RONALD SMITH
d/b/a  SMITH FIELD SERVICE, 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 agrees with the decision of the ALJ, and it adopts the findings and conclusion in that decision as its own, except that it makes the following modifications:

The third paragraph and all subsequent paragraphs of the FINDINGS OF FACT and CONCLUSION OF LAW section are deleted and the following substituted:

Effective November 12, 2001, Smith Field Service, a sole proprietorship owned by Ronald P. Smith (Smith), entered into a contract (Exhibit #1) with Marathon County to provide certain specified real estate services. The services to be performed under this contract included "negotiations for the purchase of the real estate required for the [McCleary Bridge] project." Under the terms of this contract, Smith Field Service would be paid $200,000 over the 25-month term of the contract; Smith Field Service, the "Consultant," would be responsible for furnishing "necessary labor, materials, and professional services;" Smith Field Service could assemble a project team, but retained responsibility for fulfillment of the terms of the contract; and Smith Field Service was not permitted to "sublet or assign any part of this contract without prior approval of'' Marathon County.

Smith testified (pages 2 and 3 of synopsis) that, during the term of the contract, when there was more work than he could complete on his own, he talked to Marathon County and had Beth Steinhauer added to the contract as a "Real Estate Specialist" to perform negotiation services, and had Sue Derr added to the contract to perform "Secretarial Services," including the preparation of land parcel files.

The contract stated that Smith would be paid $75 per hour for his services, Steinhauer $50 per hour, and Derr $25 per hour. These rates were recommended to the county by Smith and were not the subject of arms-length negotiations with either Steinhauer or Derr. Smith, Steinhauer, and Derr were reimbursed under the contract for any expenses they incurred. Payments for the services and expenses of Steinhauer and Derr were deducted from the $200,000 contract total.

Neither Steinhauer nor Derr testified at the hearing.

Steinhauer performed services on three or four contracts between Marathon County and Smith Field Service during 2002, and the terms of these contracts, including Steinhauer's hourly rate, which had been recommended to Marathon County by Smith without Steinhauer's input, remained the same as the contract (Exhibit #1) for the McCleary Bridge project.

Steinhauer was paid directly by Marathon County for the services she performed under the subject contracts.

During the relevant time period, Steinhauer had a room in the basement of her home with office equipment, including a computer, phone, fax machine, and office supplies, which she used to perform services under the subject contracts. Steinhauer used business cards which stated "Smith Field Service" on them.

Steinhauer listed the name "Steinhauer Field Service" on the invoices she submitted to Marathan County, but requested that checks be made payable to her personally.

The record does not show that Steinhauer performed services for any entity other than Smith Field Service during 2002 or 2003.

During the relevant time period, Derr submitted her invoices to Smith Field Service and Smith paid her directly. Derr listed the name "Sue's Office Services" on the invoices she submitted to Smith Field Service.

Derr had a room in her home with a computer, printer, copier, typewriter, phone, desk, and chair which she used to perform services under the subject contracts.

The record does not show that Derr, in 2002 or 2003, performed services, other than as an employee, for any entity other than Smith Field Service.

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 four-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 seven 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.

A two-step analysis is required in order to determine whether an individual is an employee within the meaning of Wis. Stat. § 108.02(12). Goldberg v. DILHR, 168 Wis.2d 621 (Ct. App. 1992).

The first step is to determine whether the individual has been performing services for the putative employer in an employment within the meaning of Wis. Stat. § 108.02(12)(a). An "employment" is "any service...performed by an individual for pay." Wis. Stat. § 108.02(15)(a).

Smith Field Service first argues in this regard that both Steinhauer and Derr were performing services for Marathon County, not Smith Field Service, because they were accountable to Marathon County and because they were paid by Marathon County.

However, the record shows that the contract(s) relevant here was entered into by Smith Field Service and Marathon County, and that Smith Field Service, which had the right under the contract(s) to assemble a project team but remained solely responsible for compliance with the terms of the contract(s), independently chose to solicit and retain the services of Steinhauer and Derr, after seeking and obtaining the required approval from Marathon County.

This represents a classic general contractor/subcontractor relationship between Smith Field Service and Steinhauer and Derr, whereby the general contractor, Smith Field Service, enters into, and is responsible for, compliance with the terms of the contract with the client, Marathon County, and selects/recommends subcontractors, Steinhauer and Derr, to complete certain of the work within the scope of the contract. The commission has held that the subcontractors in such relationships were performing services for the general contractor, not the client, within the meaning of Wis. Stat. § 108.02(12)(a). See, Groeschl Forestry Consulting, Inc., UI Hearing No. S0000141HA (LIRC March 19, 2002); Hauden & Scholl Builders, Inc., UI Hearing No. S9700339MD (LIRC Aug. 31, 1998).

Moreover, the fact that Steinhauer and Derr may have received their pay directly from Marathon County is not dispositive here. In fact, Wis. Stat. § 108.02(12)(a) specifically states that an individual may qualify as an employee "whether or not the individual is paid directly" by the putative employer. Regardless of which entity processed the invoices from, and made the payments to, Steinhauer and Derr for their services and expenses, the source of funds for these payments was the amount Marathon County had agreed to pay to Smith Field Service, under the contract(s). In essence, therefore, Smith Field Service was paying Steinhauer and Derr for their services/expenses despite the fact that Marathon County may have been cutting the checks. See, Wisconsin Tennis Officials, Inc., UI Hearing Nos. S0200129MW, etc. (LIRC Feb. 28, 2005); Crawley v. Pioneer Transportation Ltd., UI Hearing No. 00200197EC (LIRC May 24, 2000).

As a result, the record here supports a conclusion that Steinhauer and Derr, during the time period relevant here, performed services for Smith Field Service in an employment within the meaning of Wis. Stat. § 108.02(12)(a).

If, as here, the first test is satisfied, the burden then shifts to the putative employer to establish that it is exempt from coverage. Essentially, Wis. Stat. § 108.02(12)(a) creates a rebuttable presumption that an individual performing services in an employment is an "employee" and a putative employer has the burden of rebutting that presumption by showing that the tests for independent contractor status are satisfied with regard to the individuals in issue. See, Lozon Remodeling, UI Hearing No. S9000079HA (LIRC Sept. 24, 1999); Kip Koth LLC, UI Hearing No. S0100034RH (LIRC April 8, 2003).

Smith Field Service does not dispute that the record does not show that either Steinhauer or Derr applied for or held federal employer identification numbers (FEINs). As a result, condition 1. is not satisfied.

The department has stipulated that condition 2. is satisfied as to both Steinhauer and Derr.

The focus of condition 3. is upon determining whether a separate business, i.e., an enterprise created and existing separate and apart from the relationship with the putative employer, is being maintained with the individual's own resources. See, Princess House, Inc., v. DILHR, 111 Wis.2d 46, 330 N.W.2d 169 (1983); Larson v. LIRC, 184 Wis.2d 378, 516 N.W.2d 456 (Ct. App. 1994); Lozon Remodeling, supra. In Quality Communications Specialists, Inc., UI Hearing Nos. S0000094MW, etc. (LIRC July 30, 2001), 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 record shows that both Steinhauer and Derr maintained offices and equipment at their own expense in their homes, the existence of a dedicated office area is merely one of several factors to be examined in determining whether a separate business exists. See, Care & Comfort Associates, Inc., UI Hearing No. S9700120MW (LIRC April 30, 1999). The central inquiry is whether the activity engaged in by the individual is genuinely separate from the activity of the putative employer. See, Groeschl Forestry Consulting, Inc., supra. The record does not show that, during 2002 or 2003, either Steinhauer or Derr used these offices or this equipment for a business purpose unrelated to their relationship with Smith Field Service. Although both Steinhauer and Derr used a business name on the invoices they submitted to Marathon County and Smith Field Service, the fact that the competent evidence of record does not show that they solicited business from, or engaged in business with, other entities during 2002 or 2003 militates against a conclusion that either of them in fact had a business separate and apart from her relationship with Smith Field Service. See, Prince Cable, Inc., UI Hearing No. S9900227MW (LIRC Feb. 23, 2001). As a result, condition 3. is not satisfied.

To satisfy condition 4., it must be established that the individuals operated under contracts to perform specific services for specific amounts of money, and that, under these contracts, they controlled the means and method of performing the services. The record shows that both Steinhauer and Derr exercised enough independence and discretion in conducting the work under consideration here to satisfy the second part of the test.

Condition 4., however, also requires multiple contracts. These may take the form of multiple contracts with separate entities, or multiple serial contracts with the putative employer, if such contracts are shown to have been negotiated "at arm's length," with terms that will vary over time and will vary depending on the specific services covered by the contract. The existence of bona fide multiple contracts tends to show that the individual either has multiple customers, or that she has periodic opportunities for "arm's length" negotiation with the putative employer as to the conditions of their relationship. See, T-N-T Express LLC, UI Hearing Nos. S9700385, etc. (LIRC Feb. 22, 2000).

The record does not show that either Steinhauer or Derr entered into multiple contracts with separate entities. Although the record does show that, during 2002, they entered into multiple oral contracts with Smith, it does not show that the terms of these contracts varied over time or by project, or that Steinhauer or Derr participated in the negotiation of the hourly rate established for their services in these contracts.

As a result, the multiple contracts requirement of condition 4. has not been 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. See, Lozon Remodeling, supra; Quality Communications Specialists, Inc., supra. This inquiry requires quantification of these expenses, and a determination of which entity, the worker or the putative employer, bears the larger total expense. See, Quale & Associates, Inc., UI Hearing No. S0200210MW (LIRC Nov. 19, 2004). Here, related expenses include those for required office equipment and materials, and for travel. The expense for Steinhauer's and Derr's office equipment, and what portion of this expense would have been attributable to the work they performed for Smith Field Service, was not quantified in the record. Steinhauer's and Derr's expenses for materials and travel were reimbursed under the contract, i.e., borne by Smith Field Service, and the amounts of certain of these expenses were reflected in the record. As a result, in the absence of quantification of those expenses borne by Steinhauer or Derr, and given that it is not obvious that the expenses borne by Steinhauer or Derr would necessarily exceed those borne by Smith Field Service, it would have to be concluded that the putative employer failed to sustain its burden to show that condition 5. is satisfied.

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); Quality Communications Specialist, Inc., supra.; Wisconsin Tennis Officials, Inc., supra. 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 only that Steinhauer and Derr would be expected to remedy any deficiencies without any additional pay, but not that they would sustain any penalty such as non-payment for that portion of the project in which the deficiency appeared or a requirement that they bear the expense for hiring another individual to remedy the deficiency if they failed to do so. Condition 6. has not been satisfied.

Condition 7. requires that the individuals receive compensation for their services on a commission, per-job, or competitive-bid basis and not on any other basis. Steinhauer and Derr were paid on an hourly basis which would not satisfy condition 7. See, Gary R. Gilbert, UI Hearing No. S0200083DB (LIRC July 21, 2005).

In view of the manner in which Steinhauer and Derr were paid for their services, there was no business risk to them within the meaning of condition 8. i.e., no realistic possibility that Steinhauer or Derr could realize a loss in their relationship with Smith Field Service. As long as Steinhauer and Derr performed services, they would be paid. See, Quale & Associates, Inc., supra. As a result, condition 8. is not satisfied.

Condition 9. requires proof of a cost of doing business which Steinhauer and Derr would incur even during a period of time they were not performing work through Smith Field Service. The record does not establish that Derr carried her own business liability insurance, leased a separate office, financed a major equipment purchase, or incurred any other relevant business expense which she could not discontinue, and for which she would continue to be liable, during a period of time she was not receiving work through Smith Field Service. See, Prouty v. Books Are Fun Ltd., UI Hearing No. 04610806MW (LIRC Aug. 3, 2005). As a result, condition 9. is not satisfied as to Derr.

The record does show in regard to Steinhauer, however, that she incurred expenses each year to maintain her real estate broker license. This would qualify as a continuing business liability or obligation within the meaning of condition 9., even though not quantified in the record. See, Dibbles & Dibbles, Inc., UI Hearing No. S0300140RH (LIRC Jan. 12, 2005)(the statutory language does not require that the recurring business liability or obligation meet a certain dollar minimum); Quality Communications Specialists, Inc., supra.("recurring business liabilities or obligations" test does not involve a quantitative comparison). As a result, condition 9. is satisfied as to Steinhauer.

The commission has interpreted condition 10. as intending to examine the overall course of a person's business. See, Quality Communications Specialists, Inc., supra. The record does not show that either Steinhauer or Derr had made any significant investment in a business, or that either of them faced a 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.; Harlan Mrochinski, UI Hearing No. S0100001WR (LIRC July 15, 2004)(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); Dane County Hockey Officials, Inc., supra. Condition 10. is not satisfied.

To summarize, the record supports a conclusion that only condition 2. is satisfied as to Derr, and only conditions 2. and 9. as to Steinhauer. This is far short of the seven required by Wis. Stat. § 108.02(12). As a result, the commission agrees with the ALJ that Steinhauer and Derr performed services as employees of Smith Field Service during 2002 and 2003.

Smith Field Service argues in its petition for commission review that it did not obtain a fair hearing due to bias on the part of the administrative law judge.

However, the commission carefully reviewed the record and found no evidence of ALJ bias.

Smith Field Service points to the fact that the location of the hearing in a facility owned by the department demonstrates bias. Smith Field Service, however, fails to persuasively explain how conducting the hearing in a department facility tended to prejudice its case in any way. See, e.g., Nettleton Logging, Inc., UI Hearing No. S9000138HA (LIRC Feb. 28, 1992)(fact that administrative law judge and prosecutor work for department does not demonstrate bias).

Smith Field Service also argues that bias, and prejudgment of the case, is demonstrated by the administrative law judge's reference to "employer" rather than "appellant" during the hearing and in his decision. This argument, too, is unpersuasive, given the practice by the department in setting up status case files and in captioning status cases to use the term "employer" to denominate the entity for which the subject services were performed.

Finally, it is important to note that commission review of a decision of an administrative law judge is not appellate in nature, but instead a de novo review of the factual record and the parties' arguments. See, Dane County Hockey Officials Assoc., Inc., UI Hearing No. S9800101MD (LIRC Feb. 22, 2000). Such a de novo review has been conducted here. The simple rejection of Smith Field Service's arguments alone does not demonstrate bias on the part of the ALJ or the commission. See, Perlongo v. Badger Inventory Service, Inc., UI Hearing No. 99607906MW (LIRC March 31, 2000).

Smith Field Service further contends in its petition that Exhibit #4 became part of the record and may be relied upon in reaching a decision here as a result. However, the record clearly shows that the department objected to the receipt of this exhibit into the record on hearsay grounds, and the administrative law judge sustained this objection.

Exhibit #4 is an undated letter to Ronald Smith from the Marathon County Highway Commissioner, Glenn J. Speich, Jr., setting forth his interpretation of the contracts at issue here. Speich did not testify at hearing. Although this exhibit could have been received into the record to establish that Ronald Smith received this letter and it formed the basis for his understanding of the contract, this was not the purpose for which it was offered at hearing. Instead, it was offered to show Speich's opinion as to the manner in which the contract language should be interpreted. The commission agrees with the ALJ that, when offered for this purpose, it was properly excluded as uncorroborated hearsay. Smith Field Service did not offer any reason for failing to call Speich as a hearing witness.

Smith Field Service also argues that "There was no testimony that the contract with Marathon County was ever amended or modified. There was no testimony that the job was too large so Mr. Smith had to get assistance." However, testimony to this effect is set forth on pages 2 and 3 of the synopsis.

Finally, a letter from Steinhauer was received on December 5, 2005, after the hearing record was closed and the ALJ's decision issued. This letter is not part of the evidence of record and may not, as a result, be considered by the commission in reaching its decision. Wis. Admin. Code § LIRC 1.04. See, Bruce, supra. Smith Field Service, which was represented by counsel throughout these proceedings, had full and fair opportunity to present its case at hearing. Smith had the burden to prove that Steinhauer and Derr were independent contractors rather than employees, and it was Smith's responsibility to prepare for the hearing and to bring to the hearing the evidence necessary to sustain this burden. See, Kip Koth LLC, supra.

The commission concludes that, effective January 1, 2002, Derr and Steinhauer performed services for Ronald Smith d/b/a Smith Field Service as employees within the meaning of Wis. Stat. 108.02(12)(a) and (bm).

The decision of the administrative law judge, as modified, is affirmed. Accordingly, effective January 1, 2002, based upon its employment of Susan Derr and Beth A. Steinhauer, Ronald Smith d/b/a Smith Field Services is liable for contributions to the Unemployment Reserve Fund.

Dated and mailed March 29, 2006
smithro . smd : 115 : 1   EE 409 EE 410  EE 410.03  PC 729  

James T. Flynn, Chairman

/s/ David B. Falstad, Commissioner

/s/ Robert Glaser, Commissioner

cc: Attorney Michael J. Mathis

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