BNSF Ry. Co. v. Loos
The Supreme Court ruled that lost-wage damages a railroad worker wins in an on-the-job injury lawsuit count as taxable pay under the federal law that funds railroad workers' retirement system, even though the worker never actually worked those hours.
The decision means railroads can withhold a share of injured workers' lost-wage awards for payroll taxes, reversing a lower-court ruling that had exempted those damages and settling a split among courts nationwide.
“We now hold that an award compensating for lost wages is subject to taxation under the RRTA.”
The Court's core holding that injury-lawsuit lost-wage damages are taxable.
How it got here: The district court and the Eighth Circuit both rejected BNSF's requested tax offset; the Supreme Court granted review to resolve a split among courts on the issue.
The Case in Depth
What happened
Michael Loos was hurt working at a BNSF Railway railyard and sued under a federal law letting injured railroad workers recover damages for their employer's negligence. A jury awarded him about $126,000, including $30,000 for wages he lost while unable to work. BNSF then argued it needed to withhold part of that $30,000 to cover payroll taxes that fund the railroad retirement system, treating the lost-wage award as ordinary taxable pay.
The question before the Court
When a railroad worker wins a lawsuit for wages he lost because of an on-the-job injury, does the government get to tax that award the same way it taxes regular paychecks?
The Court's answer
Yes — the Court ruled that lost-wage damages a railroad worker recovers in an on-the-job injury lawsuit count as taxable "compensation" under the Railroad Retirement Tax Act. The Court reasoned that this tax law's definition of compensation closely mirrors the definition of taxable wages under Social Security law, and that under its earlier decisions, back pay covering lost earnings counts as wages even though no work was actually performed during the covered period.
Applying that same logic, the Court found no meaningful difference between back pay for wrongful termination and injury-lawsuit damages covering lost wages — both simply replace earnings the employee would have received had the employment relationship continued without interruption. The Court also rejected arguments that statutory history or the personal-injury tax exclusion in ordinary income tax law required a different result.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
Railroad workers who win lawsuits over on-the-job injuries will see part of any lost-wages portion of their award withheld for payroll taxes, shrinking their take-home recovery. Railroads gain an incentive to negotiate settlements that label less of the payout as 'lost wages,' potentially reducing both the workers' tax bill and their credited retirement benefits.
What changes now
The case returns to the lower courts so the judgment can be recalculated to reflect that BNSF may withhold the employee's share of retirement payroll taxes from the $30,000 lost-wages portion of Loos's award. The ruling is a final merits decision resolving the legal question nationwide, so railroads elsewhere may now withhold similar taxes from lost-wage damages in injury cases going forward.
What this does not decide
The Court did not decide how railroads and injured workers should characterize or allocate settlement amounts between lost wages and other damages like pain and suffering, an issue the dissent flagged as giving railroads new leverage in settlement negotiations.
Concurrences and dissents
Dissent — Justice Gorsuch
“No one would describe a dangerous fall or the wrenching of a knee as a "service rendered" to the party who negligently caused the accident.”The dissent's central objection that injury damages aren't pay for services.
Justice Gorsuch argued that damages for a workplace injury are naturally understood as compensation for the injury itself, not for 'services rendered,' since the worker never performed any service while hurt. He pointed to Congress's deliberate removal of 'pay for time lost' language from the tax statute in 1975 and 1983 as evidence lawmakers meant to exclude such damages, and he distinguished the Social Security back-pay precedent as involving a different statute and factual context.
How the Court got there
The legal reasoning, step by step
- The Court read the retirement tax law's definition of taxable 'compensation' — 'money remuneration paid to an individual for services rendered as an employee' — as closely mirroring the Social Security law's definition of taxable 'wages,' since both cover pay tied to the employment relationship broadly, not just hours actually worked.
- Relying on its earlier rulings interpreting that parallel Social Security language, the Court explained that back pay awarded to a wrongfully fired worker counts as wages because it redresses 'the loss of wages' caused by the employer's wrongdoing, not because the worker performed any service during the period covered.
- Applying that same logic, the Court reasoned that injury-lawsuit damages covering lost wages are functionally identical to back pay: both replace earnings the worker would have received had the employment relationship continued uninterrupted.
- The Court rejected the argument that a series of statutory amendments removing express references to 'pay for time lost' meant Congress no longer intended to tax such pay, concluding those changes were technical and that the law's narrow, listed exclusions for certain sick and disability pay would be pointless if all pay for time lost were already excluded.
- The Court also rejected the argument that the tax law's use of the word 'income' imports the federal income tax's exclusion for personal-injury damages, noting the retirement tax law taxes 'compensation,' a separately defined term, not general 'gross income.'
- Because FELA lost-wage damages compensate for the same kind of loss as back pay and no exclusion in the statute covers them, the Court concluded they qualify as taxable compensation under the retirement tax law.
Doctrinal impact
Cases affected by this decision
Reaffirms Nierotko (327 U.S. 358)
The Court relies on this case's holding that back pay counts as taxable wages to support taxing injury lost-wage damages.
Reaffirms Quality Stores (572 U.S. 141)
The Court leans on this case's broad reading of taxable wages to interpret the parallel railroad tax term.