                                                        I attest to the accuracy and
                                                         integrity of this document
                                                           New Mexico Compilation
                                                         Commission, Santa Fe, NM
                                                        '00'04- 09:44:00 2016.06.09
Certiorari Denied, May 19, 2016, No. S-1-SC-35865

       IN THE COURT OF APPEALS OF THE STATE OF NEW MEXICO

Opinion Number: 2016-NMCA-052

Filing Date: March 29, 2016

Docket No. 34,167

VINCENT R. GARCIA, ROBERTO
BORBON, MARK MORAN, and
KENNETH A. ZIEGLER, on behalf of
themselves and all others similarly situated,

       Plaintiffs-Appellants,

v.

THE BOARD OF REGENTS OF THE
UNIVERSITY OF NEW MEXICO,
SANDIA FOUNDATION, and ENTERPRISE
BUILDERS, INC.,

       Defendants-Appellees.

APPEAL FROM THE DISTRICT COURT OF BERNALILLO COUNTY
Nan G. Nash, District Judge

Shane C. Youtz
Stephen Curtice
James A. Montalbano
Albuquerque, NM

for Appellants

Rodey, Dickason, Sloan, Akin & Robb, P.A.
Thomas L. Stahl
Edward Ricco
Albuquerque, NM

for Appellee Board of Regents of the University of New Mexico

Modrall, Sperling, Roehl, Harris & Sisk, P.A.

                                           1
George R. McFall
Sarah M. Stevenson
Albuquerque, NM

for Appellee Sandia Foundation

Bingham, Hurst & Apodaca, P.C.
Wayne E. Bingham
Albuquerque, NM

for Appellee Enterprise Builders Corporation

                                         OPINION

VANZI, Judge.

{1}      Plaintiffs are a class of workers who provided various electrical services on a
construction project in which the Board of Regents of the University of New Mexico, Sandia
Foundation, and Enterprise Builders (collectively, Defendants) were involved. They sued
Defendants for statutory minimum wage violations, including violation of the Public Works
Minimum Wage Act (PWMWA), NMSA 1978, §§ 13-4-10 to -17 (1937, as amended
through 2011). They also asserted their rights as alleged third-party beneficiaries to a
settlement agreement (the Agreement) between Defendants and the Department of
Workforce Solutions (the Department). The Department has since (sua sponte, we are told)
reversed the determination that led to the Agreement in the first place, and Plaintiffs’ appeal
of that decision was dismissed as untimely by the relevant agency, ultimately resulting in the
dismissal of all statutory claims. See Garcia v. Bd. of Regents of Univ. of N.M.,
2014-NMCA-083, ¶¶ 6, 16, 331 P.3d 1003.

{2}    In the present case, we are asked to consider a narrow issue: whether the district court
properly granted summary judgment on the only remaining claim, which alleged breach of
the Agreement. The sole ground for granting summary judgment was that the underlying
Agreement was “void” for violation of federal tax law. We reverse. We hold that the
Agreement indeed contains an unenforceable term, but the term can be properly severed.
Accordingly, we reverse the district court’s grant of summary judgment.

BACKGROUND

{3}     The PWMWA serves “to ensure that employees of contractors working on state . .
. projects are protected from substandard earnings.” Universal Commc’ns Sys., Inc. v. Smith,
1986-NMSC-076, ¶ 4, 104 N.M. 754, 726 P.2d 1384. “Under the PWMWA, every contract
for construction or alteration of public buildings or public works in excess of sixty thousand
dollars that involves mechanics or laborers or both must comply with minimum wage
standards set by the Director of the Labor Relations Division” of the Department of

                                              2
Workforce Solutions (the Director). Garcia, 2014-NMCA-083, ¶ 2.

{4}     In April 2009, the Director certified that a joint project undertaken by Defendants
constituted a public works project, subject to the PWMWA. Defendants appealed that
determination but then settled with the Department, which withdrew its certification and
agreed to take no further action against them. In exchange, Defendants agreed to (1) pay a
designated amount of back wages and fringe benefits due each worker under the PWMWA,
totaling $779,357.12; and (2) make separate “delay payments” to each worker, totaling
$158,150.27.

{5}     The Agreement distinguished between the two types of payments, presumably for
tax purposes. The delay payments purported to represent “payment to settle a disputed claim
for liquidated damages under the PWMWA and not wages.” They were to be issued
separately from the payments for back wages and fringe benefits. The Agreement contained
no instructions to withhold any payroll taxes from the delay payments.

{6}    In contrast, the payments for back wages and fringe benefits were divided into two
groups. Enterprise agreed to issue wage/benefit checks to its own employees “subject to
payroll withholding in the normal course.” All other workers worked for various
subcontractors who were not parties to the settlement negotiations. Wage/benefit checks
made out to those workers, “i.e., those workers not employed by any [Defendant],” were to
be issued “without such withholding.” The present appeal centers entirely on this no-
withholding clause—a single provision that applies only to one type of payment made to one
group of workers.

{7}      Defendants agreed to make all checks to all workers payable to each worker
individually. They would issue the checks to the Department by deadlines specified in the
Agreement, and the Department would then “distribute said checks to each worker” who
signed a document releasing Defendants from liability for future wage-related claims arising
out of the project. Characterized broadly, the terms of the Agreement indicate that
Defendants hoped to pay a total of $937,507.39 (the sum of wages and benefits owed plus
delay compensation owed) over to the Department in exchange for a complete release of
liability to the Department and to all workers identified to have worked on the project.

{8}      But Defendants never made any of the agreed payments, which would have been due
in full by the end of 2010. When they had not issued a single check by May 2011, Plaintiffs
filed suit for breach of the Agreement and for other claims that have since been dismissed.

{9}    Defendants moved for summary judgment, arguing, in relevant part, that the no-
withholding provision called for a performance that violated the Internal Revenue Code,
making the entire Agreement void as against public policy. Plaintiffs responded that there
remained issues of disputed facts—mostly related to Defendants’ efforts to comply with the
Agreement, that there were alternatives to “straight payroll withholding” that would make
the Agreement entirely consistent with the law, and that, in any event, the clause could be

                                             3
severed or reformed as a nonessential part of an otherwise valid wage claim settlement. The
district court ultimately concluded that the term could not be enforced and that it was
“central to the Agreement,” meaning that it could not be severed. The court also concluded
that reformation was inappropriate. Summary judgment was granted to Defendants. Plaintiffs
appealed, and we now reverse the district court.

DISCUSSION

Standard of Review

{10} All issues raised in this appeal are subject to a de novo standard of review.
“Summary judgment is appropriate where there are no genuine issues of material fact and
the movant is entitled to judgment as a matter of law. . . . We review these legal questions
de novo.” Self v. United Parcel Serv., Inc., 1998-NMSC-046, ¶ 6, 126 N.M. 396, 970 P.2d
582. This case involves a settlement agreement, which “is a species of contract.” Branch v.
Chamisa Dev. Corp., 2009-NMCA-131, ¶ 33, 147 N.M. 397, 223 P.3d 942 (internal
quotation marks and citation omitted). “New Mexico adheres to the contextual approach to
contract interpretation, in recognition of the difficulty of ascribing meaning and content to
terms and expressions in the absence of contextual understanding.” Id. (internal quotation
marks and citation omitted). “Whether a contract is against public policy is a question of law
for the court to determine from all the circumstances of each case.” K.R. Swerdfeger Constr.
Inc. v. Bd. of Regents of Univ. of N.M., 2006-NMCA-117, ¶ 23, 140 N.M. 374, 142 P.3d 962
(internal quotation marks and citation omitted). Our analysis also requires us to construe
several statutes. We do so to give effect to the intent of the Legislature, and our review is de
novo. Romero Excavation & Trucking, Inc. v. Bradley Constr. Inc., 1996-NMSC-010, ¶¶ 5-
6, 121 N.M. 471, 913 P.2d 659.

The No-Withholding Provision Is Not Enforceable

{11} Plaintiffs, who are not parties to the Agreement, have alleged that they are third-party
beneficiaries entitled to enforce it. See Fleet Mortg. Corp. v. Schuster, 1991-NMSC-046, ¶
4, 112 N.M. 48, 811 P.2d 81 (“A third party may be a beneficiary of [a] contract, and as a
beneficiary may have an enforceable right against a party to a contract.”). While that may
be true, our courts cannot enforce a provision—for anyone’s benefit—that requires
performance in violation of federal law. Kaiser Steel Corp. v. Mullins, 455 U.S. 72, 77
(1982) (“[I]llegal promises will not be enforced in cases controlled by the federal law.”).

{12} There is no dispute that back pay paid to employees in a settlement agreement is
subject to social security and income taxes. The Internal Revenue Code defines “wages” for
income tax purposes to mean “all remuneration . . . for services performed by an employee
for his employer, including the cash value of all remuneration (including benefits) paid in
any medium other than cash[.]” I.R.C. § 3401(a) (2012). There are a few exceptions to this
definition, but they are not applicable here. See id. The definition of “wages” under I.R.C.
§ 3121(a) (2012) for social security and medicare (FICA) purposes contains similar

                                               4
language.1 The United States Supreme Court and the federal circuit courts of appeals have
consistently concluded that back pay awarded pursuant to various employment, labor, and
civil rights legislation constitutes “remuneration” —and therefore “wages” subject to income
tax and FICA withholding. Soc. Sec. Bd. v. Nierotko, 327 U.S. 358, 364-65 (1946) (applying
the National Labor Relations Act); Noel v. N.Y. State Office of Mental Health Cent. N.Y.
Psychiatric Ctr., 697 F.3d 209, 213-14 (2d Cir. 2012) (applying Title VII); Gerbec v. United
States, 164 F.3d 1015, 1026 (6th Cir. 1999) (discussing the Employee Retirement Income
Security Act); see Blim v. W. Elec. Co., 731 F.2d 1473, 1480 n.2 (10th Cir. 1984) (“Back pay
is taxable . . . and subject to income tax and social security withholding.”), superceded by
statute on other grounds as stated in E.E.O.C. v. Beverage Distrib. Co., 780 F.3d 1018, 1024
(10th Cir. 2015). The point has been admitted by the parties in their briefing here.

{13} Nor is there any question that it is the employer who is obligated to deduct and
withhold the required taxes and to file the corresponding reports and returns. I.R.C. §
3402(a)(1) (2012) (“[E]very employer making payment of wages shall deduct and withhold
upon such wages a tax[.]”); Otte v. United States, 419 U.S. 43, 52 (1974) (stating that
reporting obligations follow the obligation to withhold); see also Treas. Reg. § 1.6041-
2(a)(1) (“Wages . . . paid to an employee are required to be reported on Form W-2.”); Treas.
Reg. § 1.6045-5 (providing that the reporting requirement of Section 1.6041 is not vitiated
by paying lump sum settlement to a plaintiff’s attorney). An employer that willfully fails to
meet these obligations is liable to pay a penalty apart from the tax. I.R.C. § 6672(a) (2012);
see Burden v. United States, 486 F.2d 302, 304 (10th Cir. 1973).

{14} Plaintiffs make no serious allegation that they were independent contractors. The
complaint flatly alleged that the underlying claims involved “employees who are or were
employed by Defendants,” and the taxing authority looks only to the nature of the underlying
claim when determining tax ramifications of a settlement payment. Getty v. Comm’r of
Internal Revenue, 913 F.2d 1486, 1490 (9th Cir. 1990) (“In characterizing the settlement
payment for tax purposes,” the question is, “[i]n lieu of what were the damages
awarded?”(internal quotation marks and citation omitted)); see also Treas. Reg. §
31.3121(a)-1(c) (“The name by which the remuneration for employment is designated is
immaterial.”); Treas. Reg. § 31.3401(a)-1(a)(2) (“The name by which the remuneration for
services is designated is immaterial.”).

{15} As we view it, the difficult question is whether—for purposes of the deduction and
withholding requirements—any Defendant is actually the “employer” of the employees who
worked for the various nonparty subcontractors to whom Defendants agreed to issue checks
“without such withholding.” The Internal Revenue Code defines “employer” as



       1
        Relevant provisions of state law are not meaningfully different. See NMSA 1978,
§ 7-3-2(C), (J) (2010) (defining “employer” and “wages”); see also NMSA 1978, § 7-3-3(A)
(1996) (requiring employer to withhold income taxes).

                                              5
       the person for whom an individual performs or performed any service, of
       whatever nature, as the employee of such person, except that—

       (1) if the person for whom the individual performs or performed the services
       does not have control of the payment of the wages for such services, the term
       ‘employer’ . . . means the person having control of the payment of such
       wages[.]

I.R.C. § 3401(d). The exception in paragraph (1) applies in unusual cases where the person
with legal control over the payment of wages is not the common law employer of the
recipient. In those cases, the purpose of the exception is to ensure “that the person actually
paying the wages . . . is obligated to withhold the taxes.” Educ. Fund of Elec. Indus. v.
United States, 426 F.2d 1053, 1057 (2d Cir. 1970).2 As the Ninth Circuit Court of Appeals
has stated,

       It matters little who hired the wage earner or what his duties were or how
       responsible he may have been to his common law employer. Neither is it
       important who fixed the rate of compensation. When it finally comes to the
       point of deducting from the wages earned that part which belongs to the
       United States and matching it with the employer’s share . . . , the only person
       who can do that is the person who is in ‘control of the payment of such
       wages.’

Evans v. Internal Revenue Serv., 607 F.2d 1237, 1240 (9th Cir. 1979).

{16} Defendants agreed to issue checks from their own accounts to the workers covered
by the Agreement; the Department would serve only to “distribute said checks to each
worker.” This indicates that Defendants, rather than the Department or any subcontractor,
were in sole control of the payment of wages for all workers covered by the Agreement,
including those not employed (in the traditional sense) by Enterprise. As the statutory
employer of the workers, Defendants were obligated to withhold and pay over to the United
States the taxes associated with all wage payments. See I.R.C. § 3402(a)(1).

{17} It is therefore difficult to envision any scenario in which the no-withholding clause
could be enforced by Plaintiffs. Landess v. Gardner Turf Grass, Inc., 2008-NMCA-159, ¶
8, 145 N.M. 372, 198 P.3d 871 (“[E]mployees have no cause of action against employers to
recover wages withheld and paid over to the government in satisfaction of federal income
tax liability.” (internal quotation marks and citation omitted)). Acts of Congress directly
prohibit any suit to enjoin “the assessment or collection of any tax . . . in any court by any
person,” I.R.C. § 7421(a) (2012), and expressly immunize every employer from liability for


       2
       While I.R.C. § 3401(d)(1) strictly applies only to income tax withholding, its
meaning has been extended to FICA as well. See Otte, 419 U.S. at 51.

                                              6
withholding federal taxes from wages, I.R.C. § 3403 (2012), even in cases involving breach
of an agreement not to withhold, Bright v. Bechtel Petroleum, Inc., 780 F.2d 766, 770 (9th
Cir. 1986), and even when an employee asserts a claim for money damages in a state court
in New Mexico, Landess, 2008-NMCA-159, ¶¶ 8-9. These protections are “strictly
enforced.” Maxfield v. United States Postal Serv., 752 F.2d 433, 434 (9th Cir. 1984).

{18} “In ascertaining public policy we look to the language of the statute, its subject
matter and the purpose to be accomplished.” City of Artesia v. Carter, 1980-NMCA-006, ¶
12, 94 N.M. 311, 610 P.2d 198. It is evident that Congress intends to compel employers to
withhold payroll taxes without judicial intervention, with the legal right to disputed sums
determined only in a suit for refund. Enochs v. Williams Packaging & Navigation Co., 370
U.S. 1, 7 (1962). State tax law is to the same effect. NMSA 1978, § 7-3-4 (1996) (“No
employee shall have a right of action against the employer for any amount deducted and
withheld from the employee’s wages.”). Consistent with the state and federal interest in
ensuring the undisturbed collection of lawful revenue, we conclude that the no-withholding
provision is contrary to law and unenforceable.

{19} But this is not a suit for declaratory judgment; and Defendants are not asserting tax
law as a defense to the no-withholding clause, which nobody really intends to enforce, and
which Plaintiffs argue should be severed or reformed. In essence, Defendants argue that,
since they negotiated for the illegal clause, they would lose the benefit of their bargain if
they had to make the settlement payments in compliance with the law. They argue that
enforcement of the Agreement without the illegal clause would require them to pay the
employer share of FICA and other taxes and would subject them to various administrative
burdens associated with meeting their statutory obligations. According to Defendants, the
illegality of the no-withholding clause brings the entire Agreement down with it. Plaintiffs
counter that the clause is “a technicality [that] does not strike at the heart of the . . .
Agreement” and that Defendants should not be entitled to disown a document they drafted
because they inserted a collateral clause that misconstrues tax law. We consider the parties’
arguments through the lens of severability.

The Unenforceable Clause Can Be Severed

{20} “The paramount public policy is that freedom to contract is not to be interfered with
lightly. It is the court’s duty to sustain the legality of a contract in whole or in part whenever
it can do so.” Tharp v. Allis-Chalmers Mfg. Co., 1938-NMSC-044, ¶ 13, 42 N.M. 443, 81
P.2d 703 (internal quotation marks and citation omitted). Where the purpose and subject
matter of a contract are legal, but the contract contains an illegal provision, the general rule
is that a court may enforce the valid portions of the contract in favor of a party who has not
engaged in serious misconduct if the illegal term is not an essential part of the agreed
exchange. Restatement (Second) of Contracts § 184(1) (1981). The requirement that the term
to be severed is not essential exists to prevent courts from selectively enforcing parts of a
contract in a manner that nullifies the contract’s essential purpose. See id. cmt. a. Along
these lines, our own courts have enforced contracts that are partially illegal when “the illegal

                                                7
part can be eliminated without destroying the symmetry of the contract as a whole[.]” Capo
v. Century Life Ins. Co., 1980-NMSC-058, ¶¶ 23-24, 94 N.M. 373, 610 P.2d 1202; Forrest
Currell Lumber Co. v. Thomas, 1970-NMSC-018, ¶ 16, 81 N.M. 161, 464 P.2d 891; Ritchey
v. Gerard, 1944-NMSC-053, ¶ 14, 48 N.M. 452, 152 P.2d 394.

{21} This was a contract to settle a wage claim. Its manifest purpose, which was to
“avoid[] the nuisance, costs, and inherent risks of litigation” in exchange for payments to
affected workers, was entirely legal—and in fact desirable. See Esquibel v. Brown Constr.
Co., 1973-NMCA-111, ¶ 17, 85 N.M. 487, 513 P.2d 1269 (“It is the policy of the law to
favor compromise and settlement.”). The no-withholding provision was nothing more than
an ancillary attempt to designate tax ramifications of some of the payments to some of the
workers. Such a term is not essential. As mentioned above, the labels that parties to
settlement agreements put on their payments are of no real import; they are, in fact,
“immaterial” to the taxing authority, which looks instead to the nature of the underlying
claim. Treas. Reg. §§ 31.3121(a)-1(c), 31.3401(a)-1(a)(2); Getty, 913 F.2d at 1490. The
interests of the United States are adequately protected by statutory penalties, I.R.C. §
6672(a), and by the immunity granted to all employers that withhold payroll taxes in
accordance with the law notwithstanding a contract purporting to require otherwise, Bright,
780 F.2d at 770. There is no benefit to the public to be gained by imposing an additional
penalty (the avoidance of an otherwise valid settlement agreement) on litigants who
mistakenly settle on a tax arrangement that is inconsistent with Section 3402(a)(1).

{22} While the no-withholding provision may be inconsequential to the taxing authority
and the public, Defendants—via statements of counsel—have maintained that it is important
to them. They argue that severing the no-withholding clause would alter the cost of the
Agreement. One cannot normally set aside a settlement agreement on the basis that he was
ignorant of the law when the claim was settled, see Esquibel, 1973-NMCA-111, ¶ 19; or on
the ground that the agreement turned out to be unwise, see Harkins v. Harkins, 1984-NMSC-
057, ¶ 3, 101 N.M. 296, 681 P.2d 722. For our purposes, the relevant standard is not whether
performance in compliance with the law might be more expensive than Defendants expected,
but whether the illegal term was “an essential part of the agreed exchange.” Restatement
(Second) of Contracts § 184(1). The district court granted summary judgment without
hearing any evidence that it was.

{23} There is no evidence in the record, for instance, that the agreed rates for non-
Enterprise employees were any different than those for Enterprise employees, which were
“subject to payroll withholding in the normal course.” The contract says that payments to
all “known workers who performed construction work on the site” were based “upon
amounts of back pay and fringe benefits [the workers] would have been due under the
PWMWA (less wages and benefits already paid).” Without any evidence to the contrary, this
language is clear enough. The price of the bargain was not determined by the no-withholding
provision; it was tied directly to the prevailing wage and benefit rates set by the Director of
the Department for classes of laborers and mechanics employed on a public works project.
See § 13-4-11(B).

                                              8
{24} The terms of the Agreement indicate only that Defendants sought to comply with the
law. They mistakenly believed, according to the contract, that the non-Enterprise workers
were “not employed by any [Defendants].” They made, as the attorney for Sandia
Foundation later admitted, “a very fundamental” and “somewhat embarrassing” mistake. In
other words, the only way to effectuate their intent is to bring the Agreement into
compliance with state and federal law by severing the illegal term. Under the circumstances,
we think it best not to permit sophisticated parties to evade the spirit of their agreement by
leaning on their own inexplicable misreading of tax provisions that are directed at them. Cf.
Forrest Currell Lumber Co., 1970-NMSC-018, ¶ 16; S. States Life Ins. Co. v. McCauley,
1970-NMSC-010, ¶ 7, 81 N.M. 114, 464 P.2d 404 (“The party at fault under the statute
cannot gain an advantage by his own act.”); Elephant Butte Alfalfa Ass’n v. Rouault,
1926-NMSC-009, ¶ 17, 33 N.M. 136, 262 P. 185 (“Public policy safeguards society from
oppression; it is not an instrument of oppression.”). While partial enforcement of the
Agreement may make performance more expensive than Defendants intended, they (and not
Plaintiffs, who took no part in negotiations for the illegal term) should bear the cost of their
mistake.

{25} We conclude that the appropriate remedy is to strike the single occurrence of the
words “without such withholding” from Paragraph 2 of the Agreement. The Agreement then
requires Defendants to make their wage/benefit payments to all workers in the manner
already contemplated for the Enterprise employees. Therefore, consistent with state and
federal law, all payments are naturally “subject to payroll withholding in the normal course.”

CONCLUSION

{26}   We reverse the district court’s grant of summary judgment.

{27}   IT IS SO ORDERED.

                                               ____________________________________
                                               LINDA M. VANZI, Judge

WE CONCUR:

____________________________________
MICHAEL E. VIGIL, Chief Judge

____________________________________
RODERICK T. KENNEDY, Judge




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