Am I Entitled to Punitive Damages For Embezzlement by Payroll Company?

Full question:

We have a national company that does our payroll.It turns out our account represenative embezzeled a significant amount of money from us. It was withdrawn from our office bank account as payroll then deposited into an account at a different bank that he set up in my name without my knowledge. He then cashed checks off that account. Due to the dwindling office funds I had to take out a couple of loans at a high interest rate to maintain cash flow. I didn't go over the monthly reports from them due to the fact I am not a businessman which is why I used the service in the first place.One of the companies selling points is to take the burden of payroll and taxes off of you and onto us. I trusted them totally. The company wants to settle the matter by giving me a check for the enbezelled amount only. My question is wouldn't they be responsible for damages such as the interest I have had to pay on the loans to keep the office going as well as any possible tax implications as well as punitive damages. This fraud was conducted over a period of a year and a half.

• Category: Real Property
• Subcategory: Fraud
• Date: 04/07/2025
• State: North Carolina

Answer:

There are typically costs savings involved in a settlement, such as attorney fees, time delays, and possibly damages, as well as any applicable punitive fines or imprisonment. Embezzlement is a criminal charge and crimes of an employee without employer participation or knowledge are typically outside the scope of employment for which an employer may be vicariously liable.

A civil claim may ask for damages such as restitution. Restitution is a remedy designed to restore the injured party to the position occupied prior to the formation of the contract. Parties seeking restitution may not request to be compensated for lost profits or other earnings caused by a breach. Instead, restitution aims at returning to the plaintiff any money or property given to the defendant under the contract. Out-of-pocket losses may be sought to restore a plaintiff to the position he would have occupied without the harm. In cases of fraud and embezzlement, punitive damages may be awarded, as well as direct damages and consequential damages, such as interest. I suggest you consult a local attorney who can review all of the facts and documents involved.

http://www.northcountrygazette.org/articles/050706CookedBooks.html

See also the following article from http://www.daspc.com/employer-tips.html :

Embezzlement by payroll service did not relieve employer from liability
Source: RIA Payroll Guide Newsletter (preview) 03/17/2006, Volume 65, No. 06

Pediatric Affiliates, P.A., v. United States, DC NJ, Dkt. No. 05-3108 (MLC), 2/23/2006. A U.S. District Court has ruled that an employer was liable for past due payroll taxes even though it had relied on a payroll service that embezzled its funds.

Facts. Pediatric Affiliates, P.A. ("Pediatric"), is a New Jersey professional corporation that provides pediatric medical services. Pediatric hired PAL Data to service Pediatric's payroll accounting needs. Pediatric did not know that Menachem Hirsch, the founder of PAL, embezzled the tax payments that Pediatric and other clients transferred to PAL. Hirsch would prepare and send to Pediatric a tax form that reflected Pediatric's actual tax liability. Pediatric then, would transfer money in the amount of its tax liability to Hirsch. Hirsch, however, would also prepare a tax form that reflected an understated tax liability. He sent the understated form and amount to the IRS, and invested the difference between the amount he received from Pediatric and the amount sent to the IRS in a personal hedge fund.

The IRS sent Pediatric notices of its intent to levy on Pediatric's assets. The IRS sought taxes Pediatric owed from 1999 and the first quarter of 2000 due to Hirsch's underpayment. Pediatric requested a Collection Due Process Hearing ("CDPH") in August 2004. Pediatric asserted that it was not liable for past due payroll taxes, or the interest charges it was assessed, because Hirsch embezzled its tax payments. Following the hearing, the Appeals Office of the IRS determined that the levy notice was proper, and Pediatric was liable to pay the taxes owed and interest. Pediatric brought an action to the U.S. District Court, seeking a redetermination of the IRS collection action resulting from the CDPH due to reasonable cause.

The law. IRC §6651(a) allows an employer to avoid penalties for noncompliance if it can show that its failure to file, pay, or deposit taxes was due to "reasonable cause" and not willful neglect. IRC §3504 provides that an agent is only jointly and severally liable for a company's payroll taxes if the agent actually had "control, receipt, custody, or disposal of, or pays the wages of an employee or group of employees." The form that a taxpayer must fill out to authorize an agent to make tax payments on its behalf contains an agreement that provides, "I understand that this agreement does not relieve me, as the taxpayer, of the responsibility to ensure that all tax returns are filed and that all deposits and payments are made" [Tax Form 8655, Reporting Agent Authorization ].

Ruling. The court ruled that Pediatric's reliance on Hirsch, and Hirsch's subsequent failure to properly perform the task assigned does not amount to reasonable cause. The court noted that Pediatric's situation is analogous to that of the plaintiff in Huffman, Carter & Hunt, Inc. v. United States, 317 F. 2d 816 (S.D. Ohio 2004). The plaintiff in Huffman relied on an outside payroll service. The service embezzled the plaintiff's funds, resulting in tax deficiencies and penalties. Similarly, Pediatric relied on Hirsch. Assuming, as the court did in Huffman, that Pediatric exercised prudence in selecting and monitoring Hirsch, Pediatric still bears the ultimate responsibility to ensure its taxes are properly paid. Reliance on Hirsch did not render Pediatric unable to fulfill its tax obligations.

The court also noted that Hirsch was not a corporate officer or in a position of authority. He did not have final control over Pediatric's taxpaying duties. Hirsch was only an employee of an outside company who worked for Pediatric. He was an agent of Pediatric hired to "service Pediatric Affiliates' payroll tax needs." Hirsch is not jointly and severally liable because there is no assertion or indication that Hirsch had control, custody, or paid Pediatric's wages. The court said that Pediatric's reliance on Hirsch is understandable, and the subsequent misconduct "sad and unfortunate," but such reliance does not absolve Pediatric of its tax obligations.