PHILIP A TYRRELL, Claimant

THE ARMORY INC, Appellant

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:

The claimant initiated a claim for unemployment benefits on December 12, 2005 (week 51), after being laid off from his full-time job as a carpenter. While claiming benefits in the months thereafter, he reported income earned as a musician for the appellant, a restaurant and dinner theater.

If the claimant's musical services are self-employment, his earnings from that activity are not reportable on his weekly benefit claims and do not reduce his benefits. If, instead, his musical services are employment with the appellant, he must report his earnings from the appellant as wages on his weekly claims, and his weekly benefit payments are reduced according to the partial benefit formula of Wis. Stat. § 108.05(3). The issue for decision is whether the claimant performed musical services as an independent contractor or as an employee of the appellant.

In addition to his work as a carpenter, the claimant performs musical services for a local symphony orchestra and has done so for the past five or six years. His services were provided pursuant to a written agreement. He was paid per service plus mileage. He reports his income from the symphony orchestra on Schedule C, Profit or Loss from Business (Sole Proprietorship) on his federal income tax return.

In March 2006, the claimant signed a professional musician agreement to play the acoustic guitar as part of the pit orchestra for a production at the appellant's dinner theatre. He was offered a position in the orchestra based on his reputation as a musician. He was paid $30 per rehearsal and $80 per performance. The seven rehearsals and 45 performances ran from April 2 through June 18, 2006. If he was unable to attend a rehearsal or performance, he was responsible for supplying and compensating a replacement. However, his ability to supply a substitute was circumscribed by the written agreement. For example, pursuant to the written agreement the claimant was required to provide the appellant with the names of any substitute and the appellant reserved the right to approve or deny a chosen substitute. Further the substitute was required to sit in the pit two times before the substitute could replace the claimant for a performance. The appellant also reserved the right to deny the claimant leave of any performance. He never had to provide a replacement. He provided the instrument and amplifier to perform his services, and the sheet music was provided by the appellant. Although he had some stylistic freedom, he was subject to the direction and control of the orchestra conductor, who had the final say in how the music was to be played. The appellant contracted for the services of the conductor. The claimant's investments included $3,300 for his acoustic guitar and amplifier. His expenses include strings, batteries, and minimal travel expenses. He maintains a separate area of his residence for practicing and storing his musical equipment.

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 pay for an employing unit, whether or not the individual is paid directly by the employing unit, except as provided in par. (b), (bm), (c), (d), (dm) or (dn).

(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 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.

Wisconsin Statute § 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).

First, the appellant argues that the claimant is not an employee under Wis. Stat. § 108.02(12)(a) because he is a sole proprietor pursuant to Wis. Stat. § 108.02(12)(dm). However, the language of Wis. Stat. § 108.02(12)(dm) cited by the appellant is that which existed prior to its amendment by 2005 Wisconsin Act 86. Prior to that amendment Wis. Stat. § 108.02(12)(dm) provided:

Paragraph (a) does not apply to an individual who owns a business that operates as a sole proprietorship.

That language was not intended to exclude a sole proprietor from the definition of employee for services performed for other employing units, but was intended to prevent a sole proprietor from being considered an employee of his or her own proprietorship. 2005 Wisconsin Act 86 rewrote Wis. Stat. § 108.02(12)(dm) to clarify that a sole proprietor cannot be an employee of his or her own business. Wis. Stat. § 108.02(12(dm), now states:

Paragraph (a) does not apply to an individual who owns a business that operates as a sole proprietorship with respect to services the individual performs for that business.

The appellant further argues that the claimant meets at least 7 of the 10 conditions set forth in Wis. Stat. § 108.02(12)(bm).

The appellant agrees that Wis. Stat. § 108.02(12)(bm)1. has not been satisfied.

The claimant filed self-employment income tax returns for services performed as a musician. Condition 2. has been satisfied.

The appellant disagrees with the ALJ's finding that condition 3. has not been satisfied.

The commission stated in Quality Communications Specialists, Inc., UI Hearing Nos. S0000094MW, etc. (LIRC July 30, 2001):

Separate business - This part of the this test looks at the question of whether the person "maintains a separate business", the term "separate" clearly being intended to focus on the question of whether the activity they engage in is genuinely separate from the activity of the putative employer, and the term "business" clearly being intended to focus on the question of whether the manner of engaging in the activity is characteristic of the way a business operates as distinct from the patterns typical of an employment relationship. It is critical under this test whether the person involved has a separate business apart from the appellant's business. See, St. Clair v. Rylan & Co. Inc (LIRC, June 7, 2000).

As to the remaining language of condition 3., the commission further stated in Quality Communications:

The legislature could have drafted this provision to state,

The individual maintains a separate business, attributes of which may include his or her own office, equipment, materials or other facilities

but it did not do so. Instead, it chose to ask whether the individual maintains a separate business with certain attributes, and it listed those attributes in the conjunctive ("office, equipment, materials and other facilities"). If an individual does not have his own office, it is simply not possible to say that he maintains a separate business "with his own office", without doing violence to the literal language of the statute. Similarly, if the equipment an individual uses in his "business" is not his own, or if he does not provide his own materials for use in his "business", it is simply not possible to say that he maintains a separate business "with his own equipment" and "with his own materials".

It could be argued that it is inappropriate to take this test literally, as requiring that an independent contractor actually have, inter alia, their own office, materials, equipment, etc., because it is the nature of some activities that an office (or materials, or equipment) is not necessary. The commission does not agree with this view. For one thing, as just noted, the statute is plain and unambiguous in stating that the test is whether the person has a "separate business with his or her own office, equipment, materials and other facilities". More important, this argument overlooks the fact that the legislature clearly anticipated that there would possibly be some independent contractors that would not meet some of the tests. To the extent that flexibility is necessary to take into account that some independent contractors may not have an office, materials, equipment, etc., that flexibility is already provided by the structure of the statute, which allows a finding of an independent contractor even if only 6 of the 8 tests are met.

(Footnote omitted.)

The claimant could be found to have satisfied the "separate business" portion of condition 3. by virtue of other services performed as a musician for other entities prior to his relationship with the appellant. The business existed before his association with the appellant and has continued on since he performed services for the appellant. However, although the claimant testified that he has a space in his residence where he practices and keeps his instruments, equipment and supplies, he does not have a business office or other facilities. See Glosky v. Broadband Services Inc., (LIRC September 15, 2006) (the fact that the claimant necessarily had some location where he prepared his invoices, does not satisfy the requirement that he have a separate business office.) Condition 3. has not been satisfied.

The record demonstrates that the claimant's services were performed pursuant to multiple contemporaneous contracts to perform musical services for specific amounts of money. The appellant argues that the claimant controlled the means and methods of performing services. In asserting that the claimant meets 7 of the 10 conditions set forth in Wis. Stat. § 108.02(12)(bm), the appellant references a prior commission decision, Robert S. Seftar, UI Dec. Hearing No. 01609181 (LIRC April 25, 2002). However, Seftar involved services for a non-profit organization and therefore the determination of whether the services were performed as an independent contractor was resolved under Wis. Stat. § 108.02(12)(c) which contains different conditions than Wis. Stat. § 108.02(12)(bm) and involves application of the factors set forth in Keeler v. LIRC, 154 Wis. 2d 626 (Ct. of App. 1990). The Keeler factors also differ from the conditions set forth in Wis. Stat. § 108.02(12)(bm). Under either the old law or the new law, the fact that a musician in an orchestra is directed by a conductor is not indicative of employee status versus independent contractor status. That is, whether the individual was an employee or an independent contractor, there would be a conductor directing the individual on how to play the music. However, one factor in this case, that was not shown to exist in the Seftar, is the limits placed on the claimant's ability to hire a substitute to perform in his place. Condition 4. has not been satisfied.

The record supports the finding that the claimant incurred the main expenses related to the services provided. The claimant provided services as a musician and the main expenses associated with those services were the claimant's instruments. Condition 5. has been satisfied.

The record establishes that the claimant was responsible for the satisfactory completion of services that he contracted to perform and was liable for a failure to satisfactorily complete services. Condition 6. has been satisfied.

The commission agrees with the appellant that the claimant was paid on a per-job basis. The claimant was paid a set amount per practice session and per performance. However, the job was to play for the limited-term run of Aida at the employer's place of business. The claimant had other contracts with another entity pursuant to which he was similarly paid. Condition 7. has been satisfied.

The question of whether an individual may realize a profit or suffer a loss under contracts to perform services looks at the question of whether under particular contracts the person enters into, there can be a profit (if the income received under that contract exceeds the expenses incurred in performing the contract), and also whether there can be a loss under that contract (if the income received under that contract fails to cover the expenses incurred in performing the contract). The expenses the claimant incurred to perform services for the appellant totaled $2,270.00. The claimant was to be paid a total of $3,810.00 under the contract. The claimant's income clearly would exceed the expenses he incurred if he performed the services he was contracted to perform. The appellant argues that the claimant could have suffered a loss if, for example, he was unable to attend rehearsals or performances and was required to pay a substitute. The appellant further argues that if the claimant failed to fulfill the contract the appellant could recover consequential damages and attorney's fees. The ALJ stated that those were not sufficient to meet condition 8. The appellant objects that condition 8. does not identify the magnitude of the loss as determinative and that the claimant could suffer any loss, regardless of how unlikely or insubstantial, satisfies the plain language of condition 8.

In Dane Co. Hockey Officials (LIRC, February 22, 2000), the commission said:

[T]here is virtually no activity involving providing service for someone or something, that does not require incurring some kind of outright expense. That can be just as true in the case of an acknowledged employe, who may incur expenses such as work clothes, buying and maintaining a car to be able to get to work, etc. If a person who has incurred such expenses then makes the choice not to do work which is available to them, they may well end up "out-of-pocket", but that does not necessarily constitute a "loss" such as is contemplated in the case of a business. In a real business, genuine risk of loss frequently accompanies contracts to provide particular services not because the person makes a choice not to do anything at all, but because of the unpredictability inherent in the business enterprise. The businessperson who develops a bid to do a particular job for a particular sum, must anticipate variations in prices of supplies, in the availability of time and conditions allowing fulfillment of the contract, and other matters. If they are skilled, they may correctly anticipate these things and fix a price which will generate a profit for them when, at the end of the job, the columns are all tallied. If they are not so skilled, or if unforeseen events occur that prevent the fulfillment of the contract under the conditions they anticipate, then they may suffer a genuine business loss . . .

The commission generally has considered whether there is a "realistic possibility" of profit and loss. The commission concludes that there was no realistic possibility that the claimant would suffer a loss under his contract with the appellant. Condition 8. has not been satisfied.

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).

The appellant did not establish that the claimant had recurring obligations and liabilities that were incurred regardless of whether services were being performed. It was established that the claimant would have occasion to buy a new instrument or piece of equipment, but not that he would be required to do so on a continuing and regular basis. There was no evidence of overhead expenses, or significant maintenance costs or other obligations or liabilities that were recurring in nature even when no services were being performed. Condition 9. has not been satisfied.

Finally, as to whether the success or failure of the claimant's business depended on the relationship of business receipts to expenditures, the commission stated in Dane Co. Hockey Officials (LIRC, February 22, 2000)

The commission believes that this test contemplates the existence of a genuine business or endeavor. In an entrepreneurial enterprise, a significant investment is put at risk and there is thus the potential for real "success", in the sense of the growth of the value of the investment, or "failure", in the sense of the actual loss of the investment. The potential for financial "success" or "failure" of any significance simply does not exist in the case of these hockey officials, because the level of their "investment" is so small, because there is no real risk of loss of their investment apart from wear-and-tear "on the ice", and because there is no goal to achieve "success" by increasing the capital value of the business. In addition, even the potential for occasional expenses to outweigh income is so limited. Apart from the $100 in annual memberships, the only expenses which could contribute to such a loss are incurred in connection with officiating work, which generates corresponding income. The situation is not very different from that of an employe who incurs some expenses of employment, but who by having such employment always earns wages to offset those expenses. The commission does not believe that such a situation was what was in the legislature's contemplation when it spoke of "success or failure of [a] business".

More importantly, the commission is satisfied from the evidence in this case, that the persons engaged in the hockey officiating which is the focus of this case, do so principally as recreational and enjoyable hobby. To the extent that the activity succeeds in satisfying that purpose, then it is a "success", even though it may, from time to time, involve incurring more expense in the form of necessary expenditures than it generates in income. Thus, the "success" or "failure" of the activity is not principally dependent on those financial considerations.

The appellant argues that the claimant has a significant investment in his equipment and the success of his business depends on whether his income is more that his expenditures. The record does not quantify the claimant's total investment in instruments, equipment and materials. However, the commission believes the claimant is similar to the individuals in Dane Co. Hockey Officials. The claimant makes his living as a carpenter. He filed for benefits because he was laid off from his job as a carpenter. Although not explicitly stated by the claimant, the commission believes it reasonable to conclude that it is not the money that motivates the claimant to perform as a musician. And that he would continue to perform as a musician even if, on occasion, he were to suffer a loss doing so. Condition 10. has been satisfied.

The appellant has established that conditions 2., 5., 6., 7., and 10. were satisfied. The appellant established that only 5 out of the 10 conditions were satisfied.

The commission therefore finds that the claimant performed services for the appellant as an employee within the meaning of Wis. Stat. § 108.04(12)(bm).

The decision of the administrative law judge is modified to conform to the above findings and, as modified, is affirmed. Accordingly, the claimant must report wages earned from the appellant as they are earned.

Dated and mailed December 6, 2006
tyrreph . urr : 132 : 1 : EE 410

/s/ James T. Flynn, Chairman

/s/ David B. Falstad, Commissioner

/s/ Robert Glaser, Commissioner

NOTE: This decision is issued under Wis. Stat. § 108.09, and only resolves the current benefit eligibility issue. Under Wis. Stat. § 108.101, this decision is not binding for any other purpose and cannot be used to determine whether the appellant is liable for contributions based on the services performed by this claimant.

 

cc: Attorney Matthew M. Beier

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