California’s corporate tax base may increase by up to 12% as a result of federal tax reform legislation, according to a study recently released by the State Tax Research Institute (STRI).
This means that revenues from California’s corporate income tax could increase by as much as $1.3 billion—without any action by state lawmakers to increase corporate tax rates or income definitions.
Larger tax revenues will result from the new tax reform law, which limited deductions and changed foreign tax rules. The federal tax law imposed new restrictions on companies’ ability to deduct interest payments, exchange property without paying capital gains taxes, deduct some fringe benefits and immediately write off future research costs. At the federal level, those changes were far outweighed by the rate cut.
According to Karl Frieden, vice president and general counsel at the Council on State Taxation, the study’s sponsor, “The state tax increase for corporations is totally inadvertent.”
The windfall from federal tax reform will likely produce even more revenue than would a recently proposed constitutional amendment to impose a 10% surcharge on corporate net incomes of more than $1 million.
The avowed purpose of that measure is “to share with ordinary California taxpayers the economic gains provided by federal income tax cuts for corporations with over one million dollars ($1,000,000) in net income.”
It turns out that federal tax reform will accomplish that goal without the Legislature casting a vote.
“The Impact of Federal Tax Reform on State Corporate Income Taxes” was prepared for STRI by Ernst & Young. STRI is the 501(c)(3) research affiliate of Council on State Taxation, a nonprofit trade association of multistate corporations.
Overtime pay in California is based on the employee’s “regular rate of pay,” which is not always an employee’s normal hourly wage and must include almost all forms of pay that the employee receives. But how do you calculate the regular rate of pay when an employee receives both an hourly wage and a flat sum bonus – such as an extra $15 for working a weekend shift?
This week, the California Supreme Court ruled that an employer must calculate the regular rate of pay by dividing the employee’s total compensation by the number of nonovertime hours an employee worked during the pay period, rather than the total number of hours the employee worked, including overtime hours (Alvarado v Dart Container Corporation of California).
In the case, Dart Container Corporation of California, which manufactures food service products such as cups and plates, allegedly maintained a policy of paying a flat “attendance bonus” of $15 per day to employees who worked Saturday and Sunday shifts, regardless of the number of hours worked on the weekend shift. An employee sued, claiming he was improperly paid overtime during the weeks that he earned the weekend attendance bonus.
The employee argued that overtime pay on any flat sum bonus should be divided only by the “regular” hours he worked that week (the method in the Division of Labor Standards Enforcement [DLSE] manual), not by the “total” hours worked during the week (regular hours plus overtime hours worked, the federal formula). For example, to determine the employee’s regular rate of pay, you would divide only by 40 regular hours instead of 48 total hours (regular hours plus overtime hours). This would result in a higher regular rate of pay and, thus, a higher overtime rate.
The lower court followed the federal formula for calculating overtime on flat sum bonuses and rejected the DLSE’s method found in its Enforcement Manual — finding that the manual is only guidance and not legally binding, and that California had no controlling law.
Supreme Court Agrees with Employee
The California Supreme Court unanimously reversed the lower court and approved the DLSE method of calculating the regular rate of pay when a flat sum bonus is involved: Employers must divide the employee’s total compensation by the employee’s nonovertime hours worked (not by the total hours worked).
The Court reasoned that a flat sum bonus is not tied to the number of hours worked – the $15 will be paid when an employee picks up a weekend shift, regardless of how many hours the employee worked that week. Because the flat sum bonus was payable even if the employee didn’t work overtime, only the nonovertime hours should be considered when calculating the regular rate of pay.
The Court also based its ruling on two other policy factors:
Interestingly, the Court held that the DLSE manual is a void underground regulation and not entitled to any deference. But, despite this holding, the Court held that it could consider the DLSE’s interpretation of the law if the Court was independently persuaded it was correct —which in this case it was.
The California Supreme Court was presented with an employer who was seemingly trying to do the right thing — giving its employees a bonus and taking that bonus into account when calculating overtime pay. The employer relied on a commonly used federal formula to calculate the regular rate of pay where there was no specific controlling state law on the issue.
Despite these efforts, the Court found against the employer. The employer asked the Court to only apply the decision going forward – as it would be unfair to hold the employer liable when no statute specifically addressed the flat-sum bonus calculation. Unfortunately, the Court determined that the employer should not be given a “free pass” and that its holding would apply retroactively, not just going forward.
This decision is limited to flat-sum bonuses, but we may see employees argue that it should apply to other types of extra compensation.
Employers who want to give “extra pay” to hourly workers should consult legal counsel.
CalChamber members can test their knowledge of some of the rules and exceptions for paying overtime in California in the Overtime Quiz. Not a member? Learn more about what HRCalifornia can do for you.
The Internal Revenue Service (IRS) and the Federal Bureau of Investigation (FBI) recently warned payroll and human resources professionals of a dangerous Form W-2 phishing scam that victimized hundreds of organizations and thousands of employees during the last two tax seasons—and this season is no different.
The scam goes like this: Cybercriminals identify your company’s chief operating officer or other high-level executives, pose as the executive and send emails to payroll personnel. In these emails, the fraudsters request copies of employee Forms W-2 or ask for a list of all employees and Social Security numbers (SSNs). Using a technique called business email compromise or business email spoofing, these emails look like they were sent from within your organization.
No Typical Email
According to the IRS, the initial email may be a friendly, “Hi, are you working today?” type of exchange before the fraudster asks for all Form W-2 information. But that isn’t always the case.
Last year, one actual email simply asked payroll, “[S]end me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary) as of 2/22/2016.”
Criminals then use the stolen personal information and data on the W-2s, such as SSNs, to file fraudulent tax returns for refunds. Or they sell the information on the “Dark Net.”
Last year’s scams affected all types of employers—small and large businesses, public schools and universities, hospitals, tribal governments and charities. In 2017, reports about this scam to firstname.lastname@example.org from victims and nonvictims jumped to approximately 900, up from 100 the previous year. More than 200 employers were victimized in 2017, which translated into hundreds of thousands of employees who had their identities compromised.
Employers need to educate payroll, HR and finance personnel of the W-2 scam. The IRS also urges employers to:
Employers also should immediately notify the IRS if they are victimized. The IRS can then take steps to help prevent employees from being victims of tax-related identity theft. Unfortunately, because of the nature of these scams, some businesses and organizations don’t realize for days, weeks or months that they were scammed.
The IRS has a special email notification address specifically for employers to report Form W-2 data thefts. Here’s how Form W-2 scam victims can notify the IRS:
Employers can learn more at the IRS webpage on Form W-2/SSN Data Theft: Information for Businesses and Payroll Service Providers.
A February 21 press release from the FBI Internet Crime Complaint Center, ic3.gov, provides additional information about how to report the situation to state tax agencies and other law enforcement officials.
The California Chamber of Commerce Board of Directors voted to support Proposition 68 (The California Clean Water & Safe Parks Act), a bond measure that will appear on the June 2018 ballot. The measure funds vital investments in the state’s natural resources, with a crucial emphasis on water quality and reliability.
CalChamber is proud to be a part of the broad coalition supporting Prop. 68 and urges members to join in issuing support for the bond today by clicking the link at the campaign website: https://yes68ca.com.
CalChamber’s endorsement has been echoed by organizations throughout the state, including the League of California Cities, Association of California Water Agencies, the American Heart Association, California State Parks Foundation, The Nature Conservancy and League of Women Voters.
Why CalChamber Supports
The state Legislature passed SB 5 (de León; D-Los Angeles) to put the bond measure on the ballot. If approved by voters, the measure would authorize the issuance of $4 billion in general obligation bonds.
The funds for water quality and supply total $1.27 billion of the $4 billion (30%). The funds for environmental protection and restoration total $2.83 billion of the $4 billion (70%).
The CalChamber Board voted to support Prop. 68 because the measure:
Why Join Endorsers
Prop. 68 will help tackle some of the most critical issues facing the state, helping to make California’s water supplies more secure, making needed investments in drought preparedness and ensuring every California community has access to safe, quality parks.
The measure will fund projects to ensure clean drinking water throughout California, protect communities from floods, safeguard the state’s oceans, rivers, lakes and streams, and build new outdoor spaces in neighborhoods with the greatest need.
The CalChamber invites members to join us in pushing for Prop. 68’s passage by lending their names to the broad coalition of organizations already supporting the measure.
For further information on Prop. 68, please contact Sarah Melbostad at email@example.com or (818) 760-2121.
Attorney General, Labor Commissioner Issues Guidance and FAQ for Employers on Immigration Enforcement Actions
California Attorney General Xavier Becerra and Labor Commissioner Julie Su yesterday issued two documents for California employers dealing with California’s Immigrant Worker Protection Act (AB 450).
Attorney General Becerra issued an advisory providing an overview of and guidance on the privacy prescriptions under AB 450. Commissioner Su also issued joint guidance on frequently asked questions to help employers and workers understand and comply with the new state law.
Under AB 450, all employers, regardless of size, must limit U.S. Immigration and Customs Enforcement (ICE) agents’ access to both the worksite and employee records, and must follow new notice obligations. This law applies to all California employers and was effective January 1, 2018.
California employers can no longer consent voluntarily to allow ICE to enter nonpublic work areas or to access company records. Instead, ICE must present legal documentation before employers can allow access.
Employers must follow specific requirements related to Form I-9 inspections. For example, within 72 hours of receiving a Notice of Inspection, California employers must post a notice to all current employees informing them of any federal immigration agency’s inspections of Forms I-9 or other employment records.
CalChamber added the new Notice to Employee English and Spanish versions to the HRCalifornia website. These forms are available for free.
Employers also have obligations once the inspection is over. Within 72 hours of receiving the inspection results, employers must provide each “affected employee” a copy of the results and a written notice of the employer’s and employee’s obligations arising from the inspection. The written notice must contain specific information and must be hand-delivered in the workplace, if possible. An “affected employee” is one identified by the inspection results as potentially lacking work authorization or having document deficiencies.
Unions also have the right to receive notices.
An employer that fails to follow any of these notice requirements can be fined between $2,000 to $5,000 for a first violation and $5,000 to $10,000 for each subsequent violation.
At the same time, federal penalties for Form I-9 violations can range from a couple hundred dollars to more than $20,000.
Preparation Is Essential
Because the timeframes are so short, preparation is key to meeting the notice requirements. Employers should have a process in place to respond to Notices of Inspection. Employers should identify who in their organization would likely receive a Notice of Inspection and confirm that person knows how to respond.
CalChamber members can learn more about Worksite Immigration Enforcement and Protections
in the HR Library. Not a member? Learn about the benefits of membership.
The white paper, Worksite Immigration Enforcements: What You Need to Know is available for nonmembers to download. CalChamber members can also access this white paper on HRCalifornia.