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

HYDROTEX MARKETING LLC, Appellant

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Account No. 811800, Hearing No. S0400200MD


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 appellant is a manufacturer, marketer, wholesaler and distributor of a variety of lubrication products for engines and machinery. In 2003, it utilized the services of John P. McHugh to sell, on commission, its products. McHugh performed services for the appellant in at least 20 different weeks in 2003.

Mr. McHugh had no business location and did not possess a federal employment identification number (FEIN). He was paid solely by commission and the appellant issued him a Federal tax form 1099 for the commissions he earned. Mr. McHugh was unsure if he filed a schedule C, business tax return. He was paid within ten days of a sale, whether or not the appellant was paid for the product. He worked out of his home but was required to attend annual sales conferences conducted by the appellant. He conducted no advertising of himself or any self-employment activity nor did he have a listed business telephone number. He purchased no tools or materials in the course of his services other than basic office supplies and internet access and relied on his sales skills and experience to perform those services for the appellant. He was required to pay his own expenses when on the road and selling for the appellant. He did not carry an inventory of the appellant's product and customers' purchases were delivered and payment collected by the appellant.

The appellant and Mr. McHugh signed off on a document entitled "Hydrotex Lubrication Consultant Agreement" which defined him as an independent contractor. It also included a provision that prohibited him from selling competing products.

The issue to be resolved is whether the appellant is an employer subject to the Wisconsin unemployment insurance law effective January 1, 2003, based on services performed for it by Mr. McHugh.

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 period beginning on January 1, 2000, with respect to contribution requirements, and during the period beginning on April 2, 2000, with respect to benefit eligibility, 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.

Wis. Stat. § 108.02(13)(e) provides that an employer becomes subject to Wisconsin's unemployment insurance law as of the beginning of a calendar year if it:

1. Paid or incurred liability to pay wages for employment which totaled $1,500 or more during any quarter in either that year or the preceding calendar year; or

2. Employed at least one individual in some employment in each of 20 or more calendar weeks in either that year or the preceding calendar year. ...

Mr. McHugh performed services for the appellant for which he was paid. Wis. Stat. § 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 Dec. Hearing No. S9800101MD (LIRC Feb. 22, 2000); Quality Communications Specialists, Inc., UI Dec. Hearing Nos. S0000094MW, etc. (LIRC July 30, 2001). The appellant and department agree that the condition 1 has not been satisfied. The appellant and the department agree that conditions 5, 7, and 8 have been satisfied. The commission agrees with those positions. Therefore, at issue are conditions 2, 3, 4, 6, 9 and 10. The appellant must satisfy four of those six conditions.

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.

The services at issue are those performed in 2003. Mr. McHugh actually began work for the appellant in 2002. Mr. McHugh testified that he did not know if he filed a Schedule-C for 2002 but there was a good possibility that he did. Mr. McHugh testified that he "probably" filed a Schedule-C for 2003. The question is whether a Schedule-C was filed in 2002. Mr. McHugh's testimony that it was possible that he filed a Schedule-C in 2002 is insufficient to establish that condition 2 was satisfied.

3. The individual maintains a separate business with his or her own office, equipment, materials and other facilities.

Mr. McHugh performed services for the appellant under his personal name. He did not have a separate business bank account. He had business cards provided by the appellant. He advertised by doing direct mailings to certain facilities. Mr. McHugh has an office that he used in connection with performing services for the appellant. The office is a structure physically separated from his home. The office contains a fax machine, copy machine, computer, and office desks. He had all the equipment before he began performing services for the appellant.

Mr. McHugh clearly has an office with equipment necessary to perform sales services. He had the office and equipment before he began performing services for the appellant. The issue is whether Mr. McHugh had a "separate business." The record does not reflect what Mr. McHugh did for a living immediately before working for the appellant. The commission finds that the appellant did not establish that Mr. McHugh had a sales business that existed independent of the appellant. The fact that the sales services were performed only for the appellant, and the contract between the parties prevented Mr. McHugh from selling any product the appellant deemed in competition with its products detracts from a finding that Mr. McHugh had a separate business.

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.

In Quality Communications (LIRC July 30, 2001), the commission set forth what is required to satisfy that part of condition 4 that requires that services be performed under contracts as follows:

Operates under contracts to perform specific services for specific amounts of money - Giving meaning to the legislature's presumably intentional choice of the use of the plural form, "contracts", in this statute, and taking into account the policy and purpose behind the statute, the commission has held that this test requires a showing of multiple contracts.

The existence of multiple contracts tends to show that an individual is not dependent upon a single, continuing relationship subject to conditions dictated by a putative employer. The threshold requirement of multiple contracts can be satisfied, in the view of the commission, either by multiple serial contracts or multiple contemporaneous contracts. Multiple contracts that an individual enters into with multiple business entities are most indicative of that individual's economic independence from a particular putative employer. However, multiple serial or contemporaneous contracts with a particular putative employer may satisfy the criterion if the contracts are shown to have been negotiated "at arm's length." In genuine independent contractor relationships, negotiation will typically result in terms that will vary over time and will vary depending on the specific services covered by a contract.

T & D Coils, Inc. (LIRC, Dec. 15, 1999). The test is therefore not met in cases in which the individual provides services for only one entity, and does not negotiate and re-negotiate rates with that entity, but simply accepts what is given as the going rate for the services in question, and provides those services in the course of a continuing relationship the terms of which do not vary over time. Dane Co. Hockey Officials (LIRC, February 22, 2000).

The department concedes that Mr. McHugh controlled the means and methods by which he performed services for the appellant. However, Mr. McHugh performed services for the appellant under one contract. There is no evidence that he entered into any other contract with another entity to perform services. The appellant has not established that condition 4 was satisfied.

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.

The department argues that since Mr. McHugh provided sales services the question is whether he could be held liable to the appellant based on a lack of sales. The question is not whether Mr. McHugh is responsible or liable for the failure to perform services, but responsible and liable for failing to complete them satisfactorily.

The appellant points to a provision of the written agreement between the appellant and Mr. McHugh that states, basically, that if an order is purchased by fraud or unprofessional conduct, or if a product is returned, the appellant may charge the commissions associated with the sale to Mr. McHugh or require that he return the commissions. That is, the consequence of failing to satisfactorily complete services is that Mr. McHugh will not be paid for the services. That is insufficient to satisfy condition 6. See T-N-T Express LLC (LIRC Feb. 22, 2000).

9. The individual has recurring business liabilities or obligations.

In Clear Choices Inc., (LIRC October 26, 2005), the commission stated as to condition 9:

9. The individual has recurring business liabilities or obligations -- This condition asks whether the individual at issue had recurring business liabilities or obligations. This condition is concerned with "overhead expenses that cannot be avoided by ceasing to perform services". Gamble v. American Benefit LTD (LIRC, Feb. 15, 2005). Liabilities or obligations that might satisfy this condition would be things such as monthly rent for a place of business, regular payments on a financed purchase of equipment, or the regular depreciation of equipment that unavoidably declines in value over time irrespective of the level of actual use or wear and tear. Such expenses are all recurring in nature and are incurred whatever the level of actual business activity. Dane Co. Hockey Officials (LIRC, Feb. 22, 2000).

Condition 9 requires proof of a cost of business which Mr. McHugh would incur even if he were not performing services on behalf of the appellant. There was no testimony from Mr. McHugh as to any liabilities or obligations that he incurred after he ceased performing services for the appellant.

10. The success or failure of the individual's business depends on the relationship of business receipts to expenditures.

In Borgheѕanі v. Vіrtual Heroeѕ Inc. (LIRC Dec. 27, 2006), the commission stated as to condition 10:

This condition is intended to examine the overall course of a worker's business. It requires that a significant investment have been put at risk in the business enterprise and that there be 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. See, Thomas Gronna, The Floor Guys, (LIRC Feb. 22, 2000). This is clearly not the case here, where the individual in question had no investment of any kind at risk and the expenses incurred in connection with the services were, at most, incidental expenses for home computer equipment and internet/phone connections which were in any event not shown to have been exclusively dedicated to the business activity.

The evidence did not demonstrate that Mr. McHugh had any significant investment that he placed at risk or had potential for growth. While Mr. McHugh had an office with equipment the record does not indicate that it was used initially or solely for business purposes.

The appellant established that conditions 5, 7 and 8 were satisfied. The appellant did not establish that 7 of the 10 conditions set forth in Wis. Stat. § 108.02(12)(bm) have been satisfied.

The commission therefore finds that Mr. McHugh performed services for the appellant as an employee within the meaning of Wis. Stat. § 108.02(12).

The commission therefore finds that the appellant became a subject employer effective January 1, 2003, as provided in Wis. Stat. § 108.02(13)(e)2.

DECISION

The decision of the administrative law judge is modified to conform to the foregoing findings and, as modified, is affirmed. Accordingly, the appellant is an employer subject to Wisconsin's unemployment insurance law effective January 1, 2003.

Dated and mailed February 22, 2007
hydroma . srr : 132 : 1 :  EE 410

/s/ James T. Flynn, Chairman

/s/ David B. Falstad, Commissioner

/s/ Robert Glaser, Commissioner


cc:
Linda Harris
Attorney Michael J. Mathis
Attorney Patrick P. Gill


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