The State Human Resources Director must approve the amount of reinstatement pay due to a covered employee in a reversed disciplinary action resulting from the agency internal grievance procedures, appeals at the state level or any other time a disciplinary action is reversed. This includes back pay following an employee’s return to work from a suspension pending investigation. See State Human Resources Regulations Section 19-718.10.
To request approval of back pay, an agency must submit a letter requesting approval and providing a reason the back pay is being provided. Additionally, agencies must submit a Back-Pay Calculation Work Sheet (.pdf) and a Notarized Statement of Earnings and Unemployment Compensation (.doc).
In some circumstances a personnel settlement between an agency and employee or former employee must be approved by the State Human Resources Director or the State Fiscal Accountability Authority. To determine if a settlement will require approval, please contact the Division of State Human Resources Alternative Dispute Resolution Program. To ensure there are no delays in receiving approval, agencies are urged to contact the Alternative Dispute Resolution Program before finalizing an agreement.
If approval is necessary, a justification letter must be submitted and include the following:
- Background and analysis of case.
- Liability to agency, if applicable.
- Cost effectiveness of settling the matter.
- Benefits and interests of settling the matter.
In addition, settlement agreements must contain the clauses indicated on the Personnel Settlement Checklist (.doc).
Agencies may engage an attorney at law, on a fee basis, to assist in the drafting of personnel settlements so long as the attorney is engaged in accordance with Section 1-7-170 of the South Carolina Code of Laws of 1976. As amended, the law requires that a department or agency of state government receive approval from the Attorney General prior to engaging an on a fee basis attorney at law and that the related fee be approved by the Attorney General.
Agencies are strongly encouraged to submit proposed agreements to the Division of State Human Resources Alternative Dispute Resolution Program for review prior to obtaining signatures.
Tax Implications for Personnel Settlements
The Internal Revenue Service (IRS) can impose fines or penalties on agencies if the parties to the settlement do not determine the taxation of the lump sum amount properly. Before agreeing to a lump sum amount, agencies should become familiar with the methods for determining the proper taxation of personnel settlements to avoid any potential fines or penalties.
Settlements and judgments are treated similarly when it comes to taxation, and agencies must be aware that the IRS may impose severe penalties on employers who do not withhold mandatory deductions on wage based lump sum settlements or monetary judgments. The responsibility for determining whether the lump sum payment is wage based or non-wage-based is left to the parties named in the settlement.
Parties to a monetary settlement must first determine the reasons for the payment. This determination will assist in deciding whether the payment is wage-based or non-wage based.
- If wage-based: The payment is subject to the standard state and federal withholdings. For example, FICA, FUTA, state unemployment tax, state income tax and federal tax withholdings will be deducted. The employer is responsible for reporting the wage-based payment on a W-2 Form. Examples of wage-based payments may include: back wages, future wages, allegations of inequity in pay and misclassification of position.
- If non-wage based: These types of payments fall into several categories. Parties will need to determine which categories are appropriate based on the origin of the claim. These categories include:
- Physical Injuries - Includes all physical injuries sustained by the party. It may also include pain and suffering resulting from physical injuries. Payments of this nature are non-taxable.
- Non-physical Injuries - Examples of non-physical injuries include defamation, conspiracy and free speech violations. Payments of this kind are subject to income tax and should be reported by the employer on a Form 1099.
- Emotional Distress and Mental Anguish - Parties should first consider whether the emotional distress is caused by a physical or non-physical injury. If the emotional distress is caused by a physical injury the payment is considered non-taxable. If, however, the emotional distress is caused by a non-physical injury, the payment will be taxable income. This income should be reported by the employer on a Form 1099.
- Other - Fees such as court costs, attorney's fees and interest are subject to tax and should also be reported on a Form 1099.
To ensure that your settlement is allocated properly, parties should:
- Identify the basis for the payment.
- Indicate the settlement amount.
- Allocate in writing each dollar of recovery to the respective category.
Agencies should maintain a file containing any documentation that supports the allocation of the settlement or judgment amount. Failure by the agency to allocate damages into categories will allow the IRS, at its discretion, to allocate damages or to treat the entire payment as back wages. This IRS allocation could result in additional employer liability for failure to withhold taxes, plus penalties and interest.
Most personnel settlements which contain lump sum amounts will be wage-based in nature. As stated earlier, these types of settlements will require an agency to withhold the standard State and Federal deductions before issuing a check for the lump sum amount. Agencies will be responsible for reporting the wage-based portion of the settlement on the appropriate federal form. You may wish to contact the IRS or the South Carolina Department of Revenue regarding the reporting of tax information.