pay with or without contribution by the other. Again, either might pay the required amount to the employee directly, after contribution by the other. Still again, each may pay a part directly to the employee.

With certain exceptions not here material, section 3121 of the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954) defines the term `wages' as `all remuneration for employment,' and the term `employment' as `any service, of whatever nature, performed by an employee for the person employing him.'

On the basis of the decision of the Supreme Court of the United States in the case of Social Security Board v. Joseph Nierotko , 327 U.S. 358, it is the position of the Internal Revenue Service that in situations involving an employer-respondent alone, the amounts received by an aggrieved employee of such employer under a `back pay award' order by the National Labor Relations Board constitute `wages' for Federal Insurance Contributions Act purposes. In such situations, a wrongfully discharged employee should be treated, for the period of wrongful discharge, as an `employee' of the employer who had wrongfully discharged him. See Mim. 6040, C.B. 1946-2, 155.

It is necessary to identify amounts paid to an individual as remuneration for services rendered in an employer-employer relationship existing between the parties in order to subject such payments to the taxes imposed under the Federal employment tax statutes. In the situation described herein, where the payment is made by the employer, both the requisite relationship and the payment are present. These factors also are considered to be present in the situation where an employer and a labor organization are joint respondents, regardless of the arrangements between the employer and the labor organization as to who will make the actual payment to the employee. However, a payment of a back pay award made by a labor organization, pursuant to an order by the National Labor Relations Board, directed exclusively to the labor organization as a result of a proceeding to which the employer is not a party, cannot be considered as a payment by the employer, or on behalf of the employer, since the requisite relationship does not exist.

It is therefore the further position of the Internal Revenue Service that in the case of a payment of back pay to an employee, pursuant to an order of the National Labor Relations Board which makes both the employer and a labor organization jointly and severally liable, such payment will, for Federal Insurance Contributions Act purposes, be treated as `wages' paid by the employer regardless of whether the actual payment to the employee was made by the employer or by the labor organization. However, a payment of back pay by a labor organization, pursuant to an order of the Board directed exclusively to such labor organization and in a proceeding to which the individual's employer is not a party, will not be treated as a payment of `wages' for such purposes.

The above conclusions are also applicable with respect to the tax imposed by the Federal Unemployment Tax Act and for purposes of the Collection of Income Tax at Source on Wages (chapters 23 and 24, respectively, subtitle C, Internal Revenue Code of 1954).