K. Malzi v. UCBR ( 2017 )

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Keith Malzi, :
Petitioner :
: No. 712 C.D. 2016
v. :
: Submitted: October 21, 2016
Unemployment Compensation :
Board of Review, :
Respondent :
BEFORE: HONORABLE RENÉE COHN JUBELIRER, Judge
HONORABLE PATRICIA A. McCULLOUGH, Judge
HONORABLE JAMES GARDNER COLINS, Senior Judge
OPINION NOT REPORTED
MEMORANDUM OPINION
BY JUDGE McCULLOUGH FILED: April 12, 2017
Keith Malzi (Claimant) petitions, pro se, for review of the March 21,
2016 order of the Unemployment Compensation Board of Review (Board) affirming
a referee’s decision holding that Claimant was ineligible for benefits under section
402(h) of the Unemployment Compensation Law (Law)1 and subject to a fault
overpayment and penalty under sections 804(a) and 801(c) of the Law.2
1
Act of December 5, 1936, Second Ex. Sess., P.L. (1937) 2897, as amended, 43 P.S.
§802(h). Section 402(h) of the Law generally provides that an employee shall be ineligible for
benefits for any week in which he is engaged in self-employment. This section includes an
exception, known as the “sideline activity” exception, which permits a claimant to engage in self-
employment, and remain eligible for unemployment compensation benefits if certain conditions are
met. LaChance v. Unemployment Compensation Board of Review, 987 A.2d 167, 171 (Pa. Cmwlth.
2009).
2
43 P.S. §§874(a), 871(c), respectively.
Claimant worked full-time for Temple University (Employer). Around
mid-February 2015, Claimant became aware that his job with Employer would be
ending. On March 16, 2015, Claimant registered a business under the name Home
Insite, LLC, a home care agency, with the Department of State and received a tax
identification number. Claimant owned 100% of the business. Claimant opened a
business bank account in April 2015. Claimant later registered Home Insite, LLC,
with the Department of Health and was approved on May 17, 2015. Claimant hired
his first employee for Home Insite, LLC, on June 23, 2015, and obtained its first
client at the end of July 2015. (Board’s Findings of Fact Nos. 1-2, 6-11.)
In the meantime, Claimant’s job with Employer officially ended on June
30, 2015, due to a lack of work. Claimant filed for unemployment compensation
benefits and was found eligible for a weekly amount of $573.00. The Department of
Labor and Industry’s Internal Audit Division (Audit Division) subsequently received
information from its fraud website regarding Claimant’s Home Insite, LLC business
and the fact that he was collecting benefits while self-employed. The Audit Division
initiated an investigation which revealed the facts above. (Board’s Findings of Fact
Nos. 3-5.)
The Department of Labor and Industry (Department) thereafter issued
three notices of determination to Claimant. The first notice of determination
concluded that Claimant was ineligible for benefits under section 402(h) of the Law
as a result of his self-employment and the failure of such self-employment to qualify
as a sideline business. The second notice of determination imposed a fault
overpayment of $14,275.00 pursuant to section 804(a) of the Law. The third and
final notice of determination imposed a 15% penalty of $2,141.25 pursuant to section
2
801(c) of the Law for knowingly failing to disclose information in order to obtain
unemployment compensation benefits. See Record at Item No. 4.
Claimant appealed and a referee held a hearing on February 2, 2016. At
this hearing, Bonnie Haas, an Audit and Investigations Specialist, testified on behalf
of the Department. Ms. Haas stated that the Department received information on its
fraud website that Claimant was receiving unemployment compensation benefits and
also running a personal business, Home Insite, LLC. She was assigned to the case
and began an investigation. Ms. Haas discovered that Claimant’s business had been
registered with the Department of State on March 16, 2015, and also with the
Department of Health on an unknown date, with Claimant being listed as the sole
owner. Upon search of a federal employer identification number connected to Home
Insite, LLC, Ms. Haas learned that an unemployment account had been established
for the business and wages were reported for the third quarter of 2015. She also was
able to find an internet site for the business. (Notes of Testimony (N.T.) at 7-8.)
Ms. Haas met with Claimant on December 29, 2015, at which time he
described laying the foundation for his business after learning that his job with
Employer would be ending. Claimant provided Ms. Haas with bank records, which
revealed that a business bank account was set up in April of 2015 and a significant
amount of activity as of July 1, 2015, when he was still receiving unemployment
compensation benefits. Ms. Haas stated that Claimant advised of hiring his first
employee in July 2015 and that he had twenty-two employees at the time of the
meeting. Ms. Haas noted that all business calls are received at Claimant’s residence,
that he answers the phones, and that he is available twenty-four hours a day, seven
days a week. Ms. Haas described Claimant’s participation in the business as
3
increasing significantly after he became unemployed and had received the necessary
approvals from the Department of Health to operate. (N.T. at 9-10.)
Claimant testified as to his separation from employment with Employer,
noting that while he actually stopped working on June 7, 2015, Employer paid
monthly and he received a payment for the full month of June. Claimant explained
that his contract with Employer ended as of June 30, 2015. Claimant acknowledged
that he received approval from the Department of Health for Home Insite, LLC, on
May 17, 2015, and hired his first employee on June 23, 2015, while he was still under
contract with Employer. Claimant noted that his business obtained its first client at
the end of July 2015. By August of 2015, Claimant stated that his business had four
clients and nineteen employees. (N.T. at 10-14.)
Claimant admitted that when he filed his claim for unemployment
compensation benefits he answered no in response to a question asking if he was
engaged in self-employment. Claimant explained that he answered no because he
assumed that self-employment meant that he was receiving actual income and he was
not receiving income from his business at that point in time. Claimant also admitted
that for each bi-weekly claim he submitted, he answered no when asked if he had
worked during the week, explaining that he believed himself to be available for full-
time work and went on many job interviews but was not offered a job. Further,
Claimant acknowledged receiving the Unemployment Compensation (UC) Handbook
and reviewing the discussion of sideline businesses but he did not believe that he had
increased participation in his own business at the time. Claimant described his
business as a fallback in case he could not find another job. Claimant reiterated that
he continued looking for work throughout the process of setting up his personal
business. (N.T. at 14-16.)
4
Regarding his business, Claimant testified that he hired an employee to
handle scheduling and other administrative duties, but that person was let go in
November 2015 and likely reported him to the Department’s fraud website. He
described his business as providing in-home, non-medical care to clients. He noted
that the company’s website as well as business cards and brochures were prepared
prior to cessation of his work with Employer. Upon questioning from Ms. Haas,
Claimant stated that he set up his business through an online legal website and that he
uses a computer program to do the payroll. He noted that he began drafting a
business plan and necessary client forms in February 2015. He acknowledged that
the business received its first client payment of $720.00 on July 27, 2015, and he did
not report the same to the Department. (N.T. at 17-26.)
By decision dated February 4, 2016, the referee affirmed each of the
three notices of determination issued by the Department. Claimant appealed to the
Board. By decision dated March 21, 2016, the Board affirmed the decision of the
referee. The Board concluded that Claimant was ineligible for benefits under section
402(h) of the Law. The Board noted that Claimant received benefits for the period
from June 20, 2015, through December 5, 2015, all of which were received
subsequent to Claimant taking positive steps of establishing an independent business
enterprise. Additionally, the Board concluded that Claimant was not entitled to the
sideline activity exception because the record establishes that Claimant’s activities in
his business increased after his termination. Further, the Board concluded that
Claimant’s error or omission in failing to report his work with Home Insite, LLC,
warranted the imposition of a fault overpayment and his failure to disclose a material
fact for the purpose of increasing his compensation warranted the imposition of a
15% penalty.
5
On appeal to this Court,3 Claimant argues that the Board erred in
concluding that he was self-employed under section 402(h) of the Law and not
subject to the “sideline activity” exception. More specifically, Claimant argues that
the record lacks evidence that his participation in his sideline business increased after
separation from his employment with Employer.4 We disagree.
Section 402(h) of the Law provides that an employee shall be ineligible
for compensation benefits in any week:
In which he is engaged in self-employment: Provided,
however, That an employe who is able and available for
full-time work shall be deemed not engaged in self-
employment by reason of continued participation without
substantial change during a period of unemployment in any
activity including farming operations undertaken while
customarily employed by an employer in full-time work
whether or not such work is in “employment” as defined in
this act and continued subsequent to separation from such
work when such activity is not engaged in as a primary
source of livelihood. Net earnings received by the employe
with respect to such activity shall be deemed remuneration
paid or payable with respect to such period as shall be
determined by rules and regulations of the department.
43 P.S. §802(h).
3
Our scope of review is limited to determining whether constitutional rights have been
violated, whether errors of law were committed, or whether findings of fact are supported by
substantial evidence. Procyson v. Unemployment Compensation Board of Review, 4 A.3d 1124,
1127 n.4 (Pa. Cmwlth. 2010).
4
In his brief, Claimant appears to question whether the Board considered the timeframe
during which he initiated his sideline business and his level of activity both before and after his
layoff. However, a review of the Board’s opinion and the testimony relied on by the Board, which
is described above and summarized again below, makes it clear that the Board was astutely aware of
this timeframe and Claimant’s actions during the same.
6
The Law does not expressly define the term “self-employment,” but, in
determining whether a claimant is engaged in self-employment, our courts have
looked at whether the claimant engaged in positive acts to establish an independent
business venture. Leary v. Unemployment Compensation Board of Review, 322 A.2d
749, 750 (Pa. Cmwlth. 1974). In addition, claimants who engaged in business and
the solicitation of clients have been viewed as self-employed, regardless of whether
the claimants received any income from those efforts. LaChance, 987 A.2d at 170
(citing Keslar v. Unemployment Compensation Board of Review, 195 A.2d 886, 886
(Pa. Super. 1963)). “Normally the employer has the burden of proving that a
claimant is self-employed, but where the bureau acts on its own in suspending
benefits because of self-employment, the bureau carries the burden.” Teets v.
Unemployment Compensation Board of Review, 615 A.2d 987, 989 (Pa. Cmwlth.
1992).
Nevertheless, as noted above, the “sideline activity” exception contained
within section 402(h) permits a claimant to engage in self-employment, and remain
eligible for unemployment compensation benefits, if the following conditions are
met: (1) the self-employment activity precedes valid separation from full-time work;
(2) the self-employment activity continues without substantial change after
separation; (3) the claimant remains available for full-time work after separation; and
(4) the self-employment activity is not the primary source of the claimant's
livelihood. LaChance, 987 A.2d at 171. “A claimant who wishes to fall within the
exception bears the burden of showing that all of these requirements are met.” Id.(emphasis in original).
The focus in this case lies exclusively with the second prong of the
“sideline activity” exception. Claimant relies on this Court’s prior decisions in Risse
7
v. Unemployment Compensation Board of Review, 35 A.3d 79 (Pa. Cmwlth. 2015),
Kress v. Unemployment Compensation Board of Review, 23 A.3d 632 (Pa. Cmwlth.
2011), appeal denied, 47 A.3d 849 (Pa. 2012), and Dausch v. Unemployment
Compensation Board of Review, 725 A.2d 230 (Pa. Cmwlth. 1999), in support of his
argument that his self-employment activity did not increase following his separation
from employment. However, Claimant’s reliance is misplaced as these cases are
factually distinguishable from the present case.
In Risse, the claimant maintained a sideline business for more than 25
years and throughout the course of his employment with his employer. The claimant
received no income from his sideline business in 2007 and 2008 because he was
traveling too much for his employer. After his termination in October 2009, the
claimant applied for and received unemployment compensation benefits. These
benefits were suspended in October 2010 based upon the claimant’s contract to
provide consulting services for a political campaign. This consulting work ended one
month later and the claimant sought resumption of his benefits. However, a local
service center denied his request, concluding that he was self-employed and ineligible
for the same. The claimant appealed and a referee held a hearing. At the hearing, the
claimant testified that, following his termination, he began working approximately
ten hours per week in his sideline business, earning $3,720.00 in 2009 and $8,000.00
in 2010. During this time period, he also testified that he did not seek to expand the
business, go out and seek new clients, do any marketing, hire any employees, or get
an office, and he only worked when he received a call from someone.
The referee found that Claimant was ineligible for benefits under section
402(h) because his self-employment had substantially changed as his income from his
sideline business had more than doubled from 2009 to 2010. The claimant appealed
8
to the Board, but the Board affirmed the referee’s decision. On further appeal, this
Court reversed, holding that even though the claimant had “substantial increases in
percentage terms, in the amount of money earned, and the periodic nature of that
employment, those increases are not substantial to establish that he was transitioning
that sideline activity to full-time employment.” Id. at 82. Further, we relied on the
facts that the claimant did not seek to expand his sideline business, did not go out and
seek new clients, did no marketing, and only worked when he received a call from
someone, in concluding that his sideline business had not substantially changed.
In Kress, the claimant was a lawyer who maintained a sideline business
representing indigent defendants under the Criminal Justice Act (CJA), 18 U.S.C.
§3006A, even while he was employed by a law firm. The checks he received were
made out to the claimant, not the law firm, and payment to the law firm for the
claimant’s CJA work was nothing more than a mutual agreement between the
claimant and the law firm. After the claimant was laid off by the law firm, the
claimant retained the CJA clients. He applied for unemployment compensation
benefits and the Department determined that he was not disqualified from benefits
under section 402(h) of the Law because his business qualified as a sideline business.
The employer appealed and a referee held a hearing. The claimant testified that he
had been able and available for full-time work and had not engaged in any other type
of employment since his layoff from the employer. He also stated that there had not
been any increase in the volume of his sideline employment; he did not take any other
clients from the employer other than the CJA clients; he did not engage in any
advertising; he did not rent space; and he did not solicit clients.
Nevertheless, the referee concluded that the claimant was self-employed
and ineligible for benefits under section 402(h). The claimant appealed to the Board,
9
but the Board affirmed the referee’s decision, concluding that the claimant was
engaged in the independent practice of law. The Board found that the claimant’s self-
employment activity ceased once he became an employee of the law firm and he was
acting as an employee when he performed his services related to the CJA clients. The
Board noted that even if it concluded that the claimant’s self-employment continued
during his full-time employment with the law firm, the sideline activity did undergo
substantial changes, such as the CJA payments previously directed to the employer
were paid to the claimant; the claimant purchased his own malpractice insurance,
created business cards and letterhead, and rented a post office box.
On further appeal, this Court reversed, reasoning that the claimant began
representing the CJA clients before he was hired by the law firm, continued to do so
during his employment, the checks continued to be made out to the claimant, and he
retained those clients following his layoff. In other words, we noted that the
claimant’s activities with respect to the CJA clients remained the same before, during
and after his employment with the law firm. More importantly, with regard to the
second prong of the “sideline activity” exception and claimant’s activities following
his layoff, we described the claimant’s actions following his layoff as mere
preparations to expand his sideline business and stressed that the focus of this prong
is the number of hours worked. We noted that the only testimony in that regard was
from the claimant who stated that his CJA workload remained roughly the same after
his layoff. Thus, we held that the claimant satisfied this prong. Finally, we
concluded that the claimant met the third and fourth prongs because he remained
available for full-time employment, was looking for a job at a new law firm, and the
sideline job was not a primary source of his income.
10
In Dausch, the claimant was a licensed attorney and a certified public
accountant who maintained a sideline legal and accounting practice throughout the
course of his employment with the employer. Following a layoff, the claimant
continued his sideline business and began receiving unemployment compensation
benefits, which were to terminate on November 4, 1995. In October 1995, since his
search for a job had to that point proved unsuccessful, the claimant leased office
space in the hope of expanding his sideline business into a business that could support
his family. During that month, the claimant painted the walls and shelving of the
leased office space, refinished furniture and moved it into the office, and installed a
phone system. The claimant also arranged for advertisements of his business to
appear in November issues of newspapers and magazines and began occupying the
office space on November 10, 1995.
Following a tip received by its fraud hotline, the Department
commenced an investigation of the claimant's activities and ultimately issued
determinations disapproving benefits and imposing a fault overpayment and
penalties. The claimant appealed and the referee held a hearing. The referee issued a
decision affirming the Department’s determinations, concluding that the claimant had
failed to meet the second prong of “sideline activity” exception and had become self-
employed within the meaning of Section 402(h) in October 1995 when he took
possession of his office. The claimant appealed to the Board, but the Board affirmed.
On further appeal, this Court reversed, concluding that mere preparations
undertaken to expand a sideline business during the final month of receipt of
unemployment compensation benefits did not constitute a substantial change in the
sideline business. We noted that the record lacked any evidence that the claimant
actually performed any legal or accounting services during October or early
11
November 1995; that he even worked from the office space prior to the termination of
his benefits; or that he increased solicitation of business or advertisement of the
business prior to termination. Rather, we noted that the claimant placed
advertisements that would not run until after his benefits had terminated. We
reasoned that “[t]o require individuals in claimant’s position to wait until their
benefits have terminated to begin preparing to support themselves and their families
is unrealistic and counterproductive.” Dausch, 725 A.2d at 232.
Unlike the claimants in Risse, Kress, and Dausch, Claimant here had
completed his preparations relating to his sideline business prior to his layoff from
Employer in the event that he could not find another job and this business could
become his primary source of income. While Claimant points to his testimony that
his activities in his sideline business did not increase following his layoff, the Board
did not credit Claimant’s testimony.5 Instead, the Board credited the testimony of
Ms. Haas which reflected a significant increase in Claimant’s sideline business
following his layoff on June 7, 2015. Indeed, Ms. Haas testified that her investigation
revealed that Home Insite, LLC, hired its first employee on June 23, 2015, obtained
its first client at the end of July 2015, reported wages for the third quarter of 2015,
solicited business through a website, and had twenty-two employees as of the date of
their meeting on December 29, 2015. Additionally, Ms. Haas testified that
Claimant’s bank records reflected a significant amount of activity as of July 1, 2015,
when he was still receiving unemployment compensation benefits. Further, Ms. Haas
testified that all business calls are received at Claimant’s residence, that Claimant
5
In unemployment compensation proceedings, the Board is the ultimate factfinder,
empowered to make determinations as to witness credibility and conflicting evidence. Peak v.
Unemployment Compensation Board of Review, 501 A.2d 1383, 1385 (Pa. 1985).
12
answers the phones, and that he is available twenty-four hours a day, seven days a
week. In other words, Claimant’s sideline business became fully operational
following his layoff.
This credible testimony from Ms. Haas, coupled with Claimant’s own
admissions to the revelations she discovered, renders the present matter factually
distinguishable from Risse, Kress, and Dausch, and establishes a substantial change
in Claimant’s sideline business following his layoff. Further, this testimony supports
the Board conclusions that Claimant was self-employed under section 402(h) of the
Law and not subject to the “sideline activity” exception.
Claimant next argues that the Board erred in assessing a fault
overpayment and penalty because the Law is ambiguous with respect to self-
employment and the “sideline activity” exception. Again, we disagree.
Section 804(a) of the Law addresses fault overpayments, providing, in
pertinent part, as follows:
Any person who by reason of his fault has received any
sum as compensation under this act to which he was not
entitled, shall be liable to repay to the Unemployment
Compensation Fund to the credit of the Compensation
Account a sum equal to the amount so received by him and
interest at the rate determined by the Secretary of Revenue.
...
43 P.S. §874(a). This Court recently reiterated that the term “fault” in this section
“connotes an act to which blame, censure, impropriety, shortcoming or culpability
attaches.” Castello v. Unemployment Compensation Board of Review, 86 A.3d 294,
298 (Pa. Cmwlth. 2013) (citing Amspacher v. Unemployment Compensation Board of
Review, 479 A.2d 688, 691 (Pa. Cmwlth. 1984)). To find fault, the Board must make
findings regarding a claimant’s state of mind. Fugh v. Unemployment Compensation
13
Board of Review, ___ A.3d ___ (Pa. Cmwlth., No. 129 C.D. 2016, filed January 18,
2017) (Slip op. at 7.)
Section 801(c) of the Law addresses penalties, providing, in pertinent
part, as follows:
Whoever makes a false statement knowing it to be false, or
knowingly fails to disclose a material fact to obtain or
increase compensation or other payment under this act . . .
and as a result receives compensation to which he is not
entitled shall be liable to pay to the Unemployment
Compensation Fund a sum equal to fifteen per centum
(15%) of the amount of the compensation.
43 P.S. §871(c).
Contrary to Claimant’s argument, section 402(h) of the Law expressly
provides that an employee shall be ineligible for compensation benefits in any week
in which he is engaged in self-employment. Section 402(h) further provides for an
exception to this prohibition when certain conditions are met, the so called “sideline
activity” exception. Moreover, we note that the UC Handbook, which Claimant
acknowledged receiving, includes a section entitled “Self Employment” and explains
that:
If you find work as an independent contractor (meaning that
you are self employed), or take steps to start your own
business, you are not eligible for benefits even if your busi-
ness is not profitable. However, there is an exception for a
“sideline” activity. Participating in a sideline business that
began while you were working full time for your employer
is not disqualifying if:
•you are able and available for full-time work,
•you do not substantially increase your
participation in the business, and
•the business is not the primary source of your
livelihood.
14
(UC Handbook at 12.) That section ends with the following caution,
“IMPORTANT: Notify the UC service center immediately if you are engaged in
any type of self employment.” Id. (emphasis in original). Thus, we disagree with
Claimant’s characterization of the Law as ambiguous with respect to self-
employment and the “sideline activity” exception.
Moreover, the Board in this case specifically found that Claimant
informed the Department that he was not self-employed at the time he filed for
benefits and did not report his personal business, Home Insite, LLC, at that time.
Indeed, the Department did not discover Claimant’s self-employment activities until
it received a tip through its fraud website. Yet, the record reveals that Claimant
began his business in March 2015 and actively pursued becoming operational in the
succeeding months. Claimant’s business ultimately reached operational stage around
the same time he initially applied for benefits, yet he never reported the same to the
Department and, in fact, continually denied being self-employed when filing his bi-
weekly claims. Based on these facts, the Board concluded that Claimant’s error or
omission in failing to report his work with Home Insite, LLC, warrants the
imposition of a fault overpayment, and his knowing failure to disclose a material fact
for the purpose of increasing his compensation warranted imposition of a 15%
penalty. We see no error on the part of the Board in reaching these conclusions.
Accordingly, the order of the Board is affirmed.
________________________________
PATRICIA A. McCULLOUGH, Judge
15
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Keith Malzi, :
Petitioner :
: No. 712 C.D. 2016
v. :
:
Unemployment Compensation :
Board of Review, :
Respondent :
ORDER
AND NOW, this 12th day of April, 2017, the order of the
Unemployment Compensation Board of Review, dated March 21, 2016, is hereby
affirmed.
________________________________
PATRICIA A. McCULLOUGH, Judge