STATE OF WISCONSIN
LABOR AND INDUSTRY REVIEW COMMISSION
P O BOX 8126, MADISON, WI 53708-8126 (608/266-9850)

KIP KOTH CO LLC, Employer

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Account No. 056909, Hearing No. S0100034RH


An administrative law judge (ALJ) for the Division of Unemployment Insurance of the Department of Workforce Development issued a decision in this matter. A timely petition for review was filed.

The commission has considered the petition and the positions of the parties, and it has reviewed the evidence submitted to the ALJ. Based on its review, the commission makes the following:

FINDINGS OF FACT AND CONCLUSIONS OF LAW

Kip Koth Co LLC ("KK"), a limited liability company owned by Kip Koth and his wife Christine, is a home builder. In 1999 and 2000 it used the services of a person named Fran (Francis) Moss, who painted and stained doors and trim. (1)   KK and Moss did not have a written agreement. Their practice was, that after a customer for whom KK was building a home made a decision on style, finish and color of doors and trim, KK would arrange to have its lumber supplier deliver the doors and trim to Moss at his shop, which was a garage adjacent to his home. Moss would also be provided with a sample of the paint or stain chosen by the customer. Moss would purchase the necessary paint or stain and complete the painting or staining. Moss provided the equipment used in his operation. After Moss completed the painting or staining, KK's lumber supplier would pick up the materials and deliver them to the building site. Moss would subsequently go to the building site to do any necessary touchup, which could include setting trim nails and filling nail holes. Moss would bill KK for his labor and materials, on invoices bearing the name "Moss Painting and Staining". Moss did not itemize his bills, and he might send several bills over the course of one house being built, sending a bill for each delivery of doors and trim to be stained.

Additional facts are described below, in connection with the discussion of specific statutory tests for determining whether the services were provided by Moss in employment or as an independent contractor.

A department audit concluded that Moss performed services for KK as an employee, and that therefore amounts paid to him should be included in payroll subject to unemployment tax. A determination to this effect, covering all four calendar quarters of 1999 and the first three calendar quarters of 2000, was issued on January 9, 2001. (2) KK appealed and, after hearing, an administrative law judge (ALJ) issued a decision on October 14, 2002 which affirmed the initial determination. KK then petitioned for commission review

The question for decision is whether Moss provided his services as an employee of KK or as an independent contractor.

The standard used to determine whether an individual is an employee for purposes of the unemployment compensation act is found in sec. 108.02(12), Stats. A two-step analysis is used to determine whether an individual is an employee. [citation omitted] The first step is to decide whether an individual "has been performing services for an employing unit, in an employment." Section 108.02(12)(a). An "employment" is any "service . . . performed . . . for pay." Section 108.02(15)(a). If the first step is satisfied, the burden shifts to the employer to establish that it is exempt from coverage . . .

Goldberg v. DILHR, 168 Wis. 2d 621, 625 (Ct. App. 1992) (emphasis added). Essentially, Wis. Stat. § 108.02(12)(a) creates a rebuttable presumption that an individual performing services in an employment is an "employee", and a putative employer has the burden of rebutting that presumption of employee status by showing that the tests for independent contractor status are satisfied with regard to the individuals in issue. Lozon Remodeling (LIRC, September 24, 1999).

The applicable law is different for the four calendar quarters of 1999 and the three quarters of 2000 that are at issue, in terms of the tests which must be shown to have been met if a putative employer is to be found to have carried its burden of proof.

As to the four calendar quarters of 1999, the applicable statutory provision is Wis. Stat. § 108.02(12)(b). That section provides that for an individual to be found to have been an independent contractor, they must (among other things) have satisfied one or the other of these two conditions:

1. The individual:

a. Holds or has applied for an employer identification number with the federal internal revenue service; or

b. Has filed business or self-employment income tax returns with the federal internal revenue service based on such services in the previous year

Wis. Stat. § 108.02(12)(b). The commission agrees with the ALJ's finding that neither condition was shown to have been met as to the four calendar quarters of 1999.

Christine Koth acknowledged that she did not know if Fran Moss filed self-employment or business tax returns in 1998, 1999 or 2000, asserting only that she "assumed" he did. She also acknowledged that she did not know if he had, or had applied for, a federal employer identification number. While the "Worker Status Questionnaire" form (received into the record as Ex. 3) had the "Yes" box checked by the question "Did you file a business tax return", with the year "1998" circled, the only testimony about its origin was Christine Koth's equivocal statement that "[a]s far as [she] knew", Fran Moss filled it out. Even assuming arguendo that Koth's equivocal testimony was adequate as authentication of the document, it remains the case that the document is hearsay. Pursuant to Wis. Admin. Code § DWD 140.16(1), no issue may be decided solely on hearsay evidence unless the hearsay evidence is admissible under ch. 908, Stats. The "Worker Status Questionnaire" form is not admissible under any exception to the rule against hearsay, and because it is the sole evidence on the question, it may not serve as the basis for a finding that Fran Moss filed a business tax return in 1998.

Thus, there was no competent evidence that Fran Moss filed a self-employment or business tax return for tax year 1998, and there was also no evidence that in 1999 he had, or had applied for, a federal employer identification number. Therefore, as to the calendar quarters in issue in 1999, the evidence fails to establish that either of the necessary conditions in Wis. Stat. § 108.02(12)(b)1. were met.

As to the calendar quarters at issue in 2000, the applicable statutory provision is Wis. Stat. § 108.02(12)(bm). That section provides that for an individual to be found to have been an independent contractor, they must have satisfied 7 out of 10 stated conditions. These are discussed below.

1. The individual holds or has applied for an identification number with the federal internal revenue service - As noted above, there was no competent evidence to establish that Fran Moss had ever applied for or received a federal employer identification number. KK does not argue otherwise. The commission therefore finds that this test was not met.

2. The individual has filed business or self-employment income tax returns with the federal internal revenue service based on such services in the previous year or, in the case of a new business, in the year in which such services were first performed - As noted above, there was no competent evidence to establish that Fran Moss had filed such tax returns for the years that would be necessary to satisfy this condition. The commission therefore finds that this test was not met.

3. The individual maintains a separate business with his or her own office, equipment, materials and other facilities - This test looks at the question of whether the person "maintains a separate business", the term "separate" clearly being intended to focus on the question of whether the activity the person engages in is genuinely separate from the activity of the putative employer, and the term "business" clearly being intended to focus on the question of whether the manner of engaging in the activity is characteristic of the way a business operates as distinct from the patterns typical of an employment relationship. It is critical under this test whether the person involved has a separate business apart from the appellant's business. Quality Communication Specialists (LIRC, June 7, 2000). While Moss may have had his own place of work (his garage next to his home) and used his own materials (paint, stain) and tools, it cannot be said that he had a business which was in any way "separate" from KK. As Christine Koth acknowledged, he performed services only for KK. In these circumstances it asks too much to say that Moss had a "separate business". The commission therefore finds that this test was not met.

4. The individual operates under contracts to perform specific services for specific amounts of money and under which the individual controls the means and methods of performing such services -- The commission agrees with the ALJ's finding that within the employer's time limits for completing the painting, Moss controlled means and methods for performing the work. There seems to be little question but that Moss was completely in control of means and methods. Thus, the commission finds that this test was met.

5. The individual incurs the main expenses related to the services that he or she performs under contract -- The commission agrees with the ALJ's finding that Fran Moss incurred the main expenses for the services he agreed to perform for the employer. It appears from the evidence of record that Moss incurred all of the expenses related to the painting and staining services performed. The commission therefore finds that this test was met.

6. The individual is responsible for the satisfactory completion of the services that he or she contracts to perform and is liable for a failure to satisfactorily complete the services -- Based on its review of the record, the commission is not persuaded that KK established that this test was met. It is true, that Christine Koth testified that if there were problems with the work, or a customer complaint, she would call Fran Moss and tell him and he would go out to the site to redo it, and "normally there was no additional compensation paid for correcting problems". However, because of the way Moss billed for his services, KK was often in no position to know if Moss was charging extra compensation for re-doing work. All KK established, was that if something came up after the final bill, there would be no further charge from Moss for re-work. However, Christine Koth acknowledged that "if they put an additional charge in the bill we wouldn't have any way of knowing that". As noted above, Moss did not itemize bills he sent to KK, and he might send several bills over the course of one house being built, sending a bill for each "job", i.e., each delivery he took of doors and trim to be stained.

The commission concludes that the evidence is not sufficiently clear on this point to satisfy KK's burden. There is no clear, affirmative evidence supporting the finding, that Moss was liable for failure to perform to KK's satisfaction and would do re-work for no additional charge. Because the burden of proof was on KK to establish that this test was met, and because the evidence was insufficient to carry that burden, the commission therefore finds that this test was not met.

7. The individual receives compensation for services performed under a contract on a commission or per-job or competitive-bid basis and not on any other basis - It appears that Fran Moss had a "price sheet", which listed a cost per lineal foot for various kinds of work, and that KK would then use this in developing their own estimate of the cost of building a home for a customer. Moss would apparently not give KK an estimate or bid prior to a job, however, but would just do the job and then present KK with an invoice for a single figure for the entire job (see, e.g., Exs. 1, 2). The "job" was a load of materials (doors, trim) which KK would deliver to Moss at one time. The commission believes that it is reasonable to consider this to have been work performed on a "per-job" basis. The commission therefore finds that this test was met.

8. The individual may realize a profit or suffer a loss under contracts to perform such services -- The commission agrees with the ALJ's finding that it does not appear that Moss could suffer a loss assuming that he charged more than his costs. Because Moss did not bid or estimate these jobs, he did not run the risk of mis- estimating and thereby ending up spending more money on supplies than his bid or estimate covered. Billing after the fact as he did, he was always in a position to charge enough to cover his costs and to compensate him for his work. The commission is not persuaded that Moss' operation carried with it any true risk of business (investment) loss. It therefore finds that this test was not met.

9. The individual has recurring business liabilities or obligations -- Christine Koth acknowledged that she did not know whether Moss purchased supplies per job or maintained and inventory. While she testified that he did his work in his garage adjacent to his home, there is no basis for finding that this involved any sort of recurring expense which was separate from the Mosses' personal home ownership. The only conceivable theory on which this test could be considered to have been satisfied involves a possible recurring liability insurance expense.

Christine Koth testified that Fran and Judy Moss incurred some kind of ongoing liability insurance expense. In connection with that testimony, she offered documents, received into evidence as Exhibit 5, which appear to have something to do with liability insurance, KK, and Moss.

However, it is not entirely clear what the documents in Ex. 5 represent. Koth provided no real testimony about them. The documents show "Francis Moss" as the "insured", but they also list "Kip & Company" (presumably, this is Kip Koth), as the "Certificate Holder". They bear an endorsement to the effect that "should any of the above described policies be cancelled before the expiration date thereof, the issuing company will endeavor to mail __ days written notice to the certificate holder named to the left . . ." They also bear an endorsement at the top stating, "This certificate is issued as a matter of information only and confers no rights upon the certificate holder. This certificate does not amend, extend or alter the coverage afforded by the policies below". They also bear an endorsement which states, "This is to certify that the policies of insurance listed below have been issued to the insured named above for the policy period indicated . . .".

As noted above, these documents reflect something about liability insurance and have something to do with Kip Koth and Francis Moss, but it is not clear from them who is paying for the insurance. In addition, the documents that make up Ex. 5, like the "Worker Status Questionnaire" (Ex. 3), are hearsay. The only conceivable hearsay rule exception that they might fall under would be the exception for records of regularly conducted activity under Wis. Stat. § 908.03(6), but the necessary foundation elements for the applicability of that exception were not established. Therefore, the commission does not consider the documents sufficient as proof that Moss was regularly incurring the expense of paying the premiums for insurance. That leaves only Christine Koth's bare assertion in her testimony, that Fran Moss was incurring some sort of insurance expense each year. The commission is not inclined to give weight to that testimony. While Koth presumably knew about how KK operated, she clearly did not know a lot about how Fran Moss operated. She did not establish that she was in a position to know about the expenses Moss incurred.

On balance, the commission believes that the evidence is inadequate to prove that Moss incurred the expense of liability insurance. As noted above, there is really nothing else that could be pointed to as a recurring expense that would satisfy this test. For these reasons, the commission finds that this test was not met.

10. The success or failure of the individual's business depends on the relationship of business receipts to expenditures - The commission agrees with the ALJ's findings that Moss had virtually no expenses other than painting supplies, and that he primarily was providing his labor for pay as does any employee, and that his success or failure in performing this work was therefore not dependent on him being paid more than his expenses to provide his services. In Dane County Hockey Officials (LIRC, Feb. 22, 2000), the commission held that this test contemplates the existence of a genuine business endeavor, noting that the test looked to whether a significant investment is put at risk and there is thus the potential for real "success'" in the sense of the growth of the value of the investment, or "failure", in the sense of the actual loss of the investment. The commission finds that Moss had no significant business investment placed at risk, and that his primary activity was instead a matter of providing labor with a small expense component that carries no risk of generating any overall loss. The commission therefore finds that this test was not met.

Summarizing the above, the commission finds that only 3 tests (numbers 4, 5 and 7) were shown to have been met. This falls well short of the 7 tests which it was KK's obligation to show were satisfied in order to meet its burden of proof and rebut the presumption created by Wis. Stat. § 108.02(12)(a) that Fran Moss provided his services as an employee.

The commission therefore finds that during all four calendar quarters of 1999 Fran Moss performed services for the employer as an employee within the meaning of Wis. Stat. § 108.02(12)(a) and (b), and that during the first three calendar quarters of 2000 Fran Moss performed services for the employer as an employee within the meaning of Wis. Stat. § 108.02(12)(a) and (bm).

DECISION

The decision of the administrative law judge is affirmed. Accordingly, the employer is liable for contributions to the Unemployment Reserve Fund on the basis of amounts paid to Fran Moss during all four calendar quarters of 1999 and the first three calendar quarters of 2000. The employer's contribution credit remains at $601.36.

Dated and mailed April 8, 2003
kipkoth . srr : 110 :  EE 410 EE 410.03  EE 410.10  PC 714.03

/s/ David B. Falstad, Chairman

/s/ James A. Rutkowski, Commissioner

/s/ James T. Flynn, Commissioner

MEMORANDUM OPINION

This case concerned the question of whether Fran Moss was performing services for Kip Koth Co. LLC as an employee or as an independent contractor, for purposes of determining the unemployment compensation tax liability of Kip Koth. It was undisputed that Moss was performing services for KK, for which KK paid him. Thus, as noted above, a legal presumption arose that Moss was an employee of KK. The burden of proof was on KK to present evidence sufficient to rebut that presumption. However, the only person who appeared for KK was Christine Koth, the administrative manager and bookkeeper for the business. Her husband, Kip Koth, the sole (limited liability) member of the business, chose not to come because he was busy. Moss did not appear at the hearing.

It became apparent during the hearing that there were things about KK's operation that Christine Koth simply did not know. Most significantly, she clearly knew very little about the operation of Fran Moss. Thus, Koth did not know who actually performed the services for Moss, in terms of whether it was Fran Moss or his wife Judy Moss. She did not know who endorsed the checks that KK gave to Moss Painting & Staining. She had never been to a work site where Moss was performing services for KK. She did not know if Moss filed a self-employment or business tax return, or whether he had or had applied for a federal employer identification number. She did not know if Moss ordered paints and stains for each job or if he maintained an inventory, or how much paint and stain cost them. She did not know how much Moss had invested in tools and equipment. She did not know if Moss had a business sign on the garage where he did his work, or if he advertised in any way. She did not know if Moss did work for any contractors other than KK in 1999 (she was "pretty sure" that he did not do any other work in 2000). She conceded that she had not attempted to get any information from Moss before the hearing in order to attempt to prepare for it.

As a result, there was a notable lack of evidence on many critical points. As noted above, however, the burden of proving that a person who performs services for pay is an independent contractor rather than an employee, is on the putative employer. If the evidence in the record is insufficient to allow a finding to be made on a relevant test, with the result that it is not possible to find that the test is satisfied, then the consequences fall on the party who bears the burden of proof: the putative employer. Quality Communications Specialists Inc. (LIRC, July 30, 2001).

KK argues that much of the important information about Moss' operation was not available to them, and that it was the department's fault that the Fran and Judy Moss were not at the hearing to provide that information. Thus, KK argues:

Your Unemployment Representative admitted that he forgot to notify Moss Staining and Painting to attend the hearing in August. In fact we waited an extra fifteen minutes for Moss to appear, when in the end your department forgot to contact them to attend. They were supposed to be subpoenaed.

The commission is satisfied that KK's argument misstates what occurred.

Prior to the hearing, the attorney representing the department, Peter Zeeh, prepared subpoenas to require the attendance at hearing of Fran and Judy Moss. Zeeh mailed these subpoenas to the Oneida County Sheriff's Department on July 15, 2002, asking that the subpoenas be served on them. However, neither Fran or Judy Moss appeared at the hearing. Attorney Zeeh explained to the ALJ that he had made efforts to have them subpoenaed and did not know why they had not appeared. At the end of the hearing, Zeeh asked the ALJ to hold the record open to determine whether or not the Mosses were served with a subpoena (as well as for another purpose). Subsequently, Zeeh wrote to the ALJ on August 12, 2002, with a copy to KK, to indicate that he had determined that the Mosses had not been served with the subpoenas. Zeeh indicated that the department was willing to let the matter be decided upon the record created at the hearing.

Significantly, there is no indication that KK ever made any effort prior to the hearing to ensure that the Mosses would be there. It was the department that was planning on calling them, and that sent subpoenas requiring their attendance to the Oneida County Sheriff's Department, asking that the subpoenas be served on them. Furthermore, it does not appear that KK's failure to make any efforts to ensure that the Mosses came to the hearing was caused by an assumption on their part that they would be there because of the department's subpoena: there is nothing in the record indicating that KK knew, prior to the hearing, that the department was making an effort to subpoena the Mosses. Finally, when the department notified the ALJ after the hearing that it had been determined that the Mosses had not been served with the subpoenas and that the department was agreeable to allowing the matter to be decided on the basis of the record as it stood at that point, KK did not raise any claim at that point that they wanted an opportunity for further hearing to allow the Mosses to testify.

As noted above, KK had the burden of proof in this matter. It was its responsibility to prepare for the hearing and to bring the evidence to carry its burden of proof. The fact that the department was taking steps (which ultimately proved unsuccessful) to get the Mosses to the hearing, does not change the fact that KK did nothing to get the Mosses to the hearing. The situation is really no different than it would have been if the department had made no effort to get the Mosses to the hearing. It is a situation in which the employer, which had the burden of proof, simply failed to do what was necessary to have the proof available at the time of hearing. Therefore, the commission believes that the result here was appropriate notwithstanding the fact that the Mosses were not present to testify.

In its petition for review, KK also complains about the fact that it took an inordinately long time for this matter to be brought to hearing and decided. The Initial Determination was issued in this matter on January 9, 2001, and KK filed its request for a hearing on January 15, 2001. However, the department did not scheduled the matter for hearing until August 5, 2002 - a delay of one year and 7 months.

The commission considers this delay to be a regrettable circumstance. However, that circumstance does not provide a basis for reversal or a new hearing. KK was not subjected to any additional financial liability because of the delay, nor (in view of the outcome) was it deprived of any funds which it would otherwise have obtained sooner. Furthermore, it does not appear that the limited nature of the proof offered by KK was caused by the delay.

 

NOTE: The commission had no disagreement with the material findings of fact made by the ALJ. It has issued its own decision in this matter simply in order to more fully set forth the reasons it agreed with the ALJ's ultimate decision that Fran Moss had provided his services to KK as an employee rather than as an independent contractor.

 

cc: Attorney Peter W. Zeeh



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Footnotes:

(1)( Back ) Fran Moss' wife Judy was involved to some extent in his painting and staining operation but there is no clear evidence as to the extent of her involvement.

(2)( Back ) The determination did not actually result in a requirement that KK pay any additional taxes, because for unrelated reasons it had already overpaid its taxes for the relevant period and was thus due money. The effect of the determination was that the amount of the overpayment that was to be repaid to KK, was reduced, to $601.36.

 


uploaded 2003/04/18