KAE DEVELOPMENT CORP, 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:
On page 5 of the ALJ's decision, delete the paragraph numbered "6." and substitute therefor the following:
6. This condition was not met. While Mews would not be paid unless and until the project was completed to Kae's satisfaction, that is not the meaning of this condition. This condition requires more than the fact that the individual will not be paid for failing to satisfactorily complete services; the individual must incur some liability for such failure.
"Liab[ility] for a failure to satisfactorily complete the services" can be understood as meaning that the consequences provided by the contract for the failure to do such re-work to "put things right" are greater than merely not being paid for the work not put right. This might be evidenced by such things as a liquidated damages clause, or a contract provision allowing the other party to contract with someone else to do (or re-do) work not satisfactorily completed and to recover the costs of the third party's services from the original contractor even if the costs are higher than the original contractor agreed to.
Quality Communications Specialists Inc., (LIRC Jul. 30, 2001). One way of determining whether Mews was responsible for the satisfactory completion of the services he contracted to perform and is liable for a failure to satisfactorily complete the services within the meaning of this test, is to consider what would have happened if after entering into his contract with Kae, he had simply "walked away" from that contract and did nothing. While it is clear he would be paid nothing, there is no evidence in the record that he would have any kind of liability whatsoever. Specifically, there was no evidence that the (oral) contracts between Kae and Mews included any element of liability for non-performance.
The decision of the ALJ, as modified, is affirmed. Accordingly, Kae Development Corporation is subject to the unemployment insurance tax liability provisions of Chapter 108 of the Wisconsin Statutes in each of the four calendar quarters of 2001 and owes contributions and interest in the amounts to be determined by the department in accordance with this decision.
Dated and mailed July 24, 2007
kaedeve131 . smd : 110 : 2 EE 410
/s/ James T. Flynn, Chairman
/s/ Robert Glaser, Commissioner
/s/ Ann L. Crump, Commissioner
Kae Development Corporation is an incorporated business which purchases and develops land, constructing or remodeling buildings primarily for commercial purposes. Janis Kloehn is sole shareholder and officer of the business, which she operates out of her home. The issue in dispute in this case has to do with whether Kae is liable for UI tax contributions on amounts it paid to an individual named Levi Mews, who provided services to Kae as a supervisor and manager of its building development projects.
Under Wis. Stat. § 108.02(12), if an individual provides services for pay for an employing unit he or she is effectively presumed to be an employee for UI tax purposes (rather than an independent contractor) unless the employing unit can establish that at least 7 out of the 10 conditions stated in § 108.02(12)(bm) are satisfied as to that individual. It was undisputed here that Mews performed services for Kae and was paid for those services, so the question becomes whether Kae established that a sufficient number of the statutory conditions were met. The ALJ found that Kae established only that conditions 4, 6 and 7 were met, and Kae petitioned for review by the commission.
Based on a careful review of the evidence in the record, and after considering
the arguments made by Kae in its petition for review to the extent that they are
based on such evidence (1), the commission concludes that Kae failed to demonstrate that a sufficient number of the conditions stated in § 108.02(12)(bm) were satisfied, for the following reasons:
§ 108.02(12)(bm)1. -- The individual holds or has applied for an employer identification number with the federal internal revenue service -- The ALJ found that this condition
was not met. There was no evidence in the record that this condition was satisfied. Kloehn testified that she did not know if Mews had or had applied for an ID number. The employer does not contest this conclusion in its petition for review.
§ 108.02(12)(bm)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 -- The ALJ found that this condition was not met. She noted that there was no evidence in the record showing that Mews filed business or self-employment income tax returns with IRS based on his general contracting services in the previous year (2001) or in the year in which such services were first performed. Although there was evidence at hearing that Kae issued an IRS form 1099 to Mews for at least one of the years in issue, this does not actually prove that Mews filed a Schedule C with his federal income tax return for those years. Kloehn testified directly that she did not know if he had filed such returns. Kae's argument in its petition that Mews "has filed federal tax returns through 2003" is unsupported by evidence in the hearing record and is based entirely on assertions in the statement by Mews filed by Kae with its petition for review. As noted above, note 1, supra, this statement is not evidence in the hearing record, and it cannot be looked to as the basis for a finding.
§ 108.02(12)(bm)3. -- The individual maintains a separate business with his or her own office, equipment, materials and other facilities -- The ALJ found that this condition was not met. The commission agrees. Although Kloehn testified that she thought that Mews had a general building contractor business, "M & M Builders", that was not established by any competent evidence at the hearing. Kloehn conceded that when she paid Mews, she (at his request) made the check payable personally to Mews rather than to "M & M Builders". Kloehn did not know if Mews did any advertising, or if he had any kind of business location separate from his residence. While Kloehn also testified that Mews had a separate used heavy equipment sales business, there was no competent evidence at the hearing establishing that he maintained an office, equipment, materials related to any such business.
In its petition for review Kae argues that Mews' business did not require that he have a separate office facility, since he provided construction services primarily on job sites. Thus, it argues, it was "not imperative that he have" a separate office facility. However, the notion that tests under § 108.02(12)(bm) can be ignored because they relate to something which is allegedly "unnecessary" for the business in question, has been rejected:
The employer generally asserts that certain criteria are not relevant and therefore should not be considered or required. That is a matter for the legislature, however. Currently, there is a list of ten criteria, and one has to meet seven of them in order to be considered an independent contractor in the State of Wisconsin. Indeed, by requiring that one satisfy only seven of ten criteria the legislature has already taken into account that some criteria may be inapplicable to a given industry. Otherwise, the statute contains no exceptions for industries deemed unique by participants in them.
Busk v. It's Your Party LLC (LIRC, 10/12/2001). See, also, Turner v. U.W. Parkside (LIRC, Feb. 19, 2003) (asserting that a condition is "immaterial" to a particular situation does not suffice to show it is satisfied).
Kae also argues that Mews has a number of hand tools and other equipment that he uses in the completion of his contracting services. This argument, like the one concerning the previous test, is dependent on the assertions contained in the statement submitted with the petition. There is no competent evidence in the hearing record as to Mews' ownership (or use in connection with the services at issue) of any particular tools or equipment.
§ 108.02(12)(bm)4. -- The individual operates under contracts to perform specific services for specific amounts of money under which the individual controls the means and methods of performing such services -- The ALJ found that this condition was met, in that Mews performed the specific service of managing and overseeing the construction of the appellant's projects for a specific amount of money in accordance with a verbal contract. The commission agrees. Clearly, Mews "operated under contracts to perform specific services for specific amounts of money." Although Kloehn retained overall control of the building projects (i.e., contracting with architects and approving building plans, approving and contracting with subcontractors), within the areas which were Mews' responsibility he was operating with a degree of independence sufficient to satisfy the "controls the means and methods" test.
§ 108.02(12)(bm)5. -- The individual incurs the main expenses related to the services that he or she performs under contract -- The ALJ found that this condition was not met. She found that Kae incurred the main expenses related to the construction of the projects, paying for the equipment and materials used for the projects and paying the subcontractors directly, while Mews had virtually no expenses.
Kae argues that Mews was not considered the general contractor on this project, that therefore he was not responsible for paying all of the other subcontractors that provided services to Kae, and that his arrangement was to provide construction, management, and other carpentry services. It argues that he provided all of his own equipment and bought his own supplies in furtherance of this arrangement, and that he was paid for services only.
The commission agrees with Kae's contention that Mews was not a "general contractor" in the conventional sense. To be such, he would have had to enter into a contract with Kae in which he undertook to provide Kae with a building, not merely with building project supervision services. Under such an arrangement, Kae would have been agreeing to pay Mews (as "general contractor") a fixed amount covering the entire building, and Mews would then have needed to pay his subcontractors out of that. In that case, the amounts due to all of the subcontractors might have appropriately been considered part of the expenses related to the services that Mews was to perform under the contract Here, however, where the services Mews was performing under his contract with Kae were simply in the nature of organization and supervision of the building project, and where he had no obligation himself to pay any of the subcontractors, the expenses for the equipment and materials used by subcontractors and for their services, were not expenses related to the services that Mews perform[ed] under Mews' contract with Kae. The "main expenses" related to the actual services Mews contracted to provide (i.e., building project supervision) would have been the expense of transporting himself to and from sites where it was necessary for him to be in order to supervise the project, and expenses of phone (and correspondence and any other "office"-type activities) involved in that supervision.
This said, the commission still agrees with the ALJ's ultimate conclusion that this condition was not satisfied. Kloehn testified that Mews was allowed to use a vehicle owned by Kae, and also that she paid the bill for the cell phone Mews used. Thus, even under an interpretation of this condition by which the main expenses related to the services performed are considered to be limited to expenses such as transportation and phone, Mews still did not incur those main expenses.
§ 108.02(12)(bm)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 ALJ found that this condition was met. She wrote that it "seem[ed] reasonable to conclude" that Mews would not be paid for his general contracting services until he arranged for the project to be completed correctly and to the satisfaction of Kloehn. As is reflected above in the modifications made to the ALJ's findings, and for the reasons stated in those modifications, the commission disagrees with this reasoning and has found that this condition was not met.(2)
§ 108.02(12)(bm)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 -- The ALJ found that this condition was met. She noted, correctly, that the record showed that Mews was paid a lump sum on a per-job basis. This satisfies this condition.
§ 108.02(12)(bm)8. -- The individual may realize a profit or suffer a loss under contracts to perform such services -- The ALJ found that this condition was not met. She noted that Mews could not suffer a loss or profit from the construction of the project, but could only expect to be paid for his services for Kae sometime after the completion of the projects. If the property sold for less than the construction costs or could not be rented, only Kae suffered the loss. Mews would still be paid the amount for his services under his agreement with Kae, although his payment might be delayed.
Kae argues that Mews could have incurred a loss on the services he provided to Kae because (it argued) if his out-of-pocket cost exceeded the amount he was paid, that would be a loss. However, as noted above (in the discussion of condition 5), Mews had no significant expenses. Kloehn provided him a Kae vehicle and paid his cell phone bill. She was unable to testify to any other expenses she knew him to have. There was basically no way that Mews could experience a "loss" in any business sense in connection with his activities under these contracts.
§ 108.02(12)(bm)9. -- The individual has recurring business liabilities or obligations -- The ALJ found that this condition was not met. The commission agrees. There was no evidence presented to show that Mews had recurring business liabilities or obligations, such as rent, payroll, insurance, utilities, or any other expenses related to the performance of his general contracting services.
Kae's argument that Mews incurred ongoing monthly expenses for the maintenance of his equipment, insurance, and other out-of-pocket costs, relies entirely on the statement from Mews submitted with the petition for review which cannot be relied on as a basis for a finding. See, note 1, supra. Because the evidence introduced into the record at the hearing provides no support for any finding that Mews had any recurring business liabilities or obligations, the ALJ's conclusion here was correct.
§ 108.02(12)(bm)10. -- The success or failure of the individual's business depends on the relationship of business receipts to expenditures -- The ALJ found that this condition was not met. She noted that Mews was guaranteed to receive the fee for his services set by the verbal contract with Kloehn.
Kae argues that Mews did not thoroughly rely on his relationship with Kae to generate his earnings, that he had done work for other customers during the years at question as shown in his affidavit, and that since he was not dependent upon this sole supplier, he met this standard. This argument reflects a misunderstanding of what this condition is about. It appears that the employer's representative may be thinking of the old "economic independence" test. This condition, however,
is intended to look at the overall course of the person's business. It contemplates that, as in any true business, there is a potential for success and also for failure in the relationship of business receipts to expenditures.
Quality Communications Specialists Inc., (LIRC Jul. 30, 2001). This condition requires that a significant investment is put at risk and that 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. Harlan Mrochinski, (LIRC July 15, 2004). In the case of Mews, who is simply providing his personal services in exchange for payment, who was not shown to have any capital investment in his activity, and who did not even incur any significant operating expenses in connection with providing those services, this condition is not met.
For the foregoing reasons, the commission is satisfied that Kae established only that two conditions (nos. 4 and 7) were satisfied. This is of course inadequate under the 7-out-of-10 requirement of § 108.02(12)(bm), and the presumption that Mews provided his services as an employee for UI tax contribution purposes therefore remains unrebutted.
cc:
Robert M. Parkins, Schenck Business Solutions
Attorney Michael J. Mathis, BOLA
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