ACHIEVEMENT ASSOCIATES, LTD., Employer

The Department submitted a petition for Comission review alleging error in the Administrative Law Judge's Findings and Order issued on September 19, 1991. At issue is the extent of the employer's taxable payroll for 1988 and the first three quarters of 1989.

The Commission has carefully reviewed the entire record in this matter and based thereupon it makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

This proceeding concerns the question of whether the taxable "payroll" of Achievement Associates (AA) for 1988 and the first three quarters of 1989 should be deemed to include certain sums received by two persons (Forma Dubin and Kay Kriewald) in connection with services they performed as tutors. Their services were excluded from the definition of "employment" under sec. 108.02 (15)(k), Stats., and pursuant to sec. 108.02 (21), Stats., the sums in question are therefore to be considered part of "payroll" only if they are subject to tax under the Federal Unemployment Tax Act (FUTA).

FUTA imposes a tax on payments made for services "by an employe for a person employing him," and an "employe" is "any individual who, under the usual common law rules applicable in determining the employer-employe relationship, has the status of an employe." I.R.C. sees. 3121(d)(2), 3306(c)(i). The Internal Revenue Service (IRS) has promulgated regulations to guide in the application of the "usual common law rules" test. 26 C.F.R. sec. 31.3121(d-1)(c)2. Additionally, the IRS has identified 20 factors that it considers useful in determining whether there is an employer-employe relationship under the "usual common law rules" test. Resolution of the issue presented in this case requires the application of the "usual common law rules" test referred in FUTA in light of the interpretation of that test as it has been developed by the IRS.

AA is a business which provides licensed outpatient mental health services, in large part by identifying services which would be most suitable for a prospective client and then referring the client to a provider of those services. The services include career and vocational planning and development for psychological enhancement of clients, resume preparation, weight loss, marriage and family counseling, evaluation and testing, and academic tutoring. AA's income is derived from referral fees obtained from the providers. In the case of tutors, the referral fee is generally one quarter to one third of the fee charged by the tutor for his or her services. In 1987, approximately one third to one half of AA's total income was derived from referral fees from tutors.

The tutors to whom AA refers clients have the right to refuse to accept referrals and have done so. If they choose to accept them, the tutors determine where and when the services will be performed. The tutors provide all the materials and assume all of the expenses. The tutors determine the fee that will be charged to the student, and they are paid directly by the student. The written agreement between AA and the tutors does little more than to establish the extent of the referral fee. Apart from a statement in the written agreement that the tutor agrees to provide "courteous and competent professional services," there are no other areas in which AA either exercises or has the power to exercise direction and control of any substance. No written reports are required. With respect to remitting referral fees, the tutors are asked only to submit the referral fee by the fifth meeting between the student and the tutor. AA provides no training or instruction in how the tutoring should be conducted. AA does not state to the tutor when the tutoring meetings should be held, how long they should last, or where they should be held. The tutors are free to perform tutoring services for others. If a tutor is unable to attend a scheduled tutoring session, he or she has no obligation to contact AA. There is no contract between AA and the clients concerning the tutor's services.

Applying the standards which are used by the IRS to evaluate relationships under the "usual common law rules" test, it is evident that the relationship here is not one of employment under that test. There is no actual instruction or direction, no training is provided, there are no set hours, the services are provided part-time, they are provided off of the employer's premises, the employer does not dictate the order of performance, no reports are required, payment is on a job rather than a time unit basis in the sense that it is percentage of earnings, the employer does not pay expenses involved or provide materials, the employer has no right to "discharge" a tutor from his or her relationship to a particular student, and the tutor does not have the right of a typical employe to "quit" in that the tutor's agreement with AA binds him or her to pay a fixed percentage of all receipts from a referral student as a referral fee even if the tutor decides while in the course of tutoring that student not to continue his or her relationship with AA. Although AA indicated that it would wish to approve the use of an assistant hired by a tutor, thus suggesting some expectation that service will be rendered personally, as a practical matter this is insubstantial in the circumstances here. There is no relationship, contractual or otherwise, between the student and AA once the referral is made. If a tutor to whom a student has been referred begins tutoring that student by use of an assistant, AA is, as a pratical matter, in no position to do anything about it if it is agreeable to the student. AA would obviously have an interest, in every such case, in "approving" the assistant, so that it could continue to receive its percentage referral fee. The tutoring services are only partly integrated with the overall business of AA, since half or more of its overall receipts come from other activities. There is no indication that the tutors cannot or do not hold themselves out as available to perform tutoring services to the public at large. The relationship between AA and its tutors is not continuing in the sense of an employment relationship, in that it is a matter of referral of single "jobs."

In addition to the fact that its own application of the "usual common law rules" test satisfies the Commission that the relationship here is not one of employment under that test, the Commission is satisfied that the IRS would arrive at the same result.

In Revenue Ruling 59-104, 1959-1 C.B. 251 (1959), the IRS addressed a situation almost identical to that presented here. That case involved an agency that maintained a list of individuals who would accept referrals to perform tutoring services. The tutors determined where and when the services would be provided, were free to refuse referrals, were free to determine the hourly rate to be charged, were not furnished any materials by the agency, were not given any instructions regarding the manner in which the tutoring was to be conducted, and were free to perform similar work for others. The agency was entitled to a portion of the fees set by the tutors, to compensate it for the referral. In this and other respects, the material facts of the case are on all fours with the situation involving AA. The IRS, applying the "usual common law rules" test, determined that the relationship was not subject to FUTA. Because the facts of that case are not distinguishable in any material respect from the facts of the. case on review before the Commission, it is appropriate to give it great weight on the question of whether the relationship in question is one of employment subject to FUTA.

The Commission therefore finds that compensation paid to Fonna Dubin and Kay Kriewald during the period of January 1, 1988 through September 30, 1989 was not part of the taxable "payroll" of AA within the meaning of sec. 108.02 (21) of the Wisconsin Statutes.

The Appeal Tribunal Decision is affirmed. Accordingly, that portion of the Initial Determination dated April 22, 1990 including the wages paid to Fonna Dubin and Kay Kriewald for the first three quarters of 1989 is amended to delete such compensation. The employer's tax liability for 1988 is likewise amended to delete compensation attributable to the two named individuals.

Dated and mailed February 28, 1992
110 - CD3017  EE 411  PC 749 LIRC 

/s/ Pamela I. Anderson, Chairman

/s/ Richard T. Kreul, Commissioner

/s/ James R. Meier, Commissioner

The Department argues that the Administrative Law Judge reasoned that the federal "usual common law rules" test is the same as the "direction and control" part of the Wisconsin test set forth in sec. 108.02 (12)(b)1, Stats., and that this was an error because the federal "usual common law rules" test also incorporates factors bearing on the "independently established" aspect of the Wisconsin test which is found in sec. 108.02 (12)(b)2, Stats.  The Department then continues by arguing that on a number of the 20 factors looked at under the federal standards, the facts are consistent with a finding of employe status. Finally, the Department argues that Revenue Ruling 59-104 is not binding precedent, asserting that there are other rulings by the IRS that arrive at a different result.

The Commission does not believe (and it does not appear that the Administrative Law Judge believed either) that the federal "usual common law rules" test is exactly the same as the "direction and control" test set forth in section 108.02 (12)(b)1, Stats. However, it is quit apparent from IRS regulations that the "usual common law rules" test has consistently been interpreted as looking primarily to questions of direction and control. The Commission agrees with the Administrative Law Judge, that the finding of an Administrative Law Judge in the previous proceeding involving AA's subjectivity, that AA had demonstrated the applicability of the "direction and control" test under sec. 108.02 (12)(b)1, Stats., went a great way towards satisfying AA's obligation of proving the absence of an employment relationship under the "usual common law rules" test. The Commission also agrees that the Department, by virtue of its stipulation that the findings of fact made by the Administrative Law Judge in that proceeding accurately described the relationship between AA and its tutors in the quarters at issue, was hardly in a position to assert that there were any significant indicia of control here. Taking into account the findings of the Administrative Law Judge in that previous proceeding, and measuring the evidence in the record against the "usual common law rules" test in light of the 20 factor analysis, the outcome is heavily weighted in favor of finding no employment relationship.

Most significant in this case, however, is the presence of the IRS Revenue Ruling involving a factual situation which is not materially distinguishable. The Commission rejects the Department's argument that it appropriately ignored this decision in its Brief in Chief because it believed it would not be "dispositive, or for that matter, even helpful, at arriving at a decision in this case." In a case such as this, in which the law of Wisconsin requires the Commission to apply the tax law of another jurisdiction (the United States), a decision of the IRS in a case involving materially indistinguishable facts is most certainly going to be at least helpful. The Commission concludes that IRS rulings must be given due weight according to the extent to which they involve factually similar situations and the extent to which the rulings have been consistent, and that they should be given great weight in cases that are "on all fours" with the case considered and where the ruling would be considered controlling in the federal system. This is such a case.

The Commission rejects the Department's argument, based on two IRS private letter rulings, that cases have gone "both ways" on facts such as this. For one thing, the Department's argument ignores the well established rule that a Revenue Ruling, which is an official interpretation by the IRS, 26 C.F.R. 601.201 (5), is entitled to greater weight than a private letter ruling, which is subject to restrictions on its use as precedent, see I.R.C. 61 (10)(j)3. More significantly, the facts in both the private letter rulings relied on by the Department are so clearly distinguishable from the facts in Revenue Ruling 59-104 and the facts in the case of AA, that no serious argument can be made that those private letter rulings "support" the position of the Department. In those private letter rulings, the IRS expressly noted that the facts were different from those that had been presented in Revenue Ruling 59-104, and the holding of that Revenue Ruling was implicitly reaffirmed. The same distinction which the IRS drew in the letter rulings between the facts there described and the facts in Revenue Ruling 59-104, may be drawn between the facts in the private letter rulings and the facts in the case on review before the Commission. The Department's complete failure to even attempt to draw any factual distinction between this case and the Revenue Ruling 59-104 is testimony to the difficulty of distinguishing the situations. Therefore, the private letter rulings cited by the Department in fact support the position of AA, since they both expressly note that facts such as those found in Revenue Ruling 59-104 (and by extension, in the case at hand) warrant a finding that there is not an employment relationship.

AA has requested an order of attorney's fees and costs against the Department under sec. 227.485, Stats., part of the "Equal Access to Justice Act," which provides that in a contested case in which an individual, a small nonprofit corporation or a small business is the prevailing party against the state agency and submits a motion for costs, the hearing examiner shall award the prevailing party its costs incurred in connection with the contested case unless the hearing examiner finds that the losing party was substantially justified in taking its position or that special circumstances exist that would make the award unjust. However, sec. 227.485, Stats., is not applicable here. That section is part of the provisions of the Administrative Procedure Act, Chapter 227, relating to "contested cases," and sec. 227.03 (2), Stats., clearly and unambiguously provides that the only parts of the Administrative Procedure Act that are applicable to proceedings arising under Chapter 108 are those provisions relating to administrative rules. Proceedings arising under Chapter 108 can only give rise to potential claims under the "Equal Access to Justice Act" when they are in the posture of an action by the Department to obtain court review of a decision of the Commission. See, sec. 814.245, Stats. The Commission therefore has no occasion to determine whether the position taken by the Department in this matter was "substantially justified" within the meaning of the Equal Access to Justice Act.

cc: 
Michael J. Mathis
Enforcements

Richard S. Florsheim
Foley & Gardner

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