Editor’s note: This piece from the SCOV Law Blog is by Eric Fanning. 

In re Bourbeau Custom Homes, Inc., 2017 VT 51

[I]n Vermont, unemployment benefits are funded through a system of payroll taxes. Our state’s unemployment compensation law requires employers to pay taxes on wages paid to their employees. Following an audit conducted by the Department of Labor, Bourbeau Custom Homes Inc. was assessed just over $7,000 for unpaid unemployment taxes on wages paid to nine people, five of whom are at issue here. Bourbeau says that these people aren’t “employees” within the definition of the law, and so the company should not have been liable for said taxes.

In many situations, this isn’t a hard issue to resolve. If you’re a Regular Joe with a 9-to-5 job, of course you’re considered an employee of Company X. Company X has to pay taxes on Regular Joe’s wages — which go to the Unemployment Compensation Fund. But alas, it is rarely the “easy” cases that reach SCOV (or that end up as published opinions).

Bourbeau Custom Homes is a Swanton-based company that is in the business of building “dream homes” for its customers. Sounds pretty sweet to me. Anyway, here’s what we know about the company: They have a foreman on staff to visit job sites and monitor progress on its projects. Mr. Bourbeau, the company’s owner, establishes the project schedules (they aim to finish homes in 12 to 16 weeks). The workers involved in this appeal are independent contractors, according to the agreements they signed with Bourbeau. They set their own hours at the job sites and provide their own hand tools.

As I already mentioned, the Department of Labor hit Bourbeau with a $7,032.96 assessment on the basis that those workers should have been classified as “employees” and thus the company should have paid unemployment taxes on their wages. This grand total includes penalties and interest — but you get the idea.

This case concerns Chris Parent, Shawn Phillips, John Simon, Timothy Putzier and John Parah. Parent and Phillips did carpentry and siding work, Simon did painting work, and Putzier installed cement siding. Parah did carpentry, flooring, and finish work — but he contracted with Bourbeau as a single-member LLC, called (not surprisingly) John Parah Construction LLC.

The Department’s administrative law judge upheld the auditor’s determination and Bourbeau appealed to the Employment Security Board. The Board affirmed the administrative law judge’s decision, and now SCOV gets to take a crack at this one.

SCOV reviews appeals from the Employment Security Board with great deference — so this is one of those lovely cases where the appellant will usually lose unless there is absolutely no basis for the Board’s findings and conclusions of law.

The statutory test applied by the ALJ is called the “ABC” test (sorry if this case feels like alphabet soup). Basically, if an employer can satisfy all three of the A-B-C prongs of the test with respect to any individual worker, then the employer is exempt from unemployment taxes on those folks. The ABC test requires the employer to show that: (A) the individual is free from the employer’s control or direction; (B) the individual’s service is either outside the employer’s usual course of business or performed outside the employer’s place of business; and (C) the individual is independently established.

The administrative law judge’s conclusion was that Bourbeau failed to meet parts A and B for all five of the workers, and failed to meet Part C for all except Parah. So, on appeal, SCOV considers whether the administrative law judge’s conclusions are supported by the evidence and have a solid legal basis. SCOV affirms with respect to all but Parah.

So let’s start there. What about, Mr. Parah — or, more appropriately, John Parah Construction LLC? Obviously Parah is an outlier in this case because he is the only alleged employee who is also an established single-member LLC. Bourbeau, of course, argues that his company contracted with John Parah LLC, not John Parah the individual, and therefore is not liable for unemployment taxes on Parah’s pay. SCOV’s review of the Board’s decision requires it in this instance to determine if Parah is actually an “individual” who is subject to the ABC test.

Why does SCOV need to consider whether or not Parah is an “individual?” Quite simply, because it’s the law. In relevant part, the statute says that “individuals” who perform services for wages are presumed to be employees. In other words, if you’re not an “individual” – at least within the definition of this particular statutory framework, then you cannot be considered an “employee.” Since only wages paid to “employees” are subject to unemployment taxes, this is a critical question.

The problem is that the unemployment compensation statute does not define “individual,” so SCOV must flex its statutory interpretation muscles. SCOV examines the statutory framework and holds that the word “individual” does not apply to LLCs, and therefore employers are not liable for unemployment taxes on monies paid to an LLC.

SCOV’s review of the unemployment compensation statute as a whole reveals a difference in treatment between an “individual” and a business entity (e.g., an LLC). As SCOV notes, for example, Section 1301(4) defines “employing unit” to include “any individual or type of organization” (SCOV added emphasis, and so do I). On the other hand, the word “person” is used throughout the law distinctly from “individual” to include business entities and organizations, but “individual” only refers to human beings throughout the statute. SCOV provides another example from the text: “American employer” is defined to include a “person who is” either “an individual who is a resident of the United States,” a partnership, trust, or corporation. It’s apparent from this, and other examples in the law’s framework, that an “individual” is one type of person, however, business entities like corporations, are another type of “person,” that is, not an individual.

SCOV also finds support in the law’s use of gendered pronouns when referring to “individuals.” This appears to be pretty persuasive. After all, when’s the last time you heard a conversation like this:

“Volkswagen really lost my trust with the whole emissions scandal.”

“Yes, I don’t think I’ll ever buy one of his cars again.”

People don’t talk like that, and neither do the people who make up the Legislature. SCOV reasons that the Legislature knew what it was doing when designating the use of these terms, and therefore the law must be construed to carry out the Legislature’s intent. SCOV cites more examples from similar laws, and also some case law, but I think you get the idea. So, while the administrative law judge decided that Parah satisfied prong C because he operated through a registered LLC, SCOV finds that this fact was enough to exempt Parah from the ABC analysis completely.

The Department’s counterargument is that single-member LLCs should be treated as individuals unless they employ other people. SCOV finds no support for this notion in the law, and concludes that both single and multi-member LLCs are entities that are distinct from their members. Therefore, SCOV holds that it was wrong for the Department of Labor to conclude that Bourbeau contracted with Parah, the man, not Parah, the company.

After deciding that Parah (i.e. John Parah Construction LLC) is not an “individual” and thus is not even subject to the ABC test, SCOV moves on to determine if the Board’s application of the ABC test with respect to the other four workers meets muster. SCOV says “yes.”

Remember that SCOV’s standard of review here is not strict. The Board’s findings are upheld unless they’re clearly erroneous. While SCOV admits that the Department of Labor’s position in this case is driven largely by generalizations about the construction business, SCOV finds no clear error in the Board’s findings. The findings are supported by “credible evidence,” and that’s good enough for SCOV.

The Labor Department’s position basically boils down to this: A builder is in the business of building and selling homes. Builders hire construction workers to build the homes. The workers involved in the construction process further the builder’s commercial enterprise: to build houses.

Obviously I’m indulging in some oversimplification, but with respect to the ABC test, SCOV doesn’t have to venture too far off this path to reach its conclusion. Remember the B prong of the ABC test? If not, here it is again: “the service is either outside the usual course of the employer’s business or is performed outside the geographic area where the employer operates.”

SCOV holds that Bourbeau can’t satisfy this prong with respect to any of the four workers. Why not? Because Bourbeau’s business is to build and sell homes, and these four workers each performed services that were a “key component” of building homes. They did carpentry, cement siding, painting, flooring, finish work. If these weren’t key components in the building of your home, then you may have a bit of a problem — and I’m guessing you’re probably not a popular host of social gatherings amongst your friends and family.

Anyway, SCOV finds enough evidence in the record that Bourbeau’s workers performed services well within the company’s usual course of business, and therefore they fail the second prong of the ABC test. SCOV doesn’t need to go any further since you need to satisfy ALL three prongs to pass the ABC test. So SCOV affirms the Board with respect to everyone except Parah.