After a recent Public Employment Relations Board (PERB) decision, the County of Ventura was ordered to pay for tax professional services for members of the Criminal Justice Attorneys Association of Ventura County, with interest, after PERB determined that the County engaged in bad faith bargaining. The County and Association found themselves thrust into negotiations regarding the County’s Annual Leave program when the County determined that there was potential for negative tax penalties because recent Internal Revenue Service opinions indicated that the accrual of personal leave should be considered “constructively received” income whether or not it was actually cashed out. The IRS’s relatively recent decision to classify accrual of leave time as constructively received taxable income has caused a great number of accounting nightmares for both unions and municipalities alike. Upon learning about this potential for tax liability, the County sought to reopen negotiations and drastically alter the leave program. Over the course of negotiations that spanned at least three tax years, the County made a number of unilateral decisions and ultimately the County was found to have bargained in bad faith for misrepresenting their intended actions to the Association and for making an unnecessary “exploding offer” during negotiations.
The Meyers-Milias-Brown Act provides an unqualified requirement that employers and employee organizations meet and confer in good faith. (Gov. Code § 3505.) PERB uses a totality of conduct test to decide whether an employer has violated this requirement. The real question under this test is whether the employer’s conduct, when viewed as a whole, is sufficiently egregious to frustrate negotiations. (City of San Ramon (2018) PERB Decision No. 2571-M, p. 5.) Under this test, PERB commonly finds that tactics such as misrepresenting facts or positions, failing to explain a bargaining position, failing to provide requested information related to a bargaining position, evading, failing to prepare for negotiations, or making time limited offers without reason are all indicative of bad faith in the bargaining process. Not every single instance of an employer using these tactics will mean they bargained in bad faith. However, PERB often determines an employer has bargained in bad faith when bad faith tactics are frequently employed. Additionally, PERB often finds that when an employer unilaterally implements changes in the working environment or conditions, they are typically bargaining in bad faith.
Around 2015, the IRS stated that if employees have complete freedom to cash out their accrued PTO, they must report the entire value of the PTO as taxable income in the year they accrue it regardless of whether the employee actually ever cashes it out. To remedy this issue, many employers are now implementing systems where employees must decide during the prior taxable year whether they will be cashing out their PTO or keeping it, and once they make that decision, they cannot go back on it. The County attempted to implement a similar system with the Association despite the fact they were still under an existing Memorandum of Agreement (MOA).
There were two main problems with the way the County handled this change in tax law. The first problem was that during the bargaining process the County representative repeatedly told the Association that although the County would be required to report the amount of leave accrued by employees as taxable income, the County would not be withholding tax on this newly classified income. However, the County did end up withholding tax on the constructively received tax income, thus causing some employees to have $0 paychecks across multiple pay periods. Even more egregious was that in withholding these massive amounts toward the end of the year, the County made several errors such as withholding the max amount an employee could accrue even if they had accrued less, or withholding the max amount despite the employee having already paid tax on cashed out PTO. The second problem was that during negotiations regarding the leave changes, another representative for the County arbitrarily made a proposal for the new MOA to the Association and told the Association they had only 3 days to accept it, which essentially made the proposal meaningless.
PERB found that the County had no justification to make a 3-day “exploding offer” and that the County only did it to strong-arm the Association into accepting it, a tactic that is particularly indicative of bad faith. Regarding the County’s repeated statements that the County would not be withholding tax on the constructively received income, PERB found that these statements were misrepresentations that substantially impacted the bargaining process. Had the Association been aware of the impending withholding, they could have responded very differently to proposals and possibly worked out an agreement. Further, PERB found that the County unilaterally implemented its tax withholding decision because of their antics, the fact that the County was not under any real time pressure to make the decision, and the County did not give sufficient advanced notice to the Association.
Due to the catastrophic results of the County’s withholding implementation, many employees retained tax professionals to file for tax refunds on their behalf. PERB found that requiring the County to cover the cost of the tax professional services was an appropriate remedy to make the employees whole given the bad faith bargaining by the County. This decision applied not only to tax professional fees that had already been incurred, but also for future tax fees that would be incurred by others that intended to file for refunds.
As more employers attempt to implement leave systems to account for the potential tax consequences, these withholding practices may become more prevalent. Watch out for “exploding offers” that have an arbitrary deadline as employers may use ongoing tax consequences as justification. This decision provides a good baseline of where PERB stands on employer bad faith bargaining and the consequences of unilaterally implementing sudden tax withholding decisions that have a disparate impact on employees.
