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

WEATHERGUARD SYSTEMS INC, Transferor
Account No. 195244

WEATHERGUARD SYSTEMS HOME IMPROVEMENTS LLC, Transferee
Account No. 826916

UNEMPLOYMENT INSURANCE CONTRIBUTION LIABILITY DECISION
Hearing No. S0600015AP


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 agrees with the decision of the ALJ, and it adopts the findings and conclusion in that decision as its own.

DECISION

The decision of the administrative law judge is affirmed. Accordingly, as of January 1, 2005, the transferee Weatherguard Systems Home Improvements LLC is a mandatory total successor to the unemployment reserve account of the transferor Weatherguard Systems Inc., and that unemployment reserve account is transferred. The transferor and transferee are jointly and severally liable for any amounts owed by the transferor as of the transfer date.

Dated and mailed February 22, 2008
weather015 . ssd : 110 :  ER 470.01  ER 470.02  ER 470.05   ER 470.07

/s/ James T. Flynn, Chairperson

/s/ Robert Glaser, Commissioner

/s/ Ann L. Crump, Commissioner

MEMORANDUM OPINION

Weatherguard Systems Inc. (hereinafter WS Inc.) is a Wisconsin corporation which was started by Lynn Murray in 1979 and which was engaged in residential gutter, fascia, window and siding installation, with gutter work being the main part of its business. Weatherguard Systems Home Improvements LLC (hereinafter WSHI LLC) is a Wisconsin limited liability company which was started by Lynn Murray's son, Jared Murray, in 2003. Around 2005 there were a number of changes in operations of both WS Inc. and WSHI LLC. Certain assets which had previously been used by WS Inc., were thereafter used by WSHI LLC; certain business activities which had previously been engaged in by WS Inc., were thereafter engaged in by WSHI LLC; and WS Inc. no longer had or reported any employees while a number of individuals who had previously been reported as employees of WS Inc. were thereafter reported as employees of WSHI LLC.

The issues for decision are whether there was a business transfer, and if so whether WSHI LLC was a mandatory successor to the account of WS Inc., within the meaning of Wis. Stat. § 108.16(8).

With respect to business transfers, the UC Act provides, in Wis. Stat. § 108.16:

(8)(a) For purposes of this subsection a business is deemed transferred if any asset or any activity of an employer, whether organized or carried on for profit, nonprofit or governmental purposes, is transferred in whole or in part by any means, other than in the ordinary course of business.

In addition to this statute, the department has promulgated rules which expand on the meaning of "business transfer" :

DWD 115.01 (1) BUSINESS TRANSFER. Under s. 108.16(8)(a), Stats., a transfer of business occurs when any asset or business activity is transferred in whole or in part by a transferor to a transferee by any method other than in the ordinary course of business.

(2) METHODS USED IN BUSINESS TRANSFERS. Methods of transferring assets or business activities include gift, sale, lease, inheritance, foreclosure, termination or cancellation of lease, bankruptcy sale, reorganization, merger or consolidation and receivership.

(3) EVENTS WHICH ARE NOT BUSINESS TRANSFERS. Corporate name changes, the election or cancellation of subchapter S status under section 1362 of the internal revenue code by a corporation, the transfer of payroll function only and the transfer of employees between an employee service company and its clients or customers are not transfers of a business. The transfer of shares of corporate stock by a stockholder is not a transfer of business for the corporation which issued the shares. Sale of used equipment or furniture and fixtures which are being replaced or no longer being used are considered transfers in the ordinary course of business rather than business transfers under ch. 108, Stats.

(4) TRANSFER OF AN ASSET. An asset is transferred if ownership, possession or use changes from the transferor to the transferee.

(5) TRANSFER OF A BUSINESS ACTIVITY. For a transfer of a business activity to be a business transfer under this section and s. 108.16(8)(a), Stats., the business activity after the transfer shall be similar to the business activity before the transfer. In determining whether a business activity has been transferred, continued or resumed, the department shall consider factors which suggest a similarity in business activity including the following:

(a) The existence of the same customers or the same type of customer after the transfer;

(b) The closeness of the transferee's business location to that of the transferor when location is important to the business;

(c) The continued use of the transferor's trade name by the transferee;

(d) A lapse in operation of 6 months or less unless extensive remodeling is involved or the business is seasonal in nature but in no event shall the lapse be considered if greater than 2 years;

(e) Few if any changes in the product or in brand names after the transfer;

(f) The similarity in days and hours of the business under both the transferor and transferee;

(g) The transfer of inventory, expensive plant machinery, heavy equipment or unique assets as opposed to general office furniture and fixtures;

(h) The transfer of key employees or employees with highly technical professional skills;

(i) The transfer of goodwill;

(j) The existence of a noncompetition clause in the contract prohibiting the transferor from engaging in the same kind of business activity in the area; and

(k) The transfer of a license or a franchise.

If there is a business transfer within the meaning of Wis. Stat. § 108.16(8)(a), the transferee may or may not end up being considered the successor to the UI employer account of the transferor, depending on the circumstances. As the ALJ noted, the commission has previously explained the situation this way:

[T]he occurrence of a business "transfer" raises the question of whether the acquiring entity succeeds to the account experience of the transferring entity. Often, the acquiring entity desires to succeed to an account when it is positive and has a low contribution rate, but desires to "dump" an account that has a negative balance or a high contribution rate. An acquiring entity is able to choose to succeed in cases of "optional" successorship under Wis. Stat. § 108.16(8)(b), by filing an application requesting to be deemed the successor. If an acquiring entity does not apply for an optional successorship within the specified time period after the transfer, it cannot succeed to the transferring entity's account.

However, an "optional" successorship is only available when the transfer is the result of an arms length transfer between strangers. When the transferring entity and the acquiring entity are related entities, the acquiring corporation is not allowed the option to choose not to succeed to the account experience. In those cases, successorship to the transferring entity's account experience, good or bad, is "mandatory" under Wis. Stat. § 108.16(8)(e).

Sunshine Biscuits, Inc. v. Keebler Co. (LIRC, Nov. 18, 1998). This is one of those cases in which the transferor (WS Inc.) and the transferee (WSHI LLC) are closely related, and the transferor (WS Inc.) has a high UI tax rate which the transferee (WSHI LLC) would like to avoid being made the successor to. 
 

Was there a business transfer? -- As mentioned above, the statute simply provides that there is a business transfer "if any asset or any activity of an employer, whether organized or carried on for profit, nonprofit or governmental purposes, is transferred in whole or in part by any means, other than in the ordinary course of business".

Jared Murray and his wife purchased assets (including a building, and trucks) worth approximately $600,000, from WS Inc., and then leased those trucks, as well as some space in that building, to WSHI LLC. Transfers of assets may occur by way of lease as well as sale, and an asset is considered to have been transferred if ownership, possession or use changes from the transferor to the transferee. Wis. Admin. Code § DWD 115.01(2), (4).

A transfer can also arise from the transfer of an "activity". The principal business activity of WS Inc. was gutter installation. WSHI LLC also engaged in that business activity. While gutter installation was a smaller portion of the overall business of WSHI LLC, it remains the case that it was "an activity" of WS Inc. which was transferred to WSHI LLC.

Wis. Admin. Code § DWD 115.01(5) provides that for a transfer of a business activity to be a business transfer the business activity after the transfer shall be "similar to" the business activity before the transfer, and that in determining whether a business activity has been transferred, continued or resumed, certain specified factors shall be "considered". The commission agrees fully with the ALJ's decision that consideration of these factors supports the conclusion that there was a transfer of a business activity.

Jared Murray argues that "what was termed a transfer was a purchase". This is a distinction without a difference. A business transfer can occur by the purchase of a business or the assets of a business. DWD § 115.01(2). While a transfer of assets "in the ordinary course of business" does not create a business transfer, this refers to transfers of assets by sales when the normal activity of the business is selling such assets. For example, when WS Inc. sells the gutter parts and equipment which it manufactures, this is a transfer of an asset "in the ordinary course of business". However, the transfer which occurred here, of assets including a building and trucks, was not one "in the ordinary course of business", in that it was not the ordinary business of WS Inc. to engage in sale of such assets. 
 

Is there mandatory successorship ? -- As noted in Sunshine Biscuits, the question of whether WSHI LLC is a mandatory successor to WS Inc. is governed by § 108.16(8)(e), which provides:

(8) (e) Notwithstanding par. (b), a transferee is deemed a successor for purposes of this chapter, if the department determines that all of the following conditions are satisfied:

1. At the time of business transfer, the transferor and the transferee are owned, managed, or controlled in whole or in substantial part, either directly or indirectly by legally enforceable means or otherwise, by the same interest or interests. Without limitation by reason of enumeration, it is presumed unless shown to the contrary that the "same interest or interests" includes the spouse, child, or parent of the individual who owned, managed or controlled the business, or any combination of more than one of them.

2. The transferee has continued or resumed the business of the transferor, either in the same establishment or elsewhere; or the transferee has employed substantially the same employees as those the transferor had employed in connection with the business transferred.

3. The same financing provisions under s. 108.15, 108.151, 108.152, or 108.18 apply to the transferee as applied to the transferor on the date of the transfer.

There is no dispute here but that the same financing provisions would apply, and therefore the first two tests are the important ones.

WS Inc. and WSHI LLC were clearly "owned, managed, or controlled in whole or in substantial part, either directly or indirectly by legally enforceable means or otherwise, by the same interest or interests." Because Jared Murray is the son of Lynn Murray, the presumption of "same interests" created by § 108.16(8)(e)1. applies, and the only remaining question is whether this presumption was effectively overcome by the establishment of the five conditions described in Wis. Admin. Code § DWD 115.08(2)(a)-(e). These conditions are linked by an "and" and must therefore all be met. The commission agrees fully with the ALJ's decision that none of the conditions necessary to rebut the presumption could be considered to have been established. Therefore, the first test for finding mandatory successorship was met.

As to the "continued or resumed the business ... or employed substantially the same employees" test, it is clear that it was also met. Under DWD § 115.08(3), a transferee is deemed to have employed substantially the same employees as the transferor if 50% or more of the employees employed by the transferor in connection with the business transferred, work for the transferee. Jared Murray testified that WSHI LLC hired some employees from WS Inc. While he asserted that over time there has been a reduction in the number of former WS Inc. employees working at WSHI LLC, the record shows that at least in the year immediately after the transfer, WSHI LLC was largely staffed by WS Inc. employees. Thus, the department auditor testified that his investigation determined that 54 of the 79 employees reported by WSHI LLC in 2005 had been reported by WS Inc. in 2004, and that in 2005 as compared to 2004 WSHI LLC had employed more than 50% of the 2004 employees of WS Inc. When Jared Murray was asked specifically whether he agreed that more than half of the individuals that had been employed by WS Inc. in 2004 were subsequently employed by WSHI LLC in 2005, he replied that he "would have to rely on [the department auditor's] testimony". Therefore, the second test for finding mandatory successorship was met.

For the foregoing reasons, the commission affirms the decision of the ALJ.

cc: Attorney Michael J. Mathis



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