The most exciting part of the payroll industry is that it’s always changing. New tax rates, regulations, and even court rulings can affect how employees get paid. Recently, the Supreme Court decided the case of Janus v. American Federation of State, County, and Municipal Employees (AFSCME). The result of the decision is that public-sector unions can no longer mandate the collection of agency fees from non-member employees.
Prior to the decision, 28 states had already granted the “right-to-work” without union fees to most workers. The remaining 22 states—including Illinois, the work state of plaintiff Mark Janus—did not have these laws in place.
Politics aside, let’s look at how this decision affects payroll. First, we need to understand how union dues are withheld from employee pay. Union dues are most commonly post-tax deductions, meaning they’re deducted after taxes have already been withheld.
While union payments may be involuntary in some cases, in regards to payroll they’re always treated as voluntary deductions. Examples of other voluntary deductions include retirement contributions, health insurance premiums, and even transit plan deductions. It’s worth noting that each kind of voluntary deduction is subject to its own tax rules. Whether a deduction is voluntary or involuntary does not determine if it is considered pre or post-tax.
Voluntary vs. Involuntary Deductions
So if union dues were technically mandatory, why does payroll consider them voluntary? Involuntary deductions are payroll deductions that the employer and employee have no control over. Statutory deductions like federal income tax, Social Security, Medicare and state taxes are all considered involuntary. Employers, by law, are required by law to deduct these. Other examples include wage garnishment, child support, federal tax levies, and student loans.
Let’s break this down further with an example. If an employee is paid $1000, they might have $100 deducted from their pay for health insurance. They might also have $50 in union dues. Because health insurance is pre-tax, the employee will only be taxed for $900. The union dues are post-tax, meaning that $50 will only be removed after taxes were already deducted. In other words, union dues offer no tax benefit—though some employees may itemize them as after-tax deductions when filing their annual returns.
In the post-Janus workplace, what happens if an employee wants to opt out of paying union dues? Thankfully, most payroll systems offer the option to easily remove a deduction on the employee level. Even if your company has 600 dues-paying employees, for example, it would be simple to remove the deduction on a case-by-case basis. Depending on the number of employees who decide to opt out, some payroll systems may even offer you the option of running an import for mass changes.
Supreme Court decisions can have a big impact on the everyday work of HR and payroll professionals. Don’t be surprised if an employee calls you out of the blue and demands to have their union deductions stopped. In cases like these, it’s important to work with a payroll provider who can help ensure that you’re compliant with both regulatory and legal changes.