DUNLOP v. TREMAYNE (1964)

The sole question involved in this appeal is whether or not payments made by an employer, pursuant to an industry-wide collective bargaining agreement, into independent trust funds, from which funds medical and other welfare payments and retirement benefits are paid, constitute ‘wages' as that word is used in section 1204 of the Code of Civil Procedure. The case is one of first impression in California although, as we shall point out, we are not without authority from other jurisdictions.

The facts are not in dispute and may be summarized as follows:

Cal-Pacific Downey entered into collective bargaining agreements with unions representing its employees. These agreements were part of an over-all collective bargaining agreement between these unions and various employers engaged in the lumber business in Southern California. So far as herein involved, the agreements obligated each employer to make monthly payments into two trust funds—one providing for retirement benefits, and the other for various forms of medical and other welfare care. The payments are flat sums per month for each employee working (or paid for) eighty or more hours per month and are not graduated according to the employee's actual wages, nor are they increased by overtime beyond the eighty hours per month base. The benefits payable require that the employee remain in the employ of an employer who is a party to the contracts, they are not controlled by the amount of payment made by any particular employer but are determined, as to health and welfare benefits, by the terms of a group policy carried by the trust, and as to the retirement plan by the individual's total period of employment in the industry in the geographic area involved.¹ No employee has any rights, vested or otherwise, in the trust funds, his rights being only contractual rights against the trust for the benefits as designated in the contracts. Payments are made solely by employers and are made directly to the trustees and the trustees are the only parties authorized to sue for and collect delinquent payments; no withholding tax deductions are made from or because of the payments nor are they included in social security computations.

Cal-Pacific Downey made an assignment for the benefit of creditors to defendant Tremayne, pursuant to section 1204 of the Code of Civil Procedure. There was due from Cal-Pacific Downey, on account of payments due the trustees, $1,057.50 for the Welfare Fund and $1,269.80 for the Retirement Fund. The payment due on account of any individual employee does not exceed $900, the maximum amount of wage claim preference accorded under section 1204.

Claiming that the payments involved are entitled to priority under section 1204, which grants such priority for ‘wages and salaries of miners, mechanics, salesmen, servants, clerks, laborers, and other persons, for personal services,’ plaintiff, as assignee of the trustees, brought an action for declaratory relief. It is admitted that Tremayne has funds in his hands sufficient to pay the amounts claimed, if they are entitled to a statutory priority. Judgment was entered in her favor and defendant Tremayne has appealed.²

I

We agree with respondent that, as a matter of labor economics, such payments are within the concept of wages. It is common knowledge that, from the standpoint of the employer, the cost of direct wages, of social security taxes, of paid vacations, or severance pay, and of the various ‘fringe benefits' such as are herein involved, make up a total ‘wage package’ which constitutes his cost of employing labor. And ordinarily the employer is relatively indifferent to whether this total labor cost is represented by take-home pay or by some or all the other benefits.³ Some of the cases and statutes relied on are merely recognitions of this economic fact.

(a) Respondent cites the decision in People v. Alves (1957) 155 Cal.App.2d Supp. 870, 320 P.2d 623. The Alves case involved the constitutionality of section 227 of the Labor Code, which makes it a criminal offense for an employer ‘wilfully and unlawfully’ to fail to make payments to funds such as are herein involved. It was claimed that this section violated the constitutional provisions (Cal.Const., art. I, § 15) against imprisonment for debt. The court noted that the Supreme Court had rejected a similar attack on section 216 of the Labor Code, which section makes it a crime to wilfully and unlawfully fail to pay ‘wages.’ (In re Trombley (1948) 31 Cal.2d 801, 193 P.2d 734.) In the Trombley case, the court said, at page 809 of 31 Cal.2d, at page 740 of 193 P.2d: ‘It has long been recognized that wages are not ordinary debts, that they may be preferred over other claims, and that, because of the economic position of the average worker and, in particular, his dependence on wages for the necessities of life for himself and his family, it is essential to the public welfare that he receive his pay when it is due.’ In Alves, the court stated: ‘There is no doubt that payments to a health or welfare fund made as part of the compensation for services rendered by employees are wages as that word is used in the foregoing quotation.’ (People v. Alves, supra, (1957) 155 Cal.App.2d Supp. 870, 872, 320 P.2d 623, 624.) But to say that payments into welfare and similar funds fall within the policy that exempts wages from the ‘debts' covered by article I, section 15, is not necessarily to say that such payments are ‘wages' as that word is used in section 1204.

(b) Similarly, we think that respondent's reliance on Inland Steel Co. v. N. L. R. B. (1948) 7 Cir., 170 F.2d 247, is misplaced. All that that case held was that pension plans (and by analogy welfare plans) were matters which the federal law required an employer to include in collective bargaining negotiations, and that the term ‘wages,’ as used in the federal statute, included within its scope such employer contributions. Since, as we have seen, the amount of take-home pay which an employer can and will pay is necessarily affected by his generosity (or his reluctant acquiescence) in the matter of fringe benefits, it necessarily followed that negotiations on wages should include negotiations on other terms of a proposed contract. But, again, recognition of this economic fact for the purpose of construing one federal statute does not necessarily mean that the California Legislature used the word ‘wages' in the same sense in enacting section 1204.

(c) Respondent argues that payments into funds of this type are ‘wages' within the definition of that term in the federal tax laws. Section 3401 of the Internal Revenue Code sets out sundry definitions. So far as here pertinent, that section provides:

‘(a) Wages—For purposes of this chapter, the term ‘wages' means all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration paid in any medium other than cash; except that such term shall not include remuneration paid——

‘(12) to, or on behalf of, an employee or his beneficiary——

‘(A) from or to a trust described in section 401(a) which is exempt from tax under section 501 (a) at the time of such payment unless such payment is made to an employee of the trust as remuneration for services rendered as such employee and not as a beneficiary of the trust; or

‘(B) under or to an annuity plan which, at the time of such payment, is a plan described in section 403 (a);'4

Since the Congress thought it necessary thus to exempt payment such as these from the operation of the section, respondent argues that they must have been thought otherwise to fall within the general definition with which the section begins. However, the pattern of the federal tax laws is to include within the concept of ‘income’ all economic value possible, and then to exclude from tax computations such of this ‘income,’ so broadly defined, as considerations of public policy dictate. But thus to recognize the economic facts of life for tax purposes hardly determines whether or not any particular economic gain was intended by a different legislative body to receive a preferred status in cases of insolvency.

II

Of more value in the present case is the construction placed by the United States Supreme Court on the section of the Bankruptcy Act granting a priority to wages (Bankruptcy Act, § 64, (sub. a(2).) In United States v. Embassy Restaurant, Inc. (1959) 359 U.S. 29, 79 S.Ct. 554, 3 L.Ed.2d 601, that court refused priority to payments of the type herein involved. But, as respondent points out, the court was careful to say that its decision rested on the language of the federal act, which speaks of wages ‘due to’ the workman, whereas section 1204 speaks of wages ‘of’ the employees. We agree that no controlling importance can be placed on the construction of a statute enacted by a different sovereign, with differing language. However, as we shall point out below, it is not without some significance that a statute enacted in pursuance of the same public policy as section 1204 has been limited to payments in which the employee has a more direct and personal interest than inheres in payments into trust funds established and administered as are the ones which plaintiff here represents.

III

In addition to the construction of the Bankruptcy Act, appellant points out that, in the cases from other states involving statutes similar to our own, the construction has been to deny priority to similar payments (In re Well Bilt Box Spring Corp. (1949) 196 Misc. 848, 89 N.Y.S.2d 768; In re Hollywood Commissary, Inc. (1949) 195 Misc. 441, 87 N.Y.S.2d 625; In the Matter of the General Assignment For the Benefit of Creditors of National Meat Supply Co., Inc. (1961) 66 N.J.Super. 423, 169 A.2d 236); and that, where such priority does exist, it is by virtue of express statutory provisions expressly referring to such payments. (N.H.Laws 1963, C. 286; In the Matter of the General Assignment for the Benefit of Creditors of Larry Jay, Inc. (1958) 4 N.Y.2d 912, 174 N.Y.S.2d 662, 151 N.E.2d 93, construing a 1952 amendment of section 22 of the Debtor and Creditor Law—the statute discussed in the earlier New York cases above cited.)⁵

IV

Finally, we think that the legislative history in California supports appellant's position and impels a construction of our statute in accord with that of our sister states and in harmony with the federal act. Since 1919, California law has (as we have above pointed out) imposed criminal penalties for the wilful failure or refusal to pay ‘wages' (Lab.Code, § 216). Although the statute defined wages as ‘all amounts for labor performed by employees of every description, whether the amount is fixed or ascertained by the standard of time, task, piece, commission basis, or other method of calculation’ (Lab.Code, § 200), still when, in the post war years, plans such as those herein involved became common, the Legislature obviously did not regard the long standing statute as adequate to protect this new type of benefit, but found it necessary expressly to enact section 227 of the Labor Code, which was construed in the Alves case above discussed.⁶ If express statutory language was required to bring welfare and pension trust payments within the penal provisions of the Labor Code, such express language is also required to bring such payments within the priority provisions of section 1204.

Our interpretation of the pertinent statutes is further fortified by the phraseology of section 228, added to the Labor Code in 1961. That section reads:

‘The payments under Section 227 of this code shall be deemed to include payments to apprenticeship funds.

‘This amendment is hereby declared to be merely a clarification of the original intention of the Legislature and is not a substantive change.’

The difference between this language and that used in section 227 is significant. If respondent's view of the legislative intent were correct, section 227 would not have created a new offense, but would (as in section 228) have declared that ‘wages as used in section 226 shall be deemed to include payments to a health or welfare fund [etc.].’

It is not for the courts to determine whether or not the policy considerations which resulted in the enactment of sections 227 and 228 of the Labor Code also apply in determining the priority of payments by an assignee for the benefit of creditors. Unless and until the California Legislature sees fit to follow the example of New Hampshire and New York, and enact appropriate legislation on this subject, trusts such as plaintiff here represents have, as they do in New Jersey and in the bankruptcy courts, the status of general creditors only.

The judgment is reversed.

FOOTNOTES

1.  There are special provisions for continuing eligibility for a brief period after a particular employment ends and other minor variations; but, for the purpose of this case, the generalized statement above is an adequate description.

2.  The briefs list Cal-Downey as a co-appellant. However, the record discloses no notice of appeal by that defendant. Since it is not involved in the priority claim, which involves only the assignee Tremayne, the omission is not fatal to the appeal.

3.  We are not unmindful of the fact that an employer may, for reasons of his own, sometimes prefer a particular distribution of the total labor cost; but this is not usually a significant part of the negotiation process.

4.  Trusts such as those herein involved fall within the trusts thus exempted. It is, of course, this statutory provision which makes inconsequential the fact, above noted, that the payments into these trusts were not taken into account in connection with withholding or other tax returns.

5.  The New York law contained two sections bearing on the instant problem. Section 21-a of the Debtor and Creditor Law McKinney's Conso.Laws, c. 12, makes an employer a trustee of funds withheld by the employer and contributed to a ‘retirement system or plan’ maintained by the employer. Clearly the priority granted by this section in cases of insolvency has no relation to a plan to which the employees make no personal contribution. The section pertinent to the case at bench, and the New York equivalent of our section 1204, is section 22 of the Debtor and Creditor Law. As to that section, apart from one unreported trial court decision, mentioned but rejected in the Well Bilt Box case, supra, 196 Misc. 848, 89 N.Y.S.2d 768, 769, the New York cases uniformly denied priority until the 1952 amendment expressly provided that employer contributions should be ‘wages' as used in the section.

6.  The same observations are pertinent with reference to the 1959 amendment of section 227 which expressly added ‘vacation plan[s]’ to the funds covered by that section.

KINGSLEY, Justice.

BURKE, P. J., and JEFFERSON, J., concur.