Uninsured Employers Fund v. Darlene Crowder ( 2016 )

IMPORTANT NOTICE
NOT TO BE PUBLISHED OPINION
THIS OPINION IS DESIGNATED "NOT TO BE PUBLISHED."
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PROMULGATED BY THE SUPREME COURT, CR 76.28(4)(C),
THIS OPINION IS NOT TO BE PUBLISHED AND SHALL NOT BE
CITED OR USED AS BINDING PRECEDENT IN ANY OTHER
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RENDERED AFTER JANUARY 1, 2003, MAY BE CITED FOR
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RENDERED: MAY 5, 2016
NOT TO BE PUBLISHED
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UNINSURED EMPLOYERS' FUND APPELLANT
ON APPEAL FROM COURT OF APPEALS
V. CASE NO. 2014-CA-1556-WC
WORKERS' COMPENSATION NO. 10-00493
DARLENE CROWDER;
PULASKI FRANCHISES, INC.;
QFA ROYALTIES, LLC.;
EUGENE DAVIS; JAMES DICK;
HONORABLE J. GREGORY ALLEN,
ADMINISTRATIVE LAW JUDGE; AND
WORKERS' COMPENSATION BOARD APPELLEES
MEMORANDUM OPINION OF THE COURT
AFFIRMING
Appellant, Uninsured Employers' Fund ("UEF"), appeals a Court of
Appeals decision which affirmed that Appellee, QFA Royalties, LLC, ("QFA") did
not have up-the-ladder liability for workers' compensation benefits paid to
Darlene Crowder, and that Appellees, Eugene Davis and James Dick, are also
not jointly and severally liable to pay for the benefits in question. For the
below stated reasons, we affirm the Court of Appeals.
On February 27, 2009, Davis and Dick purchased an existing Quiznos
sandwich shop in Somerset, Kentucky, from a third party. Davis purchased
45% of the business and was to participate in the day-to-day management of
the Quiznos. Dick purchased the remaining 55% but was not active in
management. Davis and Dick signed the transfer agreements and franchise
agreement with QFA in their individual capacity. The franchise agreement
required Davis and Dick to pay QFA a one time transfer fee of $12,500 and a
monthly 7% royalty fee based on sales. Several days after signing the
contracts, on March 2, 2009, Davis and Dick created Pulaski Franchises, Inc.
("Pulaski") for the purpose of owning and operating the Quiznos. Davis owned
45% of Pulaski and Dick 55%. However, the record indicates that neither the
franchise agreement nor the assets of the restaurant were transferred into
Pulaski's name. Nevertheless, all of the restaurant's cash flow was placed into
accounts held by Pulaski. The employees' wages, taxes, and royalty payments
to QFA were also paid from the Pulaski account.
Davis hired Tyler Hibbard to manage the Quiznos. Hibbard, in turn,
hired Crowder to serve as his assistant. Crowder's first day of work was April
3, 2010. On April 15, 2010, she severely injured her left eye while working at
the Quiznos. At the time Crowder suffered her work-related injury, the
workers' compensation insurance for Quiznos, that was held in Pulaski's name,
had lapsed. Crowder filed a Form 101 Application for Resolution of Injury
Claim. QFA, Pulaski, Davis, and Dick were all joined as parties. The UEF was
also joined as a party due to the lack of a workers' compensation insurance
policy.
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QFA's designated corporate representative, Lori Christensen, testified by
deposition. She stated that QFA is in the business of licensing franchises and
makes profit from the initial franchise fee and monthly
o royalties from its
franchisees. Christensen testified that QFA has never owned or operated any
Quiznos sandwich shops. However, another corporate entity which is part of
the "Quiznos family" did briefly operate corporate owned restaurants.
Christensen did testify that while QFA is not in the business of running the
day-to-day operations of Quiznos restaurants, it did have an interest in making
sure the individual franchises lived up to a certain standard to provide a
consistent experience for its customers.
UEF filed a copy of the franchise agreement entered into between QFA,
Davis, and Dick. The franchise agreement set out with great specificity the
parties' rights and obligations with respect to operating the franchise. The
franchise agreement stated that QFA must approve the location for the
Quiznos, the lease, the type of equipment used, and the signage. The
agreement also stated that the franchisees must comply with the operations
manual which provided even greater detail into how the Quiznos must be
managed. The operations manual gave rules on how many employees must be
on duty at all times, what the daily hours of the restaurant must be, and how
to make and wrap sandwiches, among other rules.
Davis testified that he was initially responsible for the day-to-day
operation of the Quiznos, but hired Hibbard to take over all management
duties. Davis stated that his primary employment was as a snack food
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salesman. Dick testified that he was just a passive investor in the business
and had no knowledge of the daily operations. However, there was no contract
or agreement limiting Dick's involvement in the enterprise. His primary
employment was as a funeral director. Both Davis and Dick testified that they
set up Pulaski to own the Quiznos, but neither came up with a reason as to
why the franchise was not transferred to the corporation However, Davis
stated that all of the Quiznos's receipts were placed into and payments were
made out of an account in Pulaski's name. Neither Davis nor Dick knew that
the workers' compensation coverage for Pulaski had lapsed.
ALJ Allison Jones entered an interlocutory opinion and order on
December 6, 2012, on the bifurcated issues of whether QFA had up-the-ladder
liability per KRS 342.610(2); whether Pulaski, Dick, or Davis was Crowder's
employer; and whether QFA can be held liable if it did not have a written
agreement with Crowder's employer. ALJ Jones found QFA was in the
business, of granting and overseeing franchise agreements, and that making
and selling sandwiches to customers is not a regular and recurrent part of its
business. She found that while QFA provides very detailed instructions to its
franchises, it is not involved in operating or managing the stores. ALJ Jones
found QFA's role in this matter was indistinguishable from the scenario in
Doctors' Associates, Inc. v. Uninsured Employers' Fund, 364 S.W.3d 88 (Ky.
2011). ALJ Jones reasoned that QFA did not have up-the ladder liability, and
dismissed it from the case. ALJ Jones then further found that Pulaski was
Crowder's employer based on bank records and the parties' testimony. She
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dismissed Davis and Dick from the claim. Thus, Pulaski would be responsible
to repay the UEF for any workers' compensation benefits paid to Crowder.
The UEF filed a petition for reconsideration asking for additional findings
of fact and conclusions of law on the question of whether Davis, Dick, and
Pulaski were involved in a joint venture and were therefore jointly and severally
liable. The elements essential to find that there was a joint enterprise/venture
are: "1) an agreement, express or implied, among the members of the group; 2)
a common purpose to be carried out by the group; 3) a community of pecuniary
interest in that purpose among the members; and 4) an equal right to a voice in
the direction of the enterprise, which gives an equal right of control." Huff v.
Rosenberg, 496 S.W.2d 352 (Ky. 1973).
Applying the facts of this matter, ALJ Jones determined that Davis, Dick,
and Pulaski were not involved in a joint enterprise/venture because the first,
third, and fourth element of the Huff test were not satisfied. ALJ Jones found
the first element was not satisfied because there was no agreement between
Dick, Davis, and Pulaski to jointly operate and run the Quiznos. The third
element was not satisfied because ALJ Jones found that there was no evidence
the three parties shared profits from the Quiznos. Instead, ALJ Jones believed
that all of the profits from the restaurant were treated as corporate profits and
retained by Pulaski to put back into the business. Finally, ALJ Jones found
that the fourth element was not satisfied because Dick testified that he was a
passive investor and exercised no control over the business. The ALJ further
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opined that the parties made a mutual mistake when Dick and Davis
purchased the franchise in their personal capacity and not in Pulaski's name.
ALJ Gregory Allen was assigned to the matter after ALJ Jones was
appointed to the Court of Appeals. He adopted ALJ Jones's findings regarding
the parties' liability to pay Crowder's workers' compensation benefits. ALA
Allen then ordered Pulaski to reimburse UEF per KRS 342.760(4) for any
benefits paid. He awarded Crowder temporary total disability benefits and
permanent partial disability benefits enhanced by the three multiplier per KRS
342.730(1)(c)1. The Workers' Compensation Board ("Board") and Court of
Appeals affirmed, and this appeal followed.
The Board's review in this matter was limited to determining whether the
evidence is sufficient to support the ALJ's findings, or if the evidence compels a
different result. W. Baptist Hosp. v. Kelly, 827 S.W.2d 685, 687 (Ky. 1992).
Further, the function of the Court of Appeals is to "correct the Board only
where the Court perceives the Board has overlooked or misconstrued
controlling statutes or precedent, or committed an error in assessing the
evidence so flagrant as to cause gross injustice." Id. at 687-88. Finally, review
by this Court "is to address new or novel questions of statutory construction,
or to reconsider precedent when such appears necessary, or to review a
question of constitutional magnitude." Id. The ALJ, as fact-finder, has the sole
discretion to judge the credibility of testimony and weight of evidence.
Paramount Foods, Inc. v. Burkhardt, 695 S.W.2d 418 (Ky. 1985).
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I. QFA DOES NOT HAVE UP-THE-LADDER LIABILITY TO
REIMBURSE THE UEF FOR CROWDER'S WORKERS'
COMPENSATION BENEFITS
UEF first argues that QFA should have up-the-ladder liability to pay for
Crowder's workers' compensation benefits. UEF contends that QFA was a
contractor and Davis, Dick, and Pulaski collectively served as a subcontractor,
as a matter of law. It argues that QFA was as much in the sandwich selling
business as Davis, Dick, and Pulaski, based on Christensen's testimony which
indicated that QFA had an interest in making individual franchises succeed,
and that the franchise agreement provided very specific instructions on how
franchises must run their business. Because the UEF was unsuccessful before
the ALJ and had the burden of proof regarding whether QFA has up-the-ladder
liability, the question on appeal is if, upon consideration of the whole record,
the evidence compels a finding in its favor. Wolf Creek Collieries v. Crum, 673
S.W.2d 735 (KY. App. 1984).
KRS 342.610(2) states, "A contractor who subcontracts all or any part of
a contract and his or her carrier shall be liable for the payment of
compensation to the employees of the subcontractor unless the subcontractor
primarily liable for the payment of such compensation has secured the
payment of compensation as provided for in his chapter." Any person who
contracts with another, "To have work performed of a kind which is a regular or
recurrent part of the work of the trade, business, occupation, or profession of
such person shall for the purposes of [the statute] be deemed a contractor, and
such other person a subcontractor." KRS 342.610(2)(b).
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Work of a kind that is a 'regular or recurrent part of the work of
the trade, business, occupation, or profession' of an owner does
not mean work that is beneficial or incidental to the owner's
business or that it is necessary to enable the owner to continue in
business, improve or expand its business, or remain or become
more competitive in the market. It is work that is customary,
usual, or normal to the particular business (including work
assumed by contract or required by law) or work that the business
repeats with some degree of regularity, and it is of a kind that the
business or similar business would normally perform or be
expected to perform with employees.
General Electric Co. v. Cain, 236 S.W.3d 579, 588 (Ky. 2007). Nothing within
KRS 342.610(2) precludes a franchisor, such as QFA, from being considered
the statutory employer of its uninsured franchisee's employee. Doctors'
Associates, Inc., 364 S.W.3d at 92. Whether an individual or business has up-
the-ladder liability is decided on a case by case basis. Id. at 89
In this matter, the ALJ's determination that QFA does not have up-the-
ladder liability is supported by substantial evidence. The ALJ found that QFA
is in the business of granting and overseeing franchisee agreements and that,
unlike the Quiznos in Somerset, making and selling sandwiches to customers
is not a regular and recurrent part of its business. This finding is supported by
the fact that QFA did not actually operate any Quiznos restaurant. While the
franchise agreement and operating manual do provide detailed instructions on
how to manage the restaurants on a day-to-day basis, these guidelines were
instituted to protect the brand which QFA sold. Keeping the brand strong is a
critical part of QFA's purpose because it derives its revenue from franchise fees
and royalties. Additionally, while the success of individual franchises does
benefit QFA, its primary focus is making Quiznos franchises attractive to
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investors. Thus, since QFA is not in the business of making and selling
sandwiches to customers and the Quiznos in Somerset was engaged in that
work, QFA cannot be considered the contractor, and does not have up-the-
ladder liability in this matter.
II. CROWER'S EMPLOYER IS PULASKI, THEREFORE DAVIS
AND DICK ARE NOT JOINTLY AND SEVERALLY LIABLE TO
PAY FOR HER WORKERS' COMPENSATION BENEFITS
UEF also argues that Davis and Dick are jointly and severally liable for
Crowder's workers' compensation benefits because they were engaged in a joint
venture with Pulaski to operate the Quiznos. UEF argues that Davis, Dick, and
Pulaski had a common purpose to make money selling Quiznos sandwiches,
and thus per the Huff test, they were engaged in a joint venture. However the
UEF's focus on whether Davis, Dick, and Pulaski were involved in a joint
venture is misplaced. Clearly, Davis and Dick were involved in a joint venture
to make money from operating a Quiznos franchise and created Pulaski in an
attempt to shield themselves from the liability of running such a business. See
KRS 271B.6-220. The real question here is whether Pulaski is Crowder's
employer despite the fact that Davis and Dick never transferred the assets and
franchise agreement from the Quiznos to the corporation. If Pulaski is
Crowder's employer, then Davis and Dick are shielded from being jointly and
severally liable for the workers' compensation benefits.
KRS 342.640(1) defines employees as, "Every person including a minor,
whether lawfully or unlawfully employed, in the service of an employer under
any contract of hire or apprenticeship, express or implied, and all helpers and
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assistants of employees, whether paid by the employer or employee, if
employed with the knowledge, actual or constructive, of the employer."
Crowder was clearly under a contract of hire because she was asked by
Hibbard to work for Quiznos. There is no evidence that Davis or Dick had any
say in hiring Crowder and both testified that Pulaski was incorporated to
operate the Quiznos. Crowder and Hibbard were paid from Pulaski's bank •
account and would have received worker's compensation benefits from an
insurance policy held in Pulaski's name if it had not lapsed. Therefore, the
ALJ's conclusion that Crowder was employed by Pulaski is supported by the
record and shall not be disturbed on appeal. The fact that Davis and Dick
never transferred the franchise agreement and restaurant assets into Pulaski's
name does not change the fact that Pulaski was operating the restaurant on
Davis and Dick's behalf. Pulaski is solely responsible to pay the UEF for
Crowder's workers' compensation.
For the above stated reasons, we affirm the decision of the Court of
Appeals.
All sitting. All concur.
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COUNSEL FOR APPELLANT,
UNINSURED EMPLOYERS' FUND:
James Robert Carpenter
COUNSEL FOR APPELLEE,
DARLENE CROWDER:
McKinnley Morgan
COUNSEL FOR APPELLEE,
PULASKI FRANCHISES, INC.;
EUGENE DAVIS; JAMES DICK:
John G. Prather, Jr.
Arden Winter Robertson Huff
COUNSEL FOR APPELLEE,
QFA ROYALTIES, LLC:
Donald Cameron Walton, III
John Patterson
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