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Jennifer E. Gauger Office of the Indiana Attorney General

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NAAG/NAGTRI/SABA Bankruptcy From a Government Perspective Seminar Worker’s Compensation and Unemployment Taxes. Jennifer E. Gauger Office of the Indiana Attorney General. Worker’s Compensation Overview. - PowerPoint PPT Presentation
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NAAG/NAGTRI/SABA NAAG/NAGTRI/SABA Bankruptcy From a Government Perspective Seminar Bankruptcy From a Government Perspective Seminar Worker’s Compensation and Unemployment Worker’s Compensation and Unemployment Taxes Taxes Jennifer E. Gauger Jennifer E. Gauger Office of the Indiana Attorney General Office of the Indiana Attorney General
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Page 1: Jennifer E. Gauger Office of the Indiana Attorney General

NAAG/NAGTRI/SABANAAG/NAGTRI/SABABankruptcy From a Government Perspective SeminarBankruptcy From a Government Perspective Seminar

Worker’s Compensation and Worker’s Compensation and Unemployment TaxesUnemployment Taxes

Jennifer E. GaugerJennifer E. GaugerOffice of the Indiana Attorney GeneralOffice of the Indiana Attorney General

Page 2: Jennifer E. Gauger Office of the Indiana Attorney General

Worker’s Compensation OverviewWorker’s Compensation Overview

A government-mandated insurance program designed to A government-mandated insurance program designed to compensate employees who suffer job-related injuries or illnessescompensate employees who suffer job-related injuries or illnesses

Every state has adopted laws to administer worker’s compensationEvery state has adopted laws to administer worker’s compensation

Primary goal is to return the employee to work while providing support Primary goal is to return the employee to work while providing support when the employee is unable to workwhen the employee is unable to work

Provides immediate benefits such as wage replacement and medical Provides immediate benefits such as wage replacement and medical treatmenttreatment

Page 3: Jennifer E. Gauger Office of the Indiana Attorney General

Worker’s Compensation OverviewWorker’s Compensation Overview

Quid pro quo Quid pro quo Howard Delivery Service, Inc. v. Zurich American Ins. Co.Howard Delivery Service, Inc. v. Zurich American Ins. Co., ,

547 U.S. 651 (2006)547 U.S. 651 (2006) Common social trade-off: injured employee receives Common social trade-off: injured employee receives

limited benefits regardless of fault while giving up right to limited benefits regardless of fault while giving up right to recover full tort damagesrecover full tort damages

Employer-oriented thrustEmployer-oriented thrust Policies protect employers from full tort liability and cover Policies protect employers from full tort liability and cover

an employer’s obligation to pay compensationan employer’s obligation to pay compensation Often, if an employer is unable to pay, the employee may Often, if an employer is unable to pay, the employee may

attain benefits from the state’s fundattain benefits from the state’s fund Foreseeable costs for worker’s compensation for employerForeseeable costs for worker’s compensation for employer

Page 4: Jennifer E. Gauger Office of the Indiana Attorney General

Unemployment InsuranceUnemployment Insurance

States usually allow employers to provide worker’s States usually allow employers to provide worker’s compensation in three ways:compensation in three ways:

1.1. Self-insuranceSelf-insurance

2.2. State insurance fundState insurance fund

3.3. Third-party insuranceThird-party insurance

How an employer chooses to pay workers’ How an employer chooses to pay workers’ compensation may determine how those obligations compensation may determine how those obligations are prioritized if the employer files for bankruptcyare prioritized if the employer files for bankruptcy

Page 5: Jennifer E. Gauger Office of the Indiana Attorney General

Worker’s Compensation in BankruptcyWorker’s Compensation in Bankruptcy

All worker’s compensation claims are treated as All worker’s compensation claims are treated as arising on date the injury occurred, rather than the arising on date the injury occurred, rather than the date on which the employee actually receives date on which the employee actually receives compensation or medical benefits compensation or medical benefits

Worker’s compensation obligations are pre-petition Worker’s compensation obligations are pre-petition claimsclaims

Receive unsecured status and may only be paid, if at all, Receive unsecured status and may only be paid, if at all, at the end of bankruptcyat the end of bankruptcyMedical treatment is often withheld by health care Medical treatment is often withheld by health care providers who know they will only be paid as an providers who know they will only be paid as an unsecured creditorunsecured creditorWage replacement for the injured or ill employee may Wage replacement for the injured or ill employee may be severedbe severed

Page 6: Jennifer E. Gauger Office of the Indiana Attorney General

Problems with the Current ApproachProblems with the Current Approach

Automatic StayAutomatic Stay

Priority (lack thereof)Priority (lack thereof)

In re DPH Holdings Corp.In re DPH Holdings Corp., 448 Fed. Appx. 134 (2nd Cir. , 448 Fed. Appx. 134 (2nd Cir. 2012)2012)

Subject Matter JurisdictionSubject Matter Jurisdiction Injured employees are forced to litigate their rights in a Injured employees are forced to litigate their rights in a

potentially remote bankruptcy courtpotentially remote bankruptcy court

Sovereign ImmunitySovereign Immunity States unable to defend and litigate their own worker’s States unable to defend and litigate their own worker’s

compensation lawscompensation laws

Page 7: Jennifer E. Gauger Office of the Indiana Attorney General

Problems with the Current ApproachProblems with the Current Approach

Cost Shifting to the StatesCost Shifting to the States

State’s Claims for Excise TaxesState’s Claims for Excise Taxes Classification of Employers, e.g., non-profit entitiesClassification of Employers, e.g., non-profit entities In re DeRocheIn re DeRoche, 287 F.3d 751 (9th Cir. 2002), 287 F.3d 751 (9th Cir. 2002)

Discharged Upon ConfirmationDischarged Upon Confirmation

Different Treatment for Ordinary Wages and Health Care Different Treatment for Ordinary Wages and Health Care Benefits in BankruptcyBenefits in Bankruptcy

Unpaid wages and health care benefits accruing during Unpaid wages and health care benefits accruing during bankruptcy are administrative expensesbankruptcy are administrative expenses

Different Treatment for Worker’s Compensation Benefits Different Treatment for Worker’s Compensation Benefits Based on the Date of InjuryBased on the Date of Injury

Page 8: Jennifer E. Gauger Office of the Indiana Attorney General

Case Law UpdatesCase Law Updates

In re Cmty. Mem'l HospIn re Cmty. Mem'l Hosp., 494 B.R. 906 (Bankr. E.D. ., 494 B.R. 906 (Bankr. E.D. Mich. 2013)Mich. 2013)

In re Irving Tanning CoIn re Irving Tanning Co., 2013 WL 4400254 (1st Cir. ., 2013 WL 4400254 (1st Cir. BAP Aug. 15, 2013)BAP Aug. 15, 2013)

In re Somerset, IncIn re Somerset, Inc., 2013 WL 3788510 (Bankr. D. ., 2013 WL 3788510 (Bankr. D. Idaho July 19, 2013)Idaho July 19, 2013)

In re WiebeIn re Wiebe, 485 B.R. 667 (Bankr. D. Kan. 2013), 485 B.R. 667 (Bankr. D. Kan. 2013)

Page 9: Jennifer E. Gauger Office of the Indiana Attorney General

ProposalProposal

Treat obligations for wage replacement or medical Treat obligations for wage replacement or medical benefit payments as becoming a “claim” under the benefit payments as becoming a “claim” under the Bankruptcy Code only when the amount is due and Bankruptcy Code only when the amount is due and payable in the normal course of claims administrationpayable in the normal course of claims administration

Consistent with the definition of “claim” in 11 U.S.C. § Consistent with the definition of “claim” in 11 U.S.C. § 101(5)101(5)

Page 10: Jennifer E. Gauger Office of the Indiana Attorney General

Effects of ProposalEffects of Proposal

Only benefits already delinquent on petition date will Only benefits already delinquent on petition date will be treated as claims against the bankruptcy estatebe treated as claims against the bankruptcy estate

New benefits accruing post-petition will be treated New benefits accruing post-petition will be treated as administrative expenses that must be paid in full as administrative expenses that must be paid in full for the debtor to receive plan confirmationfor the debtor to receive plan confirmation

Benefit obligations arising after confirmation will Benefit obligations arising after confirmation will remain due and owed since they will not be “claims” remain due and owed since they will not be “claims” until such time as the expense is incurred in the until such time as the expense is incurred in the future future

Page 11: Jennifer E. Gauger Office of the Indiana Attorney General

Effects of ProposalEffects of Proposal

Claims that arise during the 180-day pre-petition Claims that arise during the 180-day pre-petition preference period will be given the same priority as preference period will be given the same priority as other wage and benefit claimsother wage and benefit claims

Except determinations relating to worker’s Except determinations relating to worker’s compensation from the automatic staycompensation from the automatic stay

Treats employees who suffered job-related injuries Treats employees who suffered job-related injuries or illnesses to be treated as working employeesor illnesses to be treated as working employees

Page 12: Jennifer E. Gauger Office of the Indiana Attorney General

Contributions v. ReimbursementsContributions v. Reimbursements

Employer contributions are considered taxes for 11 Employer contributions are considered taxes for 11 U.S.C. § 507(a)(8) priorityU.S.C. § 507(a)(8) priority

What about reimbursements to employers who pay What about reimbursements to employers who pay reimbursements in lieu of state/third-party premiums?reimbursements in lieu of state/third-party premiums?

Employer contributions meet the United States Employer contributions meet the United States Supreme Court’s definitions of “tax”Supreme Court’s definitions of “tax”

Enforced contributions - Enforced contributions - United States v. La Franca, 282 U.S. 568, 572 (1931)

Pecuniary burdens” - Pecuniary burdens” - City of New York v. Feiring, 313 U.S. 283, 285 (1941)

Lorber/Suburban II Lorber/Suburban II test - test - Ohio Bureau of Workers’ Comp. v. Yoder, 36 F.3d 484 (6th Cir. 1994); County Sanitation Dist. No. 2 v. Lorber Indus. of Cal., Inc., 675 F.2d 1062 (9th Cir. 1982)

Page 13: Jennifer E. Gauger Office of the Indiana Attorney General

Contributions v. ReimbursementsContributions v. Reimbursements

Reimbursements paid by employers in lieu of Reimbursements paid by employers in lieu of contributions are not taxescontributions are not taxes

In re Suburban Motor Freight, Inc.In re Suburban Motor Freight, Inc., 36 F.3d 484 (6th Cir. , 36 F.3d 484 (6th Cir. 1994)1994)

In re Boston Reg’l Med. Ctr., Inc.In re Boston Reg’l Med. Ctr., Inc., 291 F.3d 111 (1st Cir. , 291 F.3d 111 (1st Cir. 2002)2002)

In re United Healthcare System, Inc.In re United Healthcare System, Inc., 396 F.3d 247 (3rd , 396 F.3d 247 (3rd Cir. 2005)Cir. 2005)

But see But see In re Albert Lindley Lee Memorial HospitalIn re Albert Lindley Lee Memorial Hospital , 428 , 428 B.R. 283 (Bankr. N.D. N.Y. 2010) B.R. 283 (Bankr. N.D. N.Y. 2010)

More cost shifting to the statesMore cost shifting to the states

Incentive to pay reimbursements in lieu contributionsIncentive to pay reimbursements in lieu contributions


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