BIOSYSTEM DEVELOPMENT LLC, Employer

On May 29, 2008, the Department of Workforce Development issued an initial determination which held that three individuals who performed services for the employer, James Devault, Zachery Van Den Heuval, and Richard Nelson, did so as employees for unemployment insurance purposes. The employer timely requested a hearing on the determination, and hearing was held on December 2, 2008 in Madison, Wisconsin before a department administrative law judge. On February 16, 2009, the administrative law judge issued an appeal tribunal decision which reversed the determination as to Devault and Van Den Heuval and affirmed the determination as to Nelson. The employer filed a timely petition for commission review of the decision, and the matter is now ready for disposition.

Based upon the applicable law and the record in the case, the commission issues the following:

Biosystem Development LLC is engaged in the business of manufacturing scientific instruments. It is organized as a limited liability company and files federal income taxes as a partnership. The appellant for payroll purposes does not treat as employees members of the LLC, whether they participate in the partnership as "consultants," "investors," "directors," "founders," or as "employees." The partnership has five employees, treated as such for unemployment insurance purposes, and as of December 31, 2007 had more than 30 participating members with ownership percentage shares in the partnership.

A department audit of the employer's records revealed that during the fourth quarter of 2006 and the first, second, third, and fourth quarters of 2007, Devault, listed on a Capitalization Table (Exhibit 4) submitted by the employer under the category of "consultant" and Van Den Heuval, listed under the category labeled "employees," performed services for pay for the appellant. Devault worked as a bio-chemist in the lab and Van Den Heuval as a development engineer. Neither are, as part of their job duties, involved in significant management decision-making.

During the first and second quarters of 2007, Richard Nelson performed services for pay for BD as a sales and marketing consultant pursuant to a "Consulting Agreement" (Exhibit 6) and an addendum, "Sales and Marketing Project 1" (Exhibit 7). The agreement, effective February 2, 2007, was terminated by the employer on April 17, 2007 (Exhibit 9). Nelson was paid a fixed cash retainer and, paid in part, at the end of his services, $1000 equivalent (non-voting units that represent a profits interest only and for which he received an initial balance of zero) in equity compensation.

The initial determination found taxes and interest due in the amount of $1,774.58 payable May 31, 2008. The employer filed a letter of appeal on June 16, 2008 (Exhibit 2) contending that Nelson was an independent contractor and Van Den Heuval and Devault were unit holders that received K1's for their ownership interest and paid self employment taxes on their wages (which are classified as guaranteed payments).

At hearing the employer argued that, as members of the LLC, both Devault and Van Den Heuval should be treated as partners of that partnership and that Nelson performed services as an independent contractor. Nelson did not respond to the department's audit request or appear at the hearing. Devault and Van Den Heuval also did not appear at the hearing.

The department contends all three individuals are employees for unemployment insurance purposes. In the case of Devault and Van Den Heuval, the department argues that, because of their de minimus ownership percentages, .08% and 1.06% respectively, and their non-involvement in management decision-making, "in the interests of justice" each should be treated as employees of BD for unemployment insurance purposes. The department presumes as a matter of law that Nelson is an "employee" because he provided services for pay to the appellant and failed to respond to the department's audit request for information.

The first issue to be resolved is whether Devault and Van Den Heuval should be treated as employees or as partners of the LLC.

Wisconsin Stat. § 108.068(4) of the statutes 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."

Wisconsin Stat. 108.02(12)(dn) of the statutes provides that a partner in a business that operates as a partnership is not an "employee" with respect to services the partner performs for that business.

Wisconsin Stat. § 108.068(6) of the statutes provides: "The department may, in the interests of justice, or to prevent fraud upon the unemployment insurance program, determine that a member of a limited liability company is an employee of that company."

Van Den Heuval's ownership percentage, 1.06 %, is de minimus. Devault's ownership interest, .08 %, is infinitesimal. In addition, neither Van Den Heuval nor Devault have management duties, responsibilities, or rights correlative with their ownership interests in the employer. Specifically, no voting rights are attached to those interests.

These factors, taken together, render it in the interests of justice, within the meaning of Wis. Stat. § 108.068(6), that Van Den Heuval and Devault be classified as employees, and the commission so finds.

The remaining issue to be resolved is whether Nelson performed services for the appellant as an "employee."

The appellant is an employing unit subject to the Wisconsin unemployment insurance law. "Employment" is broadly defined by Wis. Stat. § 108.02(15) as service performed by an individual for pay, subject to certain exclusions. It is undisputed that Nelson provided services as a consultant to BD pursuant to an agreement to perform sales and marketing services on a "project" basis. The contract provides that he is paid for services performed in lump sums at the inception, during, and at the end of the project. As such, Nelson's services as a consultant constitute "employment" in Wisconsin.

Next, it must be determined whether, as the appellant asserts, Nelson performed services as a consultant for BD not as an "employee" but as an independent contractor. The appellant has the burden of proof.

Wisconsin Stat. § 108.02(12)(a), which provides:

(12) EMPLOYEE. (a) "Employee" means any individual who is or has been performing services for pay for an employing unit, whether or not the individual is paid directly by such employing unit, except as provided in par. (b), (bm), (c) or (d), (dm) or (dn).

Because the individual performed services for the appellant for pay, he is an employee unless exempted under Wis. Stat. § 108.02(12)(bm).

Wisconsin Stat. § 108.02(12)(bm), provides:

(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 other than a government unit or nonprofit organization in a capacity other than as a logger or trucker, if the employing unit satisfies the department that the individual meet 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 methods of performing such 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 such 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.

The first condition is not satisfied where an individual operates as a sole proprietor and uses his or her social security number rather than a federal employer identification number when filing business tax returns. Huckstep v. J & JH Company, UI Dec. Hearing No. 02006946MD (LIRC May 28, 2003). The appellant does not know whether Nelson has a federal employer identification number and there is not competent evidence presented to that effect.

As a result, the individual does not satisfy the first condition.

As to the second condition, it is not met simply because the appellant considers the individual to be an independent contractor and issues a 1099 Form to the claimant. Gamble v. American Benefit Ltd., UI Dec. Hearing No. 04004847MD (LIRC February 15, 2005). The appellant does not know whether Nelson filed a federal tax return, for taxable year 2007, related to work performed for the appellant and no competent evidence was presented to establish that fact.

The individual does not satisfy the second condition.

To satisfy the third condition, there must be evidence of a separate business with its own office, equipment, materials, and other facilities. Quality Communication Specialists, Inc., UI Dec. Hearing Nos. S0000094MW and S0000095MW (LIRC July 30, 2001). The fact that a worker performs services for only one entity is inconsistent with the existence of a separate business. Yochem v. Universal Strap, Inc., UI Dec. Hearing No. 04005157FL (LIRC November 4, 2005). No evidence was presented that the individual has provided similar services to other entities. The appellant asserts that Nelson operates out of his home and provides computer equipment. However, there is no competent evidence presented that Nelson has an office at his home or that he maintains a separate business with its own office equipment, materials, and other facilities separate and apart from his relationship with BD.

The individual does not satisfy the third condition.

For the fourth condition to be met, the appellant must establish "both that the individual operates under contracts to perform specific services for specific amounts of money, and that the individual operates under contracts under which they control the means and method of performing the services." Quality Communication Specialists, Inc., UI Dec. Hearing Nos. S0000094MW and S0000095MW (LIRC July 30, 2001). The individual is paid per project. The contract under which he works for the appellant is ongoing unless and until one of the parties to the contract terminates the agreement. Even if it is concluded the individual controlled the methods and means of performing the services, BD did not establish that the individual had multiple contracts either with BD or with any other entities. T-N-T Express LLC, UI Dec. Hearing Nos. S9700385, etc. (LIRC Feb. 22, 2000); Dane Co. Hockey Officials, UI Dec. Hearing No. S9800101MD (LIRC Feb. 22, 2000).

There is no competent evidence presented that the individual satisfies the fourth condition.

As to the fifth condition, whether the individual incurred the main expenses related to the services that he or she performed under contract, a determination must be made regarding what services were performed under the contract, what expenses were related to the performance of those services, and which of those expenses were borne by the individual. Lozon Remodeling, UI Dec. Hearing No. S9000079HA (LIRC September 24, 1999). If equipment is involved, equipment depreciation is factored to reduce the actual business costs. Quality Communication Specialists, Inc., UI Dec. Hearing Nos. S0000094MW and S0000095MW (LIRC July 30, 2001). The inquiry requires quantification of these expenses. BD did not provide any quantification of the expenses of the individual necessary to establish that the individual's expenses would have exceeded BD's.

There is insufficient competent evidence presented that the individual satisfied the fifth condition.

When examining the sixth condition, liability for failure to satisfactorily complete the services may be established by demonstrating a contract provision allowing the other party to contract with someone else to do (or re-do) work not satisfactorily completed and to recover costs of the third party's services. Quality Communication Specialists, Inc., UI Dec. Hearing Nos. S0000094MW and S0000095MW (LIRC July 30, 2001). The work can be reassigned on the appellant's initiative if Nelson's performance is unsatisfactorily and presumably he is not paid the full amount under such circumstances. The test is whether Nelson is responsible for completion of the services he is to perform, and liable for any failure to satisfactorily complete them.

BD's record establishes only that the individual would not get paid in full if he did not properly complete the required services. These facts do not distinguish the individual's responsibility or liability from that of a piecework employee. T&D Coils, UI Dec. Hearing No. S9800147MW (LIRC Dec. 15, 1990); Spencer Siding, Inc., UI Dec. Hearing Nos. S0300142GB, etc. (LIRC June 2, 2006).

The individual does not satisfy the sixth condition.

In order to satisfy the seventh condition, the individual must receive compensation for services performed under a contract on a commission or per-job or competitive-bid basis and not on any other basis.

When considering the manner of payment, the relevant issue is the type of payment for the applicable base period, because it is those payments that will ultimately be included in a claimant's base period computation for purposes of unemployment insurance benefit entitlement. Yochem v. Universal Strap, Inc., UI Dec. Hearing No. 04005157FL (LIRC November 4, 2005). He is paid, as described above, on a project or per job basis.

The individual appears to satisfy the seventh condition.

As to the eighth condition, the risk of loss refers to entrepreneurial risk, such as when someone makes a bid to perform a specific job, and the costs of the materials exceed the bid. Lisko & Erspamer, S.C., UI Dec. Hearing No. S0100035MW (LIRC February 24, 2004). The individual is paid on a project or per job basis. However, in his work for the appellant, it does not appear from the evidence presented that Nelson has any entrepreneurial risk.

The individual does not satisfy the eighth condition.

The ninth condition requires proof of a cost of doing business incurred by the individual. Such "recurring business liabilities or obligations" may include monthly rent for a place of business or ownership of expensive equipment. Thomas Gronna (Floor Guys), UI Dec. Hearing No. S9900063WU (LIRC February 22, 2000). Liability insurance also is a continuing business liability or obligation. Dibbles & Dibbles Inc., UI Dec. Hearing No. S0300140RH (LIRC January 12, 2005). This condition "requires proof of a cost of business which the claimant would incur even during a period of time he was not performing work." Cole v. Handyman Connection, UI Dec. Hearing No. 04002664MD (LIRC February 11, 2005). BD did not prove with competent evidence that the individual had such ongoing costs.

The individual does not satisfy the ninth condition.

The tenth condition contemplates the existence of a genuine business endeavor; a significant investment is put at risk with the potential for growth in the capital value of the business or significant loss of the investment. Dane Co. Hockey Officials, UI Dec. Hearing No. S9800101MD (LIRC Feb. 22, 2000) and Thomas Gronna, supra. Analysis under condition 10 examines the overall course of a worker's business. Quality Communications Specialists, Inc., supra. BD presented no competent evidence that the individual has anything more than nominal recurring expenditures and insurance expenses.

The individual does not satisfy the tenth condition.

Under the circumstances, the appellant failed to prove that the services provided by Nelson met at least seven of the ten required tests. Therefore, his services must be deemed to have been performed as an "employee" during the time period in question.

The commission therefore finds that, during the fourth quarter of 2006 and the first, second, third, and fourth quarters of 2007, James Devault and Zachery Van Den Heuval performed services for the appellant as employees, within the meaning of Wis. Stat. § 108.02(12)(a).

The commission further finds that, during the first and second quarters of 2007, Richard Nelson performed services for the employer as an employee in employment within the applicable base period, within the meaning of Wis. Stat. § § 108.02(12)(a) and (bm).

The appeal tribunal decision is reversed as to Van Den Heuval and Devault, and affirmed as to Nelson. Accordingly, Biosystem Development, LLC is liable for contributions and related interest regarding services performed by Van Den Heuval, Devault, and Nelson for the time periods in question.

Dated and mailed January 20, 2010
biosyst : 105 : 5  EE 410

/s/ James T. Flynn, Chairperson

/s/ Robert Glaser, Commissioner

/s/ Ann L. Crump, Commissioner

NOTE: The commission did not confer with the administrative law judge before determining to reverse in part the appeal tribunal decision in this matter. The commission's reversal is not based upon a differing credibility assessment from that made by the appeal tribunal. Rather, its reversal is based upon its legal conclusion that the undisputed facts make applicable Wis. Stat. § 108.068(6).

cc:
Attorney Jorge L. Fuentes (Bureau of Legal Affairs)
Attorney Daniel J. LaRocque (Bureau of Legal Affairs)

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