State ex rel. Aaron's, Inc. v. Ohio Bur. of Workers' Comp. (Slip Opinion)

[Until this opinion appears in the Ohio Official Reports advance sheets, it may be cited as State
ex rel. Aaron’s, Inc. v. Ohio Bur. Of Workers’ Comp., Slip Opinion No. 2016-Ohio-5011.]
NOTICE
This slip opinion is subject to formal revision before it is published in an
advance sheet of the Ohio Official Reports. Readers are requested to
promptly notify the Reporter of Decisions, Supreme Court of Ohio, 65
South Front Street, Columbus, Ohio 43215, of any typographical or other
formal errors in the opinion, in order that corrections may be made before
the opinion is published.
SLIP OPINION NO. 2016-OHIO-5011THE STATE OF OHIO EX REL. AARON’S, INC., APPELLANT, v. OHIO BUREAU OF
WORKERS’ COMPENSATION, APPELLEE.
[Until this opinion appears in the Ohio Official Reports advance sheets, it
may be cited as State ex rel. Aaron’s, Inc. v. Ohio Bur. Of Workers’ Comp.,
Slip Opinion No. 2016-Ohio-5011.]
Workers’ compensation—Ohio Adm.Code 4123-17-17(C)—Bureau of Workers’
Compensation did not abuse discretion when it applied audit adjustment to
the 24 months prior to the current payroll where substantial
misclassifications occurred over a significant period of time and resulted in
considerable underpayment of premiums to state fund.
(No. 2014-1641—Submitted January 5, 2016—Decided July 20, 2016.)
APPEAL from the Court of Appeals for Franklin County, No. 13AP-170,
2014-Ohio-3425.
_______________________
SUPREME COURT OF OHIO
Per Curiam.
{¶ 1} This action by appellant, Aaron’s, Inc., f.k.a. Aaron Rents, Inc.
(“Aaron’s”), arose as a result of a limited writ of mandamus granted in State ex rel.
Aaron Rents, Inc. v. Ohio Bur. of Workers’ Comp., 129 Ohio St.3d 130, 2011-Ohio-
3140, 950 N.E.2d 551, ordering appellee, the Bureau of Workers’ Compensation,
to explain why it had denied the company’s request that the bureau’s order
reclassifying some of the company’s employees for purposes of workers’
compensation premiums be applied solely prospectively.
{¶ 2} On remand, the administrator’s designee concluded that the bureau
appropriately exercised its discretion under Ohio Adm.Code 4123-17-17(C) to
apply the reclassification retroactively. The administrator’s designee relied on
evidence demonstrating the magnitude and scope of the company’s prior reporting
discrepancies that resulted in a large underpayment of premiums.
{¶ 3} Aaron’s filed this action for mandamus relief. The court of appeals
concluded that the evidence in the record supported the bureau’s decision and that
no internal policy of the bureau created a clear legal duty requiring the bureau to
apply the classifications solely prospectively. 10th Dist. Franklin No. 13AP-170,
2014-Ohio-3425, ¶ 5-6. For the reasons that follow, we agree, and we affirm the
judgment of the court of appeals.
Background
{¶ 4} When a business applies for workers’ compensation coverage, the
bureau classifies the occupation or industry by degree of hazard according to the
categories established by the National Council on Compensation Insurance and
incorporated into the Ohio BWC State Insurance Fund Manual. See R.C.
4123.29(A)(1). There are two types of classifications. The “basic” or “manual”
classification describes the business of an employer. Ohio Adm.Code 4123-17-
08(B)(1); see also Ohio Adm.Code 4123-17-02(A). The “standard exception”
classification describes an occupation that is common to many businesses. Ohio
2
January Term, 2016
Adm.Code 4123-17-08(B)(2). For example, clerical office employees, not
otherwise classified (code 8810), are defined as those workers “whose duties are
confined to keeping the books and records of the risk [i.e., of the employer], and
conducting correspondence, and drafting, or who are engaged wholly in office work
where such books and records are kept, having no other duties of any nature in or
about the risk’s premises.” Ohio Adm.Code 4123-17-08(B)(2) and 4123-17-09.
{¶ 5} As we have explained:
The [BWC State Insurance Fund Manual] designates the
basic rate that an employer must pay, per $100 in payroll, to secure
workers’ compensation coverage for its employees. Each
occupational classification has a corresponding basic dollar rate.
This base rate applies to all employers within the classification and
effectively spreads the total loss within the classification among all
members.
State ex rel. Roberds, Inc. v. Conrad, 86 Ohio St.3d 221, 222, 714 N.E.2d 390(1999). Once the bureau assigns one or more classifications, it is the employer’s
responsibility to correctly report premium and payroll data to the bureau. See id.The bureau has the right to audit an employer’s records to verify the correctness of
its payroll reports used to determine premiums. Ohio Adm.Code 4123-17-17(C).
Facts
{¶ 6} Aaron’s, a Georgia corporation, began doing business in Ohio in
1992, primarily as a furniture-rental business. When Aaron’s applied for workers’
compensation coverage, the bureau assigned the business the basic occupational
classification of 8044 (store: furniture & drivers) and the standard-exception
classification of 8810 (clerical office employees, not otherwise classified). Aaron’s
3
SUPREME COURT OF OHIO
placed its employees into one of those two categories in listing its payroll for the
bureau.
{¶ 7} In 2006, the bureau conducted a routine audit of the company’s
records. The auditor apparently concluded that Aaron’s had incorrectly listed many
of its employees as 8810 clerical workers instead of placing them under the
business’s basic classification of 8044. However, the audit report was not finalized,
in part because it did not pass the bureau’s quality-review process. Therefore,
Aaron’s was not notified of its results.
{¶ 8} The bureau initiated a new audit and on March 18, 2008, issued its
audit report. As a result of the 2008 audit, the bureau added several classifications
to Aaron’s payroll, applied them retroactively to July 1, 2004, and billed Aaron’s
for more than $2 million in back premiums.
{¶ 9} Aaron’s filed an administrative protest of both the 2008 audit findings
and the retroactive application of the new classifications. Following a hearing, the
bureau’s adjudicating committee upheld the new classifications but limited their
retroactive application to a period of two years.
2009 Complaint for Writ of Mandamus
{¶ 10} Aaron’s filed a complaint in mandamus in the Tenth District Court
of Appeals alleging that the bureau had abused its discretion when it failed to
adequately explain why it rejected the company’s request to apply the
reclassifications solely prospectively. The court of appeals disagreed and denied
the writ. We reversed that judgment and issued a limited writ of mandamus
ordering the bureau to further consider the matter and to issue an amended order
explaining why it decided to apply the reclassifications retroactively and not solely
prospectively as Aaron’s had advocated. State ex rel. Aaron Rents, Inc., 129 Ohio
St.3d 130, 2011-Ohio-3140, 950 N.E.2d 551, ¶ 13.
{¶ 11} Following a hearing on remand, the administrator’s designee
concluded that the bureau properly exercised its discretion under Ohio Adm.Code
4
January Term, 2016
4123-17-17(C) to apply the reclassification retroactively. The version of Ohio
Adm.Code 4123-17-17(C) that was in effect at the time of the audit and hearing1
provided:
The bureau shall have the right * * * to inspect, examine or
audit * * * employers for the purpose of verifying the correctness of
reports made by employers of wage expenditures * * *. The bureau
shall also have the right to make adjustments as to classifications,
allocation of wage expenditures to classifications, amount of wage
expenditures, premium rates or amount of premium. * * * Except
as provided in Rule 4123–17–28 of the Administrative Code, no
adjustments shall be made in an employer's account which result in
increasing any amount of premium above the amount of
contributions made by the employer to the fund for the periods
involved, except in reference to adjustments for the semi-annual or
adjustment periods ending within twenty-four months immediately
prior to the beginning of the current payroll reporting period.
Former Ohio Adm.Code 4123-17-17(C), 2008-2009 Ohio Monthly Record 2-1840.
{¶ 12} The administrator’s designee relied on the testimony of Charles
Goellnitz, a bureau auditor, and the audit results showing that Aaron’s had
improperly reported a large percentage of its operational employees as clerical
employees, resulting in its paying substantially less in premiums than it should
have. The administrator’s designee stated that “Goellnitz concluded that because
of the scope of the reporting discrepancies, and the fact that the inaccurate reporting
1
Amendments to Ohio Adm.Code 4123-17-17(C) that became effective on July 1, 2015, see 2014-
2015 Ohio Monthly Record 2-991, changed its language slightly but would not result in a different
outcome in this case.
5
SUPREME COURT OF OHIO
resulted in a large underpayment of premiums, it would have been inappropriate to
allow the employer to benefit from its inaccurate reporting of payroll.”
2013 Complaint for Writ of Mandamus
{¶ 13} Aaron’s filed the instant complaint in the Tenth District seeking a
writ of mandamus regarding the January 17, 2012 order of the administrator’s
designee. Aaron’s alleged that the bureau’s decision to bill it for back premiums
was an abuse of discretion and violated Ohio law.
{¶ 14} The case was referred to a magistrate, who concluded that the
administrator’s designee appropriately exercised his discretion under Ohio
Adm.Code 4123-17-17(C) in ordering the reclassifications to be applied
retroactively. The magistrate noted that the administrator’s designee did not find
that Aaron’s was at fault or that it intentionally misreported its payroll. The
magistrate nevertheless concluded that the magnitude of the misclassification was
a sufficient basis for the bureau to deny the request to apply the audit findings solely
prospectively.
{¶ 15} Aaron’s objected, arguing that the magistrate’s conclusion was not
supported by the record and that the bureau’s internal policy was to “go prospective
on an audit” unless there was intentional wrongdoing or disregard on the part of the
employer.
{¶ 16} The court of appeals rejected these arguments, adopted the
magistrate’s decision, and denied the writ.
{¶ 17} This matter is before the court on an appeal as of right filed by
Aaron’s.
Legal Analysis
{¶ 18} To be entitled to the extraordinary remedy of mandamus, a relator
must establish a clear legal right to the relief requested, a clear legal duty on the
part of the bureau to provide the relief, and the lack of an adequate remedy in the
ordinary course of the law. State ex rel. Gen. Motors Corp. v. Indus. Comm., 117
6
January Term, 2016
Ohio St.3d 480, 2008-Ohio-1593, 884 N.E.3d 1075 ¶ 9. When an order is
adequately explained and based on some evidence, there is no abuse of discretion
and a reviewing court must not disturb the order. State ex rel. Mobley v. Indus.
Comm., 78 Ohio St.3d 579, 584, 679 N.E.2d 300 (1997).
{¶ 19} Aaron’s alleges that it is entitled to relief in mandamus because the
bureau’s explanation for retroactive application of the reclassification was arbitrary
and contrary to bureau policy. According to Aaron’s, the magnitude of its
misreporting was due to the bureau’s inaction and failure to notify Aaron’s of any
problems after the 2006 audit. Aaron’s maintains that it did not knowingly
misclassify employees and, had it known of a problem with its reporting, it would
have corrected any error or, in the alternative, become self-insured. Finally,
Aaron’s contends that the bureau’s explanation is inconsistent with bureau policy.
{¶ 20} The bureau contends that under Ohio Adm.Code 4123-17-17(C), it
had the right to make adjustments to correct errors and to apply those adjustments
up to 24 months preceding the employer’s current payroll period and that in doing
so, it was not required to prove intentional wrongdoing on the part of the employer.
{¶ 21} We agree. The bureau properly exercised its discretion under Ohio
Adm.Code 4123-17-17(C). The evidence supported the bureau’s decision, and no
internal policy imposed a clear legal duty on the bureau to apply the reclassification
solely prospectively. The version of Ohio Adm.Code 4123-17-17(C) that was in
effect at the time of the audit provided the bureau with authority to apply audit
adjustments for the 24 months immediately prior to the beginning of the “current
payroll reporting period.” See 2008-2009 Ohio Monthly Record 2-1840.
{¶ 22} The purpose of retroactive adjustment is to correct an error or
mistake, even if the employer was not at fault for the mistake. See State ex rel.
Granville Volunteer Fire Dept., Inc. v. Indus. Comm., 64 Ohio St.3d 518, 521, 597
N.E.2d 127 (1992). The bureau did just that in State ex rel. Harry Wolsky Stair
Builder, Inc. v. Indus. Comm., 58 Ohio St.3d 222, 569 N.E.2d 900 (1991). In that
7
SUPREME COURT OF OHIO
case, an employer sought a refund of more than three years’ worth of overcharged
premiums following a change of occupational classification. The employer argued
that the incorrect classification had been the bureau’s fault. We affirmed the
bureau’s decision that regardless of fault, refunds are limited to the 24 months
immediately prior to the current payroll-reporting period, citing former Ohio
Adm.Code 4121-7-17(C).2 Harry Wolsky Stair Builder at 223. The rules makes
no distinction between employer and bureau error. Id.; see also Granville
Volunteer Fire Dept. at 521 (although the employer blamed the bureau for its
overpayment of premiums from 1977 through 1986, the bureau was limited under
former Ohio Adm.Code 4121-7-17(C) to reimbursing for only two years’ worth).
{¶ 23} Furthermore, in 2008, Aaron’s acknowledged in a statement before
the bureau’s adjudicating committee that consistent with the application of Ohio
Adm.Code 4123-17-17(C), the postaudit premium adjustment should include the
payroll periods for the prior two years.
{¶ 24} Consequently, the bureau’s retroactive application of the
reclassification for a period of 24 months was a proper exercise of its discretion
under Ohio Adm.Code 4123-17-17(C).
{¶ 25} The evidence supported the bureau’s decision. The administrator’s
designee justified the retroactive application of the reclassification based on “the
magnitude of th[e] misreporting.” The administrator’s designee relied on the
testimony of the auditor, Mr. Goellnitz, that Aaron’s was reporting approximately
76 percent of its payroll as clerical when the audit “revealed that only six percent
of the employer’s payroll was clerical in nature.” The administrator’s designee
noted that the “audit revealed that the employer was reporting a very different
distribution of employees to insurers in other states, even though both the Bureau
and the outside insurers use the same classification system.”
2
Former Ohio Adm.Code 4121-7-17(C) is the predecessor of Ohio Adm.Code 4123-17-17(C).
Roberds, 86 Ohio St.3d at 223, 714 N.E.2d 390.
8
January Term, 2016
{¶ 26} Finally, the argument that the bureau’s decision was inconsistent
with its policy to apply audit adjustments solely prospectively lacks merit. Other
than references in the internal bureau e-mails identified at the hearing, Aaron’s does
not identify or produce a specific bureau policy that requires the bureau to apply
audit adjustments prospectively only. Nevertheless, even if Aaron’s had produced
an internal policy, this court has held that policy alone does not create a legal right
or duty. State ex rel. Estate of Sziraki v. Admr., Bur. of Workers’ Comp., 137 Ohio
St.3d 201, 2013-Ohio-4007, 998 N.E.2d 1074, ¶ 26; see also State ex rel. NHVS
Internatl., Inc. v. Ohio Bur. of Workers’ Comp., 10th Dist. Franklin No. 13AP-356,
2014-Ohio-5522, ¶ 8 (bureau policy does not create a legal right or duty); State ex
rel. Bledsoe v. Marion Steel Co., 10th Dist. Franklin No. 02AP-193, 2002-Ohio-
6835, ¶ 9 (internal memo does not create a legal duty or a legal right to the relief
requested). Consequently, no internal policy imposed a clear legal duty on the
bureau to apply the reclassification solely prospectively.
{¶ 27} Therefore, the bureau did not abuse its discretion when it applied the
audit adjustment to the 24 months prior to the current payroll period, as authorized
in former Ohio Adm.Code 4123-17-17(C), where substantial misclassifications
occurred over a significant period of time and resulted in considerable
underpayment of premiums to the state fund.
{¶ 28} We affirm the judgment of the court of appeals.
Judgment affirmed.
O’CONNOR, C.J., and PFEIFER, FRENCH, and O’NEILL, JJ., concur.
O’DONNELL, J., dissents in an opinion that LANZINGER and KENNEDY, JJ.,
join.
_________________
O’DONNELL, J., dissenting.
{¶ 29} Respectfully, I dissent.
9
SUPREME COURT OF OHIO
{¶ 30} Aaron’s, Inc., appeals from a judgment of the Tenth District Court
of Appeals denying its request for a writ of mandamus to compel the Bureau of
Workers’ Compensation to vacate its order applying the reclassification of several
Aaron’s employees retroactively and to remove the entire back billing on the
company’s account. In my view, Aaron’s is entitled to relief because the bureau
abused its discretion when it applied the 2008 audit adjustments retroactively and
ordered Aaron’s to pay $1.6 million in back billing on its account.
{¶ 31} To obtain relief in mandamus, a party must establish a clear legal
right to the relief requested, a clear legal duty to provide that relief, and the lack of
an adequate remedy in the ordinary course of law. State ex rel. Turner Constr. Co.
of Ohio v. Indus. Comm., 142 Ohio St.3d 310, 2015-Ohio-1202, 29 N.E.3d 969,
50¶ 10.
{¶ 32} The standard used by the majority is, “When an order is adequately
explained and based on some evidence, there is no abuse of discretion and a
reviewing court must not disturb the order.” Majority opinion at ¶ 18 citing State
ex rel. Mobley v. Indus. Comm., 78 Ohio St.3d 579, 584, 679 N.E.2d 300 (1997).
The majority also noted that the administrator’s designee justified the retroactive
application based on the magnitude of the company’s misreporting. Majority
opinion at ¶ 25
{¶ 33} However, the order issued by the bureau in this case is neither
adequately explained nor based on any evidence to justify a retroactive application
of the 2008 audit results. Rather, without explanation the bureau of workers’
compensation patently acted contrary to its usual and customary practice of
prospectively applying audit changes and instead applied the employee
classification audit changes from the 2008 audit retroactively without any basis to
do so, as evidenced by e-mails from personnel in the bureau because the bureau
itself admits there is no evidence of intentional wrongdoing by Aaron’s.
10
January Term, 2016
{¶ 34} In its final order, the bureau cited the testimony of Charles Goellnitz,
a bureau auditor, that it would have been inappropriate to allow Aaron’s to benefit
from its inaccurate reporting of payroll due to the scope of the reporting
inaccuracies that resulted in a large underpayment of premiums, and that the bureau
exercised its discretion under Ohio Adm. Code 4123-17-17(C) and ordered that the
audit findings be applied retroactively.
{¶ 35} However, that order fails to adequately explain the bureau’s decision
to apply the audit adjustments retroactively for two reasons: first, the bureau does
not account for its failure to notify Aaron’s of the results of its 2006 audit which
could have prevented Aaron’s from underpaying the $1.6 million that the bureau
now orders Aaron’s to pay; and second, the bureau does not explain why it is
deviating from its internal policy of applying audit adjustments retroactively only
when there is evidence of knowing or intentional wrongdoing. In this instance,
there is no indication that Aaron’s knowingly or intentionally misrepresented its
payroll and the bureau has made no finding in that regard.
{¶ 36} In 2006, the bureau audited Aaron’s and found that it had incorrectly
classified many of its employees as clerical workers. However, the bureau failed
to complete a report of the audit because the audit did not pass the bureau’s quality
review process, and the bureau never notified Aaron’s that it was misclassifying its
employees. In 2008, the bureau conducted a second audit, added new classification
codes to the company’s payroll, applied them retroactively to July 1, 2004, in
violation of the Ohio Administrative Code, and billed Aaron’s for more than $2
million. Aaron’s appealed that decision, and the bureau’s adjudicating committee
limited the retroactive adjustment to a period of two years to conform with the
Administrative Code. See former Ohio Adm.Code 4123-17-17(C), 2008-2009 Ohio
Monthly Record 2-1840 (limiting retroactive classification to a period of two
years). As a result of that adjustment however, the bureau claimed that Aaron’s
11
SUPREME COURT OF OHIO
still owed $1,667,360.81, despite the fact that prior to 2008, the bureau never
informed Aaron’s that it had misclassified some of its employees.
{¶ 37} Had the bureau informed Aaron’s after the 2006 audit that the
company was misclassifying some of its employees as clerical workers, Aaron’s
could have avoided the underpayment of its premiums. Instead, the bureau took no
further action until the 2008 audit, and Aaron’s continued to pay premiums as it
had in the past, having no indication from the bureau that it should have reclassified
its employees as a result of the bureau’s 2006 audit.
{¶ 38} In addition, the bureau has a policy of applying adjustments
retroactively only where there is an indication that the employer knew it was
improperly classifying employees. Evidence of this policy consists of e-mails
between employees of the bureau pointing out their uncertainty with respect to
whether the adjustments in this case should or should not be applied retroactively.
{¶ 39} Michael Glass, the bureau’s director of employer compliance, wrote
in an e-mail to Goellnitz:
Normally we would go prospective on an audit if we felt the
employer didn’t know or couldn’t have known proper reporting
requirements or BWC failed to assign the code to their policy, etc.
We must have felt that Aaron Rents knew how to report correctly
and had the code. This can sometimes be established through a
previous audit or some other documented communication with the
employer.
{¶ 40} In another email to Glass from Joy Bush, the bureau’s executive
director of employer management services, Bush stated, “The only exception I
think there would be to prospective is a very obvious case of disregard to previous
audit instructions.” (Emphasis added.)
12
January Term, 2016
{¶ 41} After the bureau completed its 2008 audit, however, its fraud unit
conducted an investigation that concluded:
Upon review of the claims filed and documents received
during the audit process and investigation it has been found that
Aaron Rents improperly reported several job classifications under
the clerical manual. However, based on the documents received,
there is currently no evidence to prove that Aaron Rents had
knowledge of or intentionally misreported payroll.
(Emphasis added.)
{¶ 42} The e-mail from Michael Glass tellingly articulates that the bureau
normally would “go prospective” on audits when the employer did not know proper
reporting requirements and asserts that the bureau must have felt Aaron’s knew
how to report correctly as can be established through a previous audit or other
documented communication. But here, there was no communication from a
previous audit or other communication in this case.
{¶ 43} In addition, the Joy Bush e-mail confirms that the only exception to
a prospective audit reclassification is a very obvious case of disregard of previous
audit instructions. Plainly, the bureau never communicated any previous audit
instructions to Aaron’s resulting from its 2006 audit, and that point is not contested
and therefore there is no “very obvious case of disregard of previous audit
instructions,” and that fact dispels Glass’s assumption that the bureau “must have
felt” that Aaron’s knew how to report correctly.
{¶ 44} And finally, the bureau’s fraud unit admitted that no evidence
existed to prove Aaron’s had knowledge or intended to misrepresent its payroll.
13
SUPREME COURT OF OHIO
{¶ 45} These are telling admissions from the bureau that militate strongly
against retroactive application of employee classifications and favor adhering to the
policy of the bureau regarding prospective application of audit results.
{¶ 46} While the majority emphasizes the magnitude of the misreporting as
evidence to justify retroactive application of the employee classification changes,
that view is contradicted most directly by the bureau’s fraud unit and the conclusion
reached in its report.
{¶ 47} It is apparent that Aaron’s never received previous audit instructions
or any other communication from the bureau indicating that it was misclassifying
its employees. Thus, there is relevant material evidence that the bureau deviated
from its normal policy despite a lack of evidence that Aaron’s knowingly or
intentionally misreported payroll.
{¶ 48} Accordingly, because the bureau failed to adequately explain its
order applying the audit adjustments retroactively and back billing Aaron’s for $1.6
million and because the bureau’s own e-mails and the conclusion of its fraud unit
demonstrate that no evidence exists to prove that Aaron’s knowingly or
intentionally misrepresented its payroll, I would conclude that the bureau abused
its discretion in retroactively applying its reclassification order, reverse the
judgment of the court of appeals, and grant the writ to compel the bureau to vacate
its order applying the employee reclassification retroactively and to remove the
back billing on that account.
LANZINGER and KENNEDY, JJ., concur in the foregoing opinion.
_________________
Fisher & Phillips, L.L.P., Daniel P. O’Brien, and Nicole H. Farley, for
appellant.
Michael DeWine, Attorney General, and Cheryl J. Nester, Assistant
Attorney General, for appellee.
_________________
14