QUALE & ASSOCIATES INC, Employer
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:
Quale & Associates, Inc. (Quale), is located in Glendale, Wisconsin. The corporation does business under the name "Handyman Connection" (HC). HC advertises itself as a provider of repair services, including electrical, plumbing, and carpentry, to homeowners, and has a relationship with certain craftsWorker's to provide these services.
The issue is whether this relationship is that of an employee within the meaning of Wis. Stat. § 108.02(12). If so, then Quale is liable for unemployment insurance contributions and interest.
Wisconsin Statutes § § 108.02(12)(a) and (bm) state as follows, as relevant here:
(a) "Employee" means any individual who is or has been performing services for an employing unit, in an employment, whether or not the individual is paid directly by such employing unit; except as provided in par. (b), (bm), (c), or (d).
(bm) During the 4-year period beginning on January 1, 2000, with respect to contribution requirements, .par. (a) does not apply to an individual performing services for an employing unit.if the employing unit satisfies the department that the individual meets 7 or more of the following conditions by contract and in fact:
1. The individual holds or has applied for an identification number with the federal internal revenue service.
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.
3. The individual maintains a separate business with his or her own office, equipment, materials and other facilities.
4. The individual operates under contracts to perform specific services for specific amounts of money and under which the individual controls the means and method of performing the services.
5. The individual incurs the main expenses related to the services that he or she performs under contract.
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.
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.
8. The individual may realize a profit or suffer a loss under contracts to perform services.
9. The individual has recurring business liabilities or obligations.
10.The success or failure of the individual's business depends on the relationship of business receipts to expenditures.
Wisconsin Statutes § 108.02(12)(a) creates a presumption that a person who provides services for pay is an employee, and it requires the entity paying them for those services to bear the burden of proving that they are not employees. See, Dane County Hockey Officials, UI Hearing No. S9800101MD (LIRC Feb. 22, 2000); Quality Communications Specialists, Inc., UI Hearing Nos. S0000094MW, etc. (LIRC July 30, 2001).
The employer successfully established, in regard to condition 1. that each of the craftsWorker's except Thomas Allen, Steven McCarty, Ray Nienow, Dale Polchinski, Gregory Toby, Martin Tangney, Scott Wilson, Martin Havnen, David Belleheumer, Russ Dalske, Tom Harwell, Richard Kreuzer, William Hadel, Scott Smith, Kirk Howard, Mandel Zemblowski, Steven Koehler, Bill Rubel, Robert Bates, Gregory Parson, Wallace Kutch, and Kenneth Labodda held or applied for an internal revenue service identification number. It should be noted in this regard that evidence that a craftsworker completed an application for this number does not establish that he actually made application.
In regard to condition 2., the employer successfully established, through the evidence of record here, only that craftsWorker's Juergen Sauer, Richard Araco, Paul Zaidel, Richard Perkins, Richard Blizzard, Wayne Frye, Ahmed Awadallah, and Ronald Gerstner filed business or self-employment income tax returns with the federal internal revenue service based on services provided through the employer for the relevant years.
In Quality Communications Specialists, Inc., supra., the commission clarified that all parts of the test articulated in condition 3. must be met in order for the employer to satisfy its burden. Although the employer established that certain of the craftsWorker's who testified at the hearing had a business separate from the employer's during the relevant time period and used their own equipment and materials, it established that, of these, only craftsWorker's Ahmed Awadallah and Gerstner had an office. The lack of separate facilities, which would be consistent with the nature of the business in which the craftsWorker's were engaged, would not be dispositive here. See, Groeschl Forestry Consulting, Inc., UI Hearing No. S0000141HA (LIRC March 19, 2002). As a result, the employer failed to sustain its burden in regard to condition 3 except as to craftsWorker's Ahmed Awadallah and Gerstner. See, also, Harlan Mrochinski, UI Hearing No. S0100001WR (LIRC July 15, 2004).
To satisfy condition 4., it must be established that the craftsWorker's operate under contracts to perform specific services for specific amounts of money, and that, under these contracts, they control the means and method of performing the services. The fact situation here presents a hybrid which is difficult to categorize in regard to both requirements. Although the department appears to be arguing that the craftsWorker's are only parties to one contract, i.e., the standard "independent contractor" agreement which all craftsWorker's enter into with the employer, the record establishes that the craftsWorker's negotiate the terms of, and sign, apparently as agents of the employer, the contracts with customers for the individual jobs they complete. Multiple serial contracts such as these, may satisfy condition 4. if it is shown that they were negotiated "at arm's length, " with terms that will vary over time and that will vary depending on the nature of the covered services. Thomas Gronna (The Floor Guys), UI Hearing No. S9900063WU (LIRC Feb. 22, 2000); Mrochinski, supra. Here, the terms of such contracts would vary depending on the type of service required by the customer and the craftsworker's assessment of the time and skill needed to provide the service. This would satisfy the first requirement of condition 4. In regard to the second requirement, the record shows that, although the employer made certain suggestions regarding sales techniques and completion of bid/contract forms, the craftsWorker's generally determined the means and method of performing the service. Although this is a close question, the employer sustained its burden to show that condition 4. was satisfied.
Applying condition 5. requires a determination of what services are performed under the contract, what expenses are related to the performance of those services, which of those expenses are borne by the person whose status is at issue, and whether those expenses constitute the main expense. Lozon Remodeling, UI Hearing No. S9000079HA (LIRC Sept. 24, 1999); Quality Communications Specialists, Inc., supra. This inquiry requires quantification of these expenses, and, under the circumstances present here, a determination of which entity, the worker or the employer, bears the larger total expense.
The services performed under the contracts at issue here include providing craftsworker labor, but not materials, to building owners.
The record shows that the craftsWorker's provided their own equipment, tools, and transportation. As the commission explained in Quality Communications Specialists, Inc., supra, proper quantification of an equipment/tool expense requires determination of the annual depreciation expense, i.e., the purchase price divided by the number of years of anticipated useful life. Although there is evidence in the hearing record as to the original cost of some of this equipment/tools, it varies considerably among the craftsWorker's who testified. Moreover, given the evidence of record, it is not possible to compute the useful life of such equipment/tools.
Although the craftsWorker's used their own transportation, many of them testified that they used their personal/family vehicles, and the record does not show what part of the depreciated purchase cost, or of the cost of operating and maintaining such vehicles, would be properly apportioned to the craftsWorker's' work for the employer.
The employer paid for liability insurance covering the work performed by the craftsWorker's, but failed to specify in the record the cost of such insurance. In addition, the subject contracts provided a one-year warranty for the work performed by the craftsWorker's. The employer maintained warranty records, its office staff took customer complaints relating to such warranties, and the employer bore the cost of warranty work if the original craftsworker failed to complete it. Although there is evidence in the record as to the hourly rate paid by the employer for warranty work, there is no evidence as to the annual cost, either craftsworker or administrative, of such work to the employer.
The employer failed to present sufficient evidence to sustain its burden to prove that the craftsWorker's incurred the main expenses related to the services they provided under the subject contracts. The administrative law judge concluded that, taking into account the primary expense under the contract, the craftsWorker's's labor, as well as the costs of purchasing tools and maintaining a vehicle, the record shows that condition 5. was met. However, the cost of the labor provided under the contract has not been interpreted by the commission as a qualifying expense within the meaning of condition 5. See, e.g., Quality Communications Specialists, Inc., supra,. This makes sense given that the employee is not paying for his labor but instead, depending on whether he is an employee or an independent contractor, his employer or his customer is.
In regard to condition 6., it is not simply the obligation to do re-work without additional pay which is the determining factor, because this obligation is typical as well of piece-work employees. See, T & D Coils, UI Hearing No. S9800147MW (LIRC Dec. 15, 1999). Evidence establishing, for example, not only an obligation to do such re-work but an expectation that it will be done, as well as a penalty for not doing so, would satisfy this condition. Here, the record establishes such an expectation, as well as the original craftsworker's liability for the cost of re-work if performed by a third party. As a result, the record supports a conclusion that condition 6. is satisfied here.
In regard to condition 7., the evidence of record supports a conclusion that craftsWorker's were hired to perform the warranty work of other craftsWorker's who were no longer associated with the employer, and were paid a flat hourly rate for doing so. This arrangement does not satisfy the requirement of condition 7. that the craftsWorker's not be paid on any basis other than commission, per-job, or competitive-bid. Even though this may have been a minor part of the work they performed for the employer, the language of the statute is clear and does not make a distinction based on relative frequency.
Condition 8. examines whether, under an individual contract for a craftsworker's services, there can be a profit (if the income received under that contract exceeds the expenses incurred in performing the contract), as well as whether there can be a loss under that contract (if the income received under that contract fails to cover the expenses incurred in performing the contract). Even assuming, as the commission did in Quality Communications Specialists, Inc., supra., that it is at least arguable that the receipt by the craftsWorker's of more in pay for their services under the subject contracts than they are required to spend on the various expenses they incur in performing such services would constitute "realiz[ing] a profit.under contracts to perform services," the record does not support a conclusion that they could suffer a loss within the meaning of condition 8. There is no business risk to the craftsWorker's under the subject contracts, i.e., no realistic possibility that a craftsworker who did the work under the subject contracts would earn less than he expended. The craftsWorker's who testified at the hearing acknowledged this. As a result, the record does not support a conclusion that condition 8. was satisfied. See, also, Lozon, supra. The administrative law judge concluded that a craftsworker could suffer a loss if the customer refused to pay or issued a worthless check, or if they solicited a job but the potential customer never signed a contract. However, employees as well as independent contractors share the risk of not being paid for services they have rendered, and this risk is not the type of business risk contemplated by condition 8. In addition, the language of the statute refers to potential profit or loss "under contracts to perform services," and, as a result, expenses incurred in seeking but failing to obtain such contracts would not be relevant.
Condition 9. requires proof of a cost of doing business which the craftsworker would incur even during a period of time the employee was not performing work through the employer. Of the 14 craftsWorker's who testified at hearing, only Juergen Sauer (liability insurance, work truck, business cell phone), Thomas Allen (liability insurance, business cell phone), Sam Awadallah (business pager), Steven McCarty (liability insurance, work van, rented storage facility), Ronald Gerstner (business cell phone) had such fixed business costs during the relevant time period. The employer offered no proof in relation to fixed expenses incurred by any of the other craftsWorker's. The administrative law judge concluded that this condition was satisfied as to all craftsWorker's because they all had "recurring expenses for vehicle operation and maintenance, tool purchases, and telephone use" and "[s]ome had liability insurance." The commission agrees that liability insurance for which the craftsworker would have to pay premiums whether they had a customer or not would be a continuing business liability or obligation. The commission would agree as well in regard to monthly payments for a business vehicle or a business phone. However, if the vehicle the craftsworker used was his personal vehicle, or the phone he used was his personal phone, the payments he made for these would not be considered "business liabilities or obligations" within the meaning of condition 9. In regard to tool/equipment expenses, the commission held in Thomas Gronna, supra., that such expenses would more "reasonably be characterized as an occasional expense, rather than a regularly recurring business liability or obligation."
The commission has interpreted condition 10. as intending to examine the overall course of the craftsworker's business. See, Quality Communications Specialists, Inc., supra. Here, the craftsWorker's had only a relatively small investment in tools and equipment, and their relatively small recurring expenditures, for those that had them, could be readily discontinued if the flow of work they were given ceased, so that they faced no realistic prospect of any significant period of time in which they would have to make expenditures without any receipts coming in. See, Thomas Gronna, supra.; Mrochinski, supra.(condition 10. requires that a significant investment is put at risk and there is the potential for real success through the growth in the value of the investment and for real failure in the sense of actual loss of the investment). As the commission noted in Quality Communications Specialists, Inc., supra., in regard to parallel facts, "such a situation is far from what was contemplated by the legislature when it adopted this test." The employer failed to prove that condition 10. was satisfied.
To summarize, the employer failed to sustain its burden of proof as to all its craftsWorker's in regard to conditions 5., 7., 8., and 10. This alone would be a sufficient basis upon which to conclude that the craftsWorker's were employees within the meaning of Wis. Stat. § § 108.02(12)(a) and (bm), i.e., only 6 of 10 conditions were satisfied as to all craftsWorker's. In addition, the employer sustained its burden in regard to only certain of its craftsWorker's in regard to conditions 1., 2., 3., and 9.; and only craftsworker Gerstner and Ahmed Awadallah satisfied three of these conditions, and only Gerstner satisfied all four.
The commission notes the department's stipulation at hearing that Debbie Keene was not an employee and the $75 for 2000 attributable to her should be deducted from the employer's contribution obligation; and that Gregory Toby was not an employee and any amount attributable to him should be deducted from the employer's contribution obligation.
Finally, the commission notes that the parties essentially unloaded a pile of documents relating to numerous craftsWorker's into the record and requested that the commission sort it out. In fact, the department, in its brief, asked the commission "to take a careful look individual by individual to determine whether they meet the criteria." However, this should not have been the commission's responsibility, but instead that of the administrative law judge and the parties.
The decision of the administrative law judge is reversed. The subject craftsWorker's performed services for Quale as its employees, within the meaning of Wis. Stat. § 108.02(12), in the calendar quarters at issue. Accordingly, this matter is remanded to the department to recalculate the employer's liability for such quarters.
Dated and mailed November 19, 2004
quale . srr : 115 : 1 EE 410 EE 410.05 EE 410.06 EE 410.08 EE 410.09
/s/ James T. Flynn, Chairman
/s/ David B. Falstad, Commissioner
/s/ Robert Glaser, Commissioner
NOTE: The commission did not confer with the administrative law judge before reversing his decision, because its reversal was not based upon a differing view as to the credibility of witnesses, but instead upon a differing conclusion as to what the hearing record in fact established and upon a differing interpretation of the relevant law.
Attorney Peter W. Zeeh
Attorney Douglas H. Frazer
Appealed to Circuit Court. Affirmed May 24, 2005. [Summary of Circuit Court decision]
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