In November 2017, the Criminal Justice Attorneys Association of Ventura County (Association) filed an unfair practice charge alleging the County of Ventura unilaterally characterized accrued leave as taxable income. A few weeks later, the Association filed a second unfair practice charge accusing the County of bad faith bargaining during the meet and confer over changes to represented employees’ paid leave plan. The parties consolidated both charges for the administrative hearing.
Following the hearing, an administrative law judge (ALJ) issued a proposed decision. The proposed decision found that the County violated its duty to bargain in good faith by unilaterally implementing its decision to withhold taxes on “constructive receipt income” without completing negotiations over the negotiable effects of that decision. In addition, the ALJ found that the County bargained in bad faith during its negotiations to amend the annual leave redemption plan. Specifically, the ALJ found that the County misrepresented its tax withholding plan and made an exploding offer without justification. The ALJ dismissed the Association’s remaining allegations. The County filed exceptions to the proposed decision.
Under the parties’ Memorandum of Understanding (MOU), each employee accrued annual leave on a biweekly basis at a rate based on length of service. Employees could use annual leave hours for paid time off or redeem them for cash. Before August 2016, the County neither reported accrued annual leave hours as taxable income, nor withheld taxes based on such hours until employees either used them as paid time off or redeemed them.
However, in the summer of 2016, County Counsel met with the County’s elected Auditor-Controller to express concerns about the tax implications of the redemption option in the County’s annual leave plans. The Auditor-Controller subsequently conducted an investigation and sent a letter to all County unions indicating that the redemption option in the plan risked exposing both employees and the County “to unintentional tax consequences under a tax principle known as the ‘constructive receipt doctrine.’” The Auditor-Controller noted that the County’s MOUs could be amended to avoid this issue, but in the absence of an agreement, he was legally obligated to comply with federal tax laws and would begin reporting the annual leave plan benefits as taxable income in the tax year 2017.
Representatives from the County’s HR Department then sought to meet with each of the County’s 10 unions, including the Association. While meeting with the Association, the County reiterated its position from the Auditor-Controller’s letter: absent changes to the redemption plan, the County intended to start treating accrued leave eligible for redemption as constructively received income. The County suggested reopening negotiations on the applicable MOU provision and presented three ideas for modifying the leave plan. However, the Association expressed concerns, and the meeting ended without any agreement. Thereafter, the County submitted its first written proposal including the three options discussed at the prior meeting.
After reviewing the County’s proposal, counsel for the Association sent a letter to the County asserting that its leave plans did not trigger the constructive receipt doctrine because they already included substantial limitations on employees’ ability to redeem leave hours. The County again requested to meet over changing the leave plan. The parties exchanged other proposals; however, they did not reach an agreement on the constructive receipt issue.
In January 2017, the parties began negotiations for a successor MOU. While they negotiated the redemption language in their annual leave plan on multiple occasions and issued numerous proposals, they were again unable to reach an agreement. When the Association asked questions to learn more about the County’s constructive receipt tax implementation plan, the County’s lead negotiator responded that except for a few minor exceptions, the County would only be reporting accrued leave hours as taxable constructive receipt income and that, for the most part, there would be no tax withholding.
On April 4, 2017, the County issued a proposal that expired on April 7, 2017. While there was some confusion as to which elements of the County’s proposal would expire, the Association did not accept the proposal and the County withdrew it. The parties subsequently reached a tentative agreement for a three-year successor MOU, but the tentative agreement contained no provisions designed to address the constructive receipt issue. The Association ratified the tentative agreement in May 2017.
In September 2017, the Chief Deputy Auditor-Controller sent a letter to all employees whose unions had not agreed to modify their leave redemption plans. That letter said that the County would treat the value of accrued leave as constructively received income. The Auditor-Controller’s Office later confirmed that it would be both reporting constructively received income and withholding taxes on that income from employees’ paychecks.
The Association complained that the County had provided information during negotiations that contradicted the information received from the Auditor-Controller’s Office. The Association then hired a law firm to explore litigation options regarding the constructive receipt dispute. The law firm requested that the County immediately suspend its planned withholding and maintain the status quo pending good faith discussions. However, the County implemented its plan and began withholding taxes on constructively received income beginning with employee’s November 24, 2017 paychecks. As a result, some employee’s paychecks netted out to near zero. While the Association presented alternative proposals for the County to consider, the County rejected them. The County continued to report accrued annual leave hours as a constructively received income and to withhold taxes on that income in the 2018 tax year.
The Public Employment Relations Board (PERB) first considered whether the County had negotiated in bad faith during its negotiations with the Association over amending the parties’ leave redemption plan. The County argued that both items that the ALJ had found were in bad faith – its representations at the bargaining table and its exploding offer – were outside the statute of limitations period. PERB disagreed.
PERB regulations prohibit PERB from issuing a complaint with respect to any charge based upon an alleged unfair practice occurring more than six months prior to the filing of the charge. PERB noted that the Association only knew in September 2017 that the County had made misrepresentations at the bargaining table, a time which was within six months of the Association’s November 2017 unfair practice charge. Further, while the Association knew about the County’s exploding offer in April 2017, more than six months before the November 2017 charge, PERB considers conduct that occurs outside the statute of limitations period if there is also challenged conduct within the limitations periods. Thus, the Association’s unfair practice charges were timely.
Moreover, PERB concluded that the County’s exploding offer indicated bad faith. While an exploding offer is not a per se violation, a bargaining party shows bad faith under the totality of conduct test if it does not adequately justify a threatened change in position that is inherent in an exploding offer. Here, the County made an offer with an expiration date only three days later. While PERB credited the County’s argument that the tax liability was a reasonable basis for not leaving its offer on the table throughout 2017, the County could not provide a clear reason for its exceedingly short, three-day deadline. Thus, PERB concluded that the County’s inability to justify the tight timeline was intended at least in part to pressure the Association into reaching an agreement on a successor MOU, which is not legally sufficient to justify an exploding offer.
Next, PERB found that the Association did not waive its right to bargain the effects of the County’s decision to withhold taxes on constructively received income. The duty to bargain in good faith extends to the implementation and effects of a decision that has a foreseeable effect on matters within the scope of representation. While the County argued that the Association waived its right to bargain following the September 2017 letter, PERB determined that the County did not provide the Association with clear notice of its decision to implement tax withholding based upon constructively received income until November 2017. Before November 2017, the County did not provide the Association with critical details that would have put the Association on notice of the County’s intended change. In any event, even if PERB regarded the County’s September 2017 letter as adequate notice, the Association repeatedly indicated its interest in bargaining over the impacts of the County’s decision. For these reasons, the Association did not waive its right to effects bargaining.
Finally, PERB concluded that the County did not negotiate in good faith prior to implementing its tax withholding decision. As a result, PERB ordered the County to reimburse employees for any accountancy and/or professional fees incurred in relation to the County’s implementation of its constructive receipt tax withholding decision.
County of Ventura, PERB Dec. No 2758-M (2021).
NOTE:
Because PERB had no reason to determine whether the County was right or wrong in its interpretation of the constructive receipt doctrine and because some employees were able to obtain at least partial refunds of excess withholdings from the IRS and the CA Franchise Tax Board, PERB did not order the County to make employees whole for their additional tax liability or for other harms caused when employees sought to reduce their taxes by redeeming accrued leave.