This section informs Business Units how to process vouchers for payments pursuant to Awards and Non-Judicial Settlement Agreements.

Note: These procedures take effect June 17, 2013 and are retroactive to April 1, 2013 for purposes of classifying expenditures to the correct account codes.

Definitions

An “Award” is a final decision directing payment by the State made by either (1)

an administrative agency authorized to direct such payment or (2) an arbitrator authorized under a collective bargaining agreement to direct such payment. An example of an administrative agency authorized to direct payment by the State is the Division of Human Rights under the Human Rights Law (Executive Law Art. 15). An “Award” made by an administrative agency is referred to as an “Administrative Award.” An “Award” made by an arbitrator is referred to as a “Contractual Award.”

A “Non-Judicial Settlement Agreement” is an agreement requiring payment by the State voluntarily entered into by a Business Unit and another party to resolve a legal dispute:

• after a proceeding has been begun in front of an administrative agency authorized to direct such a payment, but before the administrative agency has made a final decision (referred to as a “Administrative Settlement Agreement”); or

• after a grievance is filed under a collective bargaining agreement but before an arbitrator has made a final decision (referred to as a “Contractual Settlement Agreement”); or
• before any type of court, administrative agency or contractual proceeding has been begun (referred to as a “Pre-Adjudicatory Settlement Agreement”).

Types of Payments

Depending on the nature of the legal dispute resolved by an Award or a Non-Judicial Settlement Agreement, the State can be required to make salary payments, non-salary payments, or both type of payments.

Salary payments to be made pursuant to an Award or a Non-Judicial Settlement Agreement are processed by the OSC Bureau of State Payroll Services. Business Units should consult OSC Payroll Bulletin No.1217, available on the OSC website at https://www.osc.state.ny.us/state-agencies/payroll-bulletins, for further information on processing salary payments.

Non-salary payments to be made pursuant to an Award or a Non-Judicial Settlement Agreement (such as contract damages, compensatory damages for personal injuries, punitive damages, interest, and attorney’s fees) are processed by the OSC Bureau of State Expenditures. Business Units that seek to make a non-salary payment pursuant to an Award or a Non-Judicial Settlement Agreement are to follow the procedure described below.

Procedures

The Business Unit must enter the Award or Non-Judicial Settlement Agreement payment request into the Statewide Financial System (SFS) as a regular voucher using the appropriate account code described in Chapter IV, Section 5.C - General State Charges – Claims, Awards, Judgments and Settlement Agreements of this Guide. Note: For those payments previously made since April 1, 2013, agencies should reclassify expenditures to the appropriate account codes at this time.

• Administrative Awards and Contractual Awards are listed in GFO section IV.5.C under the titles ”Administrative or Contractual Award” (60176) and ”Elected Official Administrative Award” (60179).
• Administrative Settlement Agreements and Contractual Settlement Agreements are listed under the titles “Administrative or Contractual Settlement” (60175) and “Elected Official Administrative Settlement” (60178).
• Pre-Adjudicatory Settlement Agreements are listed under the titles “Pre-Adjudicatory Settlement” (60174) and “Elected Official Pre-Adjudicatory Settlement” (60177).
• Interest related to any settlement or award is listed under “Settlement Interest” (60200).

Required Documentation

Business Units must maintain the documentation listed below for any payment pursuant to an Award or a Non-Judicial Settlement Agreement, and must be able to provide to OSC upon request.

• A copy of the entire Award or Non-Judicial Settlement Agreement signed by all parties.
• If the Award or Non-Judicial Settlement Agreement does not describe the amount and nature of each payment to be made, then the Business Unit must identify these payment details in a statement, together with an indication of whether the Business Unit considers the payments (or portions thereof) to be taxable or non-taxable. See considerations set forth below to assist in the Business Unit’s determination.
• The Certification for Pre-Adjudicatory Settlement Agreements form, (AC-3300-S). This form is required for Pre-Adjudicatory Settlement Agreements other than those involving claims made pursuant to State Finance Law §§ 8(12), 8(12-a), 8(12-b), 8(12-c), 8(12)-d, 8(12)-e, or 8(12)-g. The Certification form must be signed by the Business Unit’s General Counsel or, in the absence of any such position, the head of the Business Unit.

The following chart summarizes the documentation requirements described in the bullets above:

Business Units should be aware that there may be issues surrounding tax liability and withholding for these payments, which then may necessitate the establishment of a vendor record for the recipient and reporting of 1099-MISC income. Please see Section 5.K - Federally Reportable Payments of this Chapter for additional information.

Business Units should also be aware that all documentation submitted to OSC in connection with the payment pursuant to an Award or a Non-Judicial Settlement Agreement is subject to the Freedom of Information Law.

Tax and Withholding Considerations

Familiarity with the following tax and withholding guidance will assist Business Units in properly processing the voucher for payment.

Depending upon their nature, payments pursuant to an Award or a Non-Judicial Settlement Agreement may be:

• taxable as wages, in which case employment taxes will be withheld, and the payments will be reported on IRS Form W-2;
• taxable but not subject to tax withholding (except in unusual situations where the payee is subject to backup withholding); such payments will be reported on IRS Form 1099; or
• not taxable.

To properly categorize each payment for tax purposes, Awards and Non-Judicial Settlement Agreements should specify the nature of each payment to be made. The allocation of amounts to be paid must reasonably reflect the nature of the payee’s underlying claims in the controversy that gave rise to the Award or Non-Judicial Settlement Agreement, and the actual basis for recovery.

Outlined below is a brief summary of the tax treatment relating to each type of payment that is processed by the OSC Bureau of State Expenditures or (in the case of salary payments), by the OSC Bureau of State Payroll Services.

Compensatory damages are generally, but not always, subject to taxation, and therefore must be reported to the IRS (see below). However, such payments are not subject to withholding except in unusual cases (such as where the claimant is subject to back-up withholding). Such payments are not processed through the State Payroll System, but are paid on vouchers through the OSC Bureau of State Expenditures.

• Payments for non-physical injuries (such as emotional distress, mental anguish, defamation, or for lost wages paid to non-State employees) are taxable to the recipient, and must be reported to the IRS on Form 1099-MISC, except to the extent that the payments are to reimburse the recipient for actual medical expenses related to the claim that have not been deducted by the recipient on his or her personal income tax return.
  • No taxes are withheld, except in unusual cases (such as where the claimant is subject to back-up withholding).
  • If the Business Unit believes that some or all of an amount paid for mental anguish or emotional distress is exempt from taxation (and withholding) it must expressly identify the amount that is exempt and the basis for such assertion.
• Payments which are for personal physical injuries or physical sickness (including payments for pain and suffering, and for lost wages paid to non-State employees) are not taxable, and are not reported on IRS Form 1099-MISC.
• Payments made for replacement of capital, such as damages paid to restore property damaged by a State entity, are generally not taxable.
• Payments made to compensate the recipient for lost profits are generally taxable and are reported on IRS Form 1099 - MISC. No taxes are withheld except in unusual cases (such as where the claimant is subject to back-up withholding).

Punitive damages as part of a settlement require an extraordinary justification. Punitive damages are paid on vouchers through the OSC Bureau of State Expenditures. Such damages are taxable to the recipient and are reported to the IRS on Form 1099-MISC. Such payments are not subject to withholding except in unusual cases (such as where the recipient is subject to back-up withholding).

Attorney’s fees may be provided only where a statute expressly authorizes awards for such fees (for example, in federal Title VII cases). Payments to the claimant’s attorney are paid on vouchers through the OSC Bureau of State Expenditures. They are taxable to the attorney and are reported on Form 1099 – MISC. No taxes are withheld except in unusual cases (such as where the attorney is subject to back-up withholding).

Interest payments are paid on vouchers through the OSC Bureau of State Expenditures. Such payments are taxable and are reported on a Form 1099 – INT. Such payments are not subject to withholding except in unusual cases (such as where the claimant is subject to back-up withholding).

Back pay awards for current and former State employees are processed through the Bureau of State Payroll Services. These payments are treated as wages for tax purposes and are processed through the State Payroll System.

• Federal, state and local income taxes, Social Security and Medicare taxes are withheld.
• Back pay awards are reported on IRS Form W-2.

Front pay awards are also processed through the Bureau of State Payroll Services and are also treated as the payment of wages for tax purposes, and are also processed through the State Payroll System. They are subject to the same tax withholding requirements that apply to back pay awards, and are also reported on IRS Form W-2. Generally, front pay awards will be paid only where front pay is a remedy expressly available under an applicable statute (e.g., 42 U.S.C. §2000e-5), collective bargaining agreement, or in extraordinary situations where continuation of an individual as a State employee would present health or safety concerns for co-workers or others.

Examples:

• A claimant is injured in an automobile accident that he alleges was caused by negligence on the part of the State. The case is settled on the basis that the claimant is to be paid $100,000 for pain and suffering. The entire payment is non-taxable because it is on account of personal physical injuries. No tax reporting is required.

• A dispute between a Business Unit and an independent contractor providing services to the Business Unit is settled by the Business Unit agreeing to pay a fixed amount for the contractor’s services. The payment is taxable as nonemployee compensation and, if payments to the contractor aggregate $600 or more in a calendar year, such payment or payments are reportable on Form 1099-MISC. Generally, taxes are not required to be withheld.

• Pursuant to statutory authority conferred on a Business Unit (such as the authority granted to the Department of Transportation under Highway Law§ 66), a Business Unit enters into a Settlement Agreement to compensate a private party for damages sustained as a result of State action. Payments made under such an agreement would generally represent a return of capital and would therefore be non-taxable.

• An employee claims to have been subjected to discrimination because of a disability, and files a lawsuit under the Americans with Disabilities Act following a Business Unit’s termination of his employment. The case is settled prior to trial on the basis that the employee be paid $100,000 (an amount equivalent to two years’ salary) plus $80,000 in damages for emotional distress. Assuming the underlying nature of the claim supports the allocations made in the settlement agreement, $100,000 is treated as back pay from which employment taxes will be withheld, is reportable on Form W-2, and is processed through the Bureau of State Payroll Services. The $80,000 allocated to damages for emotional distress is reported on Form 1099-MISC, with no withholding of employment taxes. The $80,000 payment will be paid on a voucher through the OSC Bureau of State Expenditures.

Guide to Financial Operations

REV. 06/19/2014