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April 20, 2011
Workers’ Comp Benefits and Unreported Tip Income in MA

A hair stylist was injured at work and received workers compensation benefits. She argued that her tips should have been included in calculating the amount of her benefits. Does it matter that she did not report those tips for tax purposes?

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What happened. “Meg,” a hair stylist at Rob Roy Coiffures, injured her shoulder while working. As a result, she received workers’ compensation benefits. These benefits were based on her average weekly wage, calculated without including tips that Meg did not report for tax purposes. Meg claimed this was unfair, because she received an average of $45 per day in tips. She asserted that Rob Roy knew the amount of her tip income because of its procedures for collecting and distributing tips. When a customer tipped an employee, the tip was placed into a box labeled with the employee’s name and the amount of the tip was recorded. At the end of the day, Rob Roy would tally the tips received by each employee and distribute the money accordingly. Then, Rob Roy discarded the tallies.

An administrative law judge ruled against Meg, finding that she forfeited the right to have tip income included in her average weekly wages by not reporting that income for tax purposes. The Department of Industrial Accidents Reviewing Board affirmed, and Meg appealed.

What the court said. The state Supreme Court ruled 80 years ago that tip income should generally be considered when figuring workers’ compensation benefits. However, neither that case nor the workers’ compensation law directly addresses whether unreported tip income should be considered. Because workers’ compensation and unemployment insurance provide “parallel worker protection schemes,” the definition of “wages” in the unemployment insurance law provided guidance for the Board. Under that law, cash tips are included in “wages” only to the extent that the employee has reported them to the IRS. Because the court found that the Board’s analysis and decision were reasonable, it affirmed.

The court acknowledged the competing policy concerns raised by this case. Meg was trying to “have it both ways” by claiming tips for her benefits, but not on her taxes. And, Rob Roy “was apparently happy to ignore” tip income unless employees reported it, while presumably benefiting from lower insurance rates and smaller federal and state tax obligations. The court, however, did not resolve these policy concerns, noting that that was a job for the legislature. O’Connell’s Case, 78 Mass. App. Ct. 761 (2011).

Point to Remember: Employees cannot, on the one hand, fail to report tip income for tax purposes, but, on the other hand, insist it be included in average weekly wages for purposes of workers’ compensation claims.

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