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

WILLARD R ROWLETT, Employee

EAU CLAIRE EXPRESS, Employer

UNEMPLOYMENT INSURANCE DECISION
Hearing No. 05201919EC


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

The employer is a limited liability corporation (LLC) formed for the purpose of managing a baseball team. The claimant worked for the employer as a general manager and was paid a salary for his services. He was discharged August 25, 2005 by the majority owner of the LLC. The majority owner fired the claimant over differences regarding management of the franchise.

Two individuals, the claimant and Jeffrey Jones, formed an LLC for the purpose of owning and managing a baseball franchise. The necessary papers were filed with the Wisconsin Department of Financial Institutions naming the two individuals as agents. An LLC agreement setting out the terms of the LLC was drafted and revised but never signed. Each of the original members later formed an LLC to include other family members and assigned his interest in the employer LLC to those LLCs. The claimant's LLC provided that he owned only a nominal interest in his LLC and other members were the primary owners.

The claimant maintained that the two LLCs are the members of the employer LLC. He stated that he is not a member of the employer LLC since his brother and his nephew are the principal owners of his LLC and they provided the capital which he used to finance the business. He asserted that since he is no longer a member of the employer LLC, he is not a partner for unemployment insurance purposes.

The other owner testified that he never consented to enter into a partnership with anyone other than the employee and that the employee was aware of this. He further argues that the employee held himself out as an owner of the business and acted as an owner throughout the relevant period.

The issue is whether the claimant was an employee or a member of the employer LLC.

The unemployment provision which applies to how the members of an LLC will be treated is Wis. Stat. § 108.068. Wis. Stat. § 108.068(4) provides: "Subject to subs. (2) and (6) to (8), a multimember limited liability company that is not treated as a corporation for federal tax purposes shall be treated as a partnership under this chapter, and the members of the limited liability company shall be treated for contribution and benefit purposes as partners of that partnership." Partners in a business are not employees under Wis. Stat. § 108.02(12)(dn). The employer filed federal income taxes as a partnership.

The claimant was initially a member of the LLC, and therefore ineligible under the above statute. The remaining issue is whether the claimant later transferred his ownership and therefore was no longer a member of the LLC for unemployment insurance purposes.

Wisconsin limited liability companies are governed under chapter 183 of the statutes. The provisions of that chapter permit the parties to make alternative arrangements within the operating agreement of the LLC. However, these parties never formally adopted an operating agreement. Therefore the commission concludes that disputes should be handled as prescribed in chapter 183.

Under Wis. Stat. § 183.0704(1) a party may assign his interest in an LLC to another in whole or in part but the assignment only entitles the assignee to share in distributions and allocations of profit and loss. It does not confer membership in the LLC and the original member remains a member. [See below (d), (e) and (f)]

Assignment of limited liability company interest. (1) Unless otherwise provided in an operating agreement, all of the following apply:

(a) A limited liability company interest is assignable in whole or in part.

(b) An assignment of a limited liability company interest entitles the assignee to receive only the distributions and to share in the allocations of profits and losses to which the assignor would be entitled with respect to the assigned interest.

(c) An assignment of a limited liability company interest does not dissolve the limited liability company.

(d) Unless and until the assignee becomes a member of the limited liability company under s. 183.0706, an assignment of a limited liability company interest does not entitle the assignee to participate in the management of the business of the limited liability company or to become or exercise any rights of a member nor does an assignment result in the assignee having liability as a member of the limited liability company as a result of the assignment.

(e) Unless and until the assignee of a limited liability company interest becomes a member of the limited liability company under s. 183.0706, the assignor continues to be a member and to have the power to exercise the rights of a member, subject to the members' right to remove the assignor under s. 183.0802.

(f) The assignor of a limited liability company interest is not released from any personal liability arising under this chapter as a member of the limited liability company solely as a result of the assignment. [emphasis added]

Under chapter 183, the assignment of the interest in the LLC does not require the consent of the members. However, assignment does not confer membership in the LLC, nor does it release the assignor from membership. Wis. Stat. § 183.0706(1) states that an assignee may only become a member by consent of all the other members. The record makes clear that the other member did not give his consent.

In order to dissociate from an LLC, Wis. Stat. § 183.0802(1) provides that a member must voluntarily withdraw or assign all his interest and one or more of the assignees are admitted as members. The employee never formally withdrew and no principal of his LLC was admitted.

In order for the commission to find that the claimant was an employee of the employer LLC, it must accept that he could assign his ownership interest to a third party, namely his LLC, without the formal consent of the other member. The above statutes provide otherwise. The other member credibly testified that he never consented to accept the claimant's family members as members of the LLC. The claimant never formally withdrew and therefore remains a member.

Therefore, the commission concludes that the members of the LLC during the claimant's employment were the same two individuals who organized the LLC in 2004. The claimant therefore remains a member and as a member is considered a partner and ineligible for benefits based on this employment.

The unemployment statute permits the commission to find an individual is an employee even in cases where the individual is a member of an LLC "in the interests of justice or to prevent fraud upon the unemployment insurance program." Wis. Stat. § 108.068(6). However, justice does not require the commission to exercise that power here. This business was an entrepreneurial enterprise between these two men with all the risk that such a venture entails. Unemployment insurance is not intended to protect individuals from entrepreneurial risk.

The commission therefore finds that the claimant was a member of a limited liability company under Wis. Stat. § 108.068(4), and therefore that he was not an employee as defined by Wis. Stat. § 108.02(12)(a).

The commission further finds that the claimant was paid benefits in the amount of $1,301.00 for weeks 7 through 11 of 2006, for which he was not eligible and to which he was not entitled, within the meaning of Wis. Stat. § 108.03(1).

The final issue to be decided is whether recovery of overpaid benefits must be waived. Wisconsin Stat. § 108.22(8)(c) provides that the department shall waive the recovery of overpaid benefits if the overpayment was the result of departmental error and the overpayment did not result from the fault of the employee. Under Wis. Stat. § 108.02(10e)(a) and (b), departmental error is defined as an error made by the department in computing or paying benefits which results from a mathematical mistake, miscalculation, misapplication or misinterpretation of the law or mistake of evidentiary fact, by commission or omission, or from misinformation provided to a claimant by the department, on which the claimant relied.

The overpayment in this case results from the commission's reversal of the appeal tribunal decision. Such reversal was not due to departmental error as defined in Wis. Stat. § 108.02(10e)(a) and (b).

The commission further finds that waiver of benefit recovery is not required under Wis. Stat. § 108.22(8)(c), because although the overpayment did not result from the fault of the employee as provided in Wis. Stat. § 108.04(13)(f), the overpayment was not the result of a departmental error. See Wis. Stat. § 108.22(8)(c)2.

DECISION

The decision of the administrative law judge is reversed. Accordingly, no benefits can be paid based on services for this employer. Benefits may be paid based on other employment if the claimant is otherwise eligible. The claimant is required to repay the sum of $1,301.00 to the Unemployment Reserve Fund.

Dated and mailed August 16, 2006
rowlewi . urr : 178 : 8   ET 483.01

/s/ James T. Flynn, Chairman

/s/ David B. Falstad, Commissioner

/s/ Robert Glaser, Commissioner


MEMORANDUM OPINION

The commission does not reverse due to any differing assessment of witness credibility. Instead, the commission reverses as a matter of law as set forth above.

cc:
Attorney Teresa E. O'Halloran
Attorney Victoria L. Seltun


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