ALIC D SMITH, Employee

COVERALL OF MILWAUKEE, 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:

1. The final paragraph on page 4 of the decision (analyzing condition 5.) is deleted and the following substituted:

The record does not establish that the costs borne by Smith exceed the costs borne by Coverall, and condition 5. is not met.

2. The final sentence in the first paragraph on page 5 of the decision (analyzing condition 6.) is deleted.

3. The final two sentences in the third paragraph on page 5 of the decision (analyzing condition 8.) are deleted and the following substituted:

There is a realistic possibility that Smith could make a profit and suffer a loss over the term of his contract with Coverall, and condition 8. is satisfied as a result.

4. In the third sentence of the fourth paragraph on page 5 of the decision (analyzing condition 9.), the words "cleaning supplies or" are deleted.

5. The fifth paragraph on page 5 of the decision (analyzing condition 10.) is deleted and the following substituted:

Condition 10. is satisfied since Smith made a significant business investment when he purchased the franchise.

6. In the sixth paragraph on page 5 of the decision, the word "four" is changed to "five."

The decision of the administrative law judge, as modified, is affirmed. Accordingly, the wages paid to the claimant for performing services for Coverall during the base period shall be included in the computation of the claimant's base period wages.

Smith signed a franchise agreement (exhibit #1) with Coverall on December 18, 1999, the terms of which have governed their relationship since that date. These terms were unilaterally dictated by Coverall.

Smith paid Coverall an $8,500 "Franchise Fee" to purchase this franchise.

This franchise agreement describes Coverall's relationship with its franchisees as follows:

Coverall, as part of its business operations, obtains customer accounts, which are contracts between Coverall and cleaning customers, under which Coverall delegates the performance of services to its franchisees.

Coverall developed a cleaning system which it marketed to commercial entities in each of its territories. Once it contracted with a customer in its Milwaukee territory, it would offer one of its franchisees in that territory, including Smith, the opportunity to provide the cleaning services for the customer. Smith had the option of accepting or rejecting this opportunity.

Upon entering into its agreement with Smith, Coverall provided Smith an "Initial Business Package," consisting of one or more customer accounts. Thereafter, if Smith were offered and accepted the opportunity to service additional accounts from Coverall, Smith was required to pay an additional "Sales and Marketing Fee" in an amount equaling 2.8-4.5% of Smith's gross monthly billings.

Smith was also required to pay Coverall a monthly "Royalty" of 5%, and a monthly "Management Fee" of 10%, of monthly billings.

Coverall provided training to Smith, inspected and critiqued his work, received and processed customer complaints, and handled billing and collections.

The franchise agreement required Smith to carry liability insurance which Smith purchased from Coverall.

Smith was permitted to solicit cleaning customers other than those offered to him by Coverall, but, if one of these other customers had accepted his bid, Smith would have been required to render services to this customer within the terms of his agreement with Coverall. Although Smith did submit bids to other customers, none of these bids was accepted.

Wisconsin Statutes § 108.02 states as follows, as relevant here:

108.02 Definitions. As used in this chapter:

(4) Base period. "Base period" means the period that is used to compute an employee's benefit rights under s. 108.06...

(4m) Base period wages. "Base period wages" means:

(a) All earnings for wage-earning service which are paid to an employee during his or her base period as a result of employment for an employer;...

(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 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 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....

(e) This subsection shall be used in determining an employing unit's liability under the contribution provisions of this chapter, and shall likewise be used in determining the status of claimants under the benefit provisions of this chapter....

(14m) Employing unit. "Employing unit" means any person who employs one or more individuals.

(15) Employment.

(a) "Employment", subject to the other provisions of this subsection means any service, including service in interstate commerce, performed by an individual for pay....

(26) Wages. Unless the department otherwise specifies by rule:

(a) "Wages" means every form of remuneration payable, directly or indirectly, for a given period, or payable within a given period if this basis is permitted or prescribed by the department, by an employing unit to an individual for personal services....

Pursuant to Wis. Stat. § 108.02(4m), in order to be considered base period wages, earnings must be "paid to an employee during his or her base period as a result of employment for an employer..."

The parties do not dispute that Coverall qualifies as an employer.

Employment, as defined in Wis. Stat. § 108.02(15)(a) means any service performed by an individual for pay. The record shows that Smith performed services for pay during the relevant base period.

The remaining question then is whether these services were performed by Smith as an employee.

In order to satisfy the definition of employee stated in Wis. Stat. § 108.02(12)(a) the individual at issue must provide the subject services "for an employing unit."

Coverall argues that, in fact, Smith did not provide services for Coverall, but instead Coverall provided services for Smith in the form of training, marketing, quality control, customer referrals, and administrative support.

This argument would be more persuasive if Smith were a party to the customer cleaning contracts, i.e, if Smith contracted directly with the customers to provide cleaning services and contracted separately with Coverall to provide training, marketing, customer referral, quality control, and administrative support services. Instead, as expressly stated in the franchise agreement, the parties to these contracts are Coverall and the cleaning customers. Franchise relationships assume many forms, and the form under consideration here is more akin to a contractor (Coverall)/subcontractor (Smith) business model, where the subcontractor performs services for the contractor, than the client (Smith/vendor (Coverall) model urged by Coverall. See, Ronald Smith d/b/a Smith Field Service, UI Hearing No. S0300197MD (LIRC March 29, 2006). Coverall controls the performance of cleaning services by Smith to an extent which would be inconsistent with its status as simply a training, marketing, customer referral, quality control, and administrative support purveyor. See, Lakeshore Mental Health, Inc., UI Hearing No. S0600162AP (LIRC Nov. 30, 2007).

The difference here between the relationship of Smith and Coverall and that of a typical contractor/subcontractor is that Smith paid an initial franchise fee, as well as subsequent sales and marketing fees upon acquiring additional customer accounts. However, the form in which Coverall obtained its earnings from services performed for its customers by Smith does not really change the fundamental reality that these services were performed by Smith for Coverall.

Coverall cites a decision of the Wisconsin Supreme Court (Kerl v. Dennis Rasmussen, Inc., 2004 WI 86, 273 Wis.2d 106, 682 N.W.2d 328) to support its argument that a franchisee is not an employee. However, Kerl relates to the liability of a franchisor for the negligence of one of its franchisees. Given the very different issues involved, the Kerl decision has limited utility here where the commission is required to interpret the language of Wis. Stat. § 108.

The remaining question then is whether Smith satisfies any exception to the definition of employee. The only exception arguably applicable here is set forth in Wis. Stat. § 108.02(12)(bm). In order to satisfy this exception, the record must show that Smith satisfies at least seven of the ten stated conditions.

The record does not show that Smith held or applied for a FEIN, as required to satisfy condition 1.

The record does not show that Smith filed a Schedule C. The simple fact that he included his earnings for performing the subject cleaning services as "other business" income on his income tax return does not satisfy the requirement that he have filed a business or self-employment income tax return. Condition 2. is not satisfied.

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. 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). In Quality Communications Specialists, Inc., UI Hearing Nos. S0000094MW, etc. (LIRC July 30, 2001), the commission clarified that each factor set forth in the statutory language governing this condition must be met in order for the condition to be satisfied.

Although Smith used his own computer, desk, and filing cabinet to perform services for Coverall, the record does not show that he had a separate business office or even a separate space in his home devoted primarily to a business purpose. Moreover, the fact that Smith was prohibited by the franchise agreement from performing similar services for any entity other than Coverall tends to show that he did not operate a business enterprise separate and apart from his relationship with Coverall. See, Prince Cable, Inc., UI Hearing No. S9900227MW (LIRC Feb. 23, 2001) (fact that worker performs services only for putative employer generally inconsistent with existence of separate business). Condition 3. is not satisfied.

To satisfy condition 4., it must be established that the individual operates under contracts to perform specific services for specific amounts of money, and that, under these contracts, he controls the means and method of performing the services.

Condition 4 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 he has periodic opportunities for "arm's length" negotiation with the putative employer as to the conditions of their relationship, and that he is not dependent upon a single, continuing relationship that is subject to conditions dictated by a single employing unit. See, T-N-T Express LLC, UI Hearing Nos. S9700385, etc. (LIRC Feb. 22, 2000); Dane Co. Hockey Officials, supra.

The record shows that Smith performed services under a single contract with Coverall, the terms of which were unilaterally determined by Coverall, i.e., not negotiated at arm's length. See, Spencer Siding, Inc., UI Hearing No. S0300142GB (LIRC June 2, 2006)(terms of contract must actually be subject of arms length negotiation in order to satisfy condition 4). By the terms of the franchise agreement, Smith was prohibited from entering into contracts with other entities to provide cleaning services.

The record also shows that Coverall dictated and closely monitored the manner in which the cleaning services were performed by Smith.

Consequently, neither component of condition 4. is satisfied.

Applying condition 5. requires a determination of what services are performed under a 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, Quality Communications Specialists, Inc., supra. This inquiry typically requires quantification of these expenses. See, Quale & Associates, Inc., UI Hearing No. S0200210MW (LIRC Nov. 19, 2004), aff'd Quale & Assoc. d/b/a Handyman Connection v. LIRC & DWD, Case No. 04-CV-10648 (Wis. Cir. Ct., Milwaukee Co., May 24, 2005).

The record shows that Smith bore the cost of transportation to the work sites, equipment, materials and supplies, and insurance, as well as the initial franchise fee presumably used by Coverall to cover certain of its related training, marketing, quality control, and administrative costs. Coverall paid the costs of training; marketing in Smith's territory; quality control, i.e., inspecting and providing feedback as to the quality of Smith's work; record-keeping; billing and collecting unpaid bills; and other related administrative services. These costs are not quantified, and it is not obvious that Smith's expenses would necessarily exceed Coverall's. Condition 5. is not satisfied.

The record shows that the agreement between Smith and Coverall contained an indemnification/hold harmless provision which would satisfy condition 6. See, MSI Services, Inc., UI Hearing No. S0600129AP (LIRC Sept. 5, 2008); Zoromski v. Cox Auto Trader, UI Hearing No. 07000466MD (LIRC Aug. 31, 2007).

Condition 7. requires that the individual receive compensation for his services on a commission, per-job, or competitive-bid basis and not on any other basis. Smith was compensated on a per-job basis which satisfies condition 7.

Condition 8. examines whether, under an individual contract for the claimant's services, there can be a profit (if the income received under that contract exceeds the expenses incurred in performing the contract), as well as 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 test is whether, over the term of the contract between Smith and Coverall, there was a realistic possibility that Smith could realize a profit or suffer a loss. See, Zoromski, supra. The receipt by Smith of more in pay for his cleaning services than he was required to spend could constitute "realiz[ing] a profit.under contracts to perform services." See, Quality Communications Specialists, Inc., supra. Moreover, since Smith could not easily terminate the franchise agreement even if the venture proved unprofitable for him, and bore the risk of unsuccessful retention/attraction of customer accounts, there is a realistic possibility that he could suffer a loss. Condition 8. is satisfied.

Condition 9. requires proof of a cost of doing business which Smith would incur even during a period of time he was not performing work for Coverall, such as the cost of an office lease, professional fees, or liability insurance. The record does not show that Smith had such continuing costs. Coverall argues that Smith's liability insurance costs satisfy this condition. However, since Smith was not permitted to perform cleaning work outside his agreement with Coverall, obtained the liability insurance as a requirement of this agreement, and purchased this insurance through Coverall, the resulting cost to him for this insurance would necessarily cease once he was no longer performing services under his franchise agreement with Coverall, and these insurance costs would consequently not satisfy condition 9.

The commission has interpreted condition 10. as intending to examine the overall course of a person's business. See, Quality Communications Specialists, Inc., 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). The record shows that Smith made a significant business investment when he paid $8,500 as a franchise fee. Condition 10. is satisfied.

In summary, only conditions 5., 6., 7., 8., and 10. are satisfied. Since Wis. Stat. § 108.02(12)(bm) requires that seven conditions be satisfied in order for a worker to be considered an independent contractor, the satisfaction of only five of the ten conditions compels the conclusion that Smith performed services for Coverall as an employee, not an independent contractor.
Coverall argues that the fact that the franchise agreement provides that Smith is an independent contractor, not an employee, should govern here. However, an individual's status as an independent contractor or a statutory employee is determined by statute, not by the terms of a private agreement. Roberts v. Industrial Comm., 2 Wis. 2d 399 (1957). See, also, Knops v. Integrity Project Management, UI Hearing No. 06400323AP (LIRC May 12, 2006).

Coverall also argues that the department has been inconsistent in deciding the issue of whether its franchisees are statutory employees or independent contractors, citing Villalpando v. Coverall, UI Hearing No. 09401777AP, an appeal tribunal decision issued on June 26, 2009, in which ALJ Wenning held that a Coverall franchisee satisfied each of the ten conditions. The facts of record in Villalpanso were different in numerous respects from those here. For example, as found by ALJ Wenning, the record in Villalpando showed that the claimant had applied for a FEIN and filed a business or self-employment income tax return. In addition, ALJ Wenning's analysis did not accord with prior commission decisions in regard to certain of the conditions. For example, in regard to condition 3., ALJ Wenning focused only on the claimant's ownership of equipment and supplies; and, in regard to condition 5., failed to consider the administrative, quality control, marketing, and training expenses necessarily borne by Coverall. Finally, the commission is not bound by the decision of a lower tribunal. See, Zoromski, supra.

Dated and mailed May 27, 2010

BY THE COMMISSION:

/s/ James T. Flynn, Chairperson

/s/ Robert Glaser, Commissioner

/s/ Ann L. Crump, Commissioner

cc: Attorney Kelly R. Rourke

Smithal . umd : 115 : 1

[ Search UC Decisions ] - [ UC Digest - Main Index ] - [ UC Legal Resources ] - [ LIRC Home Page ]

Editor's note:  While the conclusion paragraphs references condition 5 being satisfied, the text of the decision reflects it was not met.

uploaded 2012/07/25