Concord Enterprises Of Knoxville, Inc. v. Commissioner Of Tennessee Department of Labor & Workforce Development

01/20/2017
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
November 16, 2016 Session
CONCORD ENTERPRISES OF KNOXVILLE, INC. v. COMMISSIONER
OF TENNESSEE DEPARTMENT OF LABOR & WORKFORCE
DEVELOPMENT
Appeal from the Chancery Court for Davidson County
No. 14-664-III Ellen H. Lyle, Chancellor
No. M2016-00118-COA-R3-CV
This appeal arises from a determination by the Tennessee Department of Labor and
Workforce Development (“the Department”) that Concord Enterprises of Knoxville, Inc.
(“Concord”), a pet grooming business, misclassified certain employees as independent
contractors from 2006 through 2011 and, therefore, was liable for unpaid unemployment
taxes from that period. Following a hearing, the Appeals Tribunal concluded that
unemployment taxes were due, a decision affirmed by the Commissioner’s Designee.
Concord petitioned for judicial review. The Chancery Court for Davidson County (“the
Trial Court”) affirmed the decision of the Commissioner’s Designee and dismissed
Concord’s petition. Concord appeals to this Court. We find, inter alia, that the pet
groomers at issue both performed their service at Concord’s place of business and
performed pet grooming service that fell squarely within Concord’s course of usual
business. Evidence both substantial and material supports the agency’s determination.
We affirm the judgment of the Trial Court.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed;
Case Remanded
D. MICHAEL SWINEY, C.J., delivered the opinion of the court, in which J. STEVEN
STAFFORD, P.J., W.S., and BRANDON O. GIBSON, J., joined.
Harold C. Wimberly, Knoxville, Tennessee, for the appellant, Concord Enterprises of
Knoxville, Inc.
Herbert H. Slatery, III, Attorney General and Reporter, and, W. Derek Green, Assistant
Attorney General, for the appellee, the Tennessee Department of Labor and Workforce
Development.
OPINION
Background
In 2011, the Department conducted an audit of Concord. In September of 2011,
the Department determined that Concord misclassified certain employees as independent
contractors from 2006 through 2011 and was liable for unpaid unemployment taxes from
that period for these employees. Concord requested a redetermination. In March 2012,
the Department affirmed the earlier findings. Various appeals ensued which pertained to
whether Concord’s appeal was timely.
Eventually, the matter was heard on the merits by the Appeals Tribunal in May
2013. Susan Porterfield (“Porterfield”), owner of Concord, testified. Porterfield testified
in the affirmative that Concord was “in the business of grooming dogs.” Concord also
trained students to become pet groomers and sold certain pet products like shampoo. The
pet groomers at issue determined their prices case-by-case, and Concord paid them 50%
commission of what they brought in once a week. Concord provided the pet groomers
with necessary supplies. The pet groomers sometimes participated in selling Concord
retail items. The pet groomers could work where they wished, but their services provided
through Concord all were performed at Concord’s place of business on Kingston Pike in
Knox County. Customers would call Concord to set up appointments rather than call
individual pet groomers, although they could request a particular groomer. The Appeals
Tribunal concluded that the pet groomers were covered employees rather than
independent contractors, a decision affirmed by the Commissioner’s Designee.
Concord filed a petition for judicial review, which later was decided by the Trial
Court in a December 2015 final judgment. The Trial Court found as follows:
This case is a petition for judicial review. It was filed by a business
challenging the Respondent’s administrative decision that the Petitioner
owes back unemployment insurance premiums for the years 2006-2011.
Respondent’s finding that Petitioner owes the premiums derives from the
classification of persons who provided pet grooming services at the
Petitioner’s business location.
The Respondent concluded in the administrative proceeding that the
groomers who worked at the Petitioner’s business constituted covered
employees pursuant to Tennessee Code Annotated section 50-7-207. The
Petitioner contends the groomers are independent contractors for which no
premiums are due.
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Judicial review was initially filed in Knox County, Tennessee. On
January 27, 2014, the case was transferred to Davidson County Chancery
Court and assigned to this Court.
Although the Petitioner asserts it fits the definition of independent
contractor under the seven-factor test of Tennessee common law, the
Petitioner cited in its brief and acknowledged in oral argument that it must
also satisfy a statutory test. Known as the “ABC” test, Tennessee Code
Annotated section 50-7-207(e)(1)(A)(B)(C) requires all of the three
following factors to be present to establish that the worker is an
independent contractor. Failure to establish any one of the three factors
classifies the worker as a covered employee for which the business must
pay unemployment insurance premiums. Beare v. State, 814 S.W.2d 715,
719 (Tenn. 1991). The ABC test of Tennessee Code Annotated section 50-
7-207(e)(1)(A)(B)(C) provides as follows:
(e) SPECIAL RULES. The following rules shall govern for purposes
of this section:
(1) Service performed by an individual shall be deemed to be
included service for purposes of this section regardless of whether the
common law relationship of master and servant exists, unless and until it is
shown to the satisfaction of the administrator that:
(A) The individual has been and will continue to be free from
control and direction in connection with the performance of the service,
both under any contract for the performance of service and in fact;
(B) The service is performed either outside the usual course of the
business for which the service is performed or is performed outside of all
the places of business of the enterprise for which the service is performed;
and
(C) The individual is customarily engaged in an independently
established trade, occupation, profession or business of the same nature as
that involved in the service performed;
Upon reviewing the administrative record and applying the law, the
Court finds that, as asserted by the Respondent, the evidence establishes
that the Petitioner fails to meet subsection (B) of the three requirements of
Tennessee Code Annotated section 50-7-201(e)(1). As quoted above,
subsection (B) pertains to performance of the service. For independent
contractor classification of the worker, the business must demonstrate under
subsection (B) that the service the worker is performing is either “outside
the usual course of the business for which the service is performed” or “is
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performed outside of all the places of business of the enterprise for which
the service is performed.”
In this case the record is clear, at pages 23-25 of the transcript of the
Petitioner representative’s testimony, that the services in issue were
performed at the Petitioner’s place of business. Accordingly, the Petitioner
has failed to establish the latter element of subsection (B).
Additionally, the record establishes that the first element of
subsection (B)—the service in issue is performed “outside the usual course
of the business for which the service is performed”—also is not present in
this case. At pages 11 and 21 of the transcript, the Petitioner’s
representative admits that the type of business conducted is pet grooming.
Thus, because the Petitioner’s business was pet grooming and the service in
issue is pet grooming, the services in issue are not outside the usual course
of the business for which the service was performed.
While it is established in the transcript at pages 29, 41, 48, that the
Petitioner operates a grooming school and also is a pet supply retailer, these
other lines of business do not substantially detract from the testimony of the
Petitioner’s representative, at pages 11 and 21 of the transcript, that the
Petitioner’s third line of business at the location is pet grooming. Thus, the
record establishes that the Petitioner is in the business of pet grooming.
Further that the transcript at page 12 establishes that the Petitioner earns
money through the pet grooming business of 50% of the service fee the
groomers charge is additional evidence that the Petitioner is in the pet
grooming business. Moreover, the testimony of the Respondent’s auditor,
at pages 58-59 of the transcript, that the workers reported that they are
providing pet grooming services under the Petitioner’s corporate name and
not under their own business name, label or brand, is further substantial and
material evidence that the workers are providing services not outside the
usual course of the business for which the service was performed. Lastly,
there is no evidence that the Petitioner’s earnings are solely from the
grooming school or pet supply sales.
Having failed to establish the elements of subsection (B) of the ABC
test, the Petitioner is liable to remit unemployment insurance premiums as
was determined in the administrative proceedings conducted by the
Respondent.
It is therefore ORDERED that the decision below is affirmed . . . .
Concord timely appealed to this Court.
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Discussion
Although not stated exactly as such, Concord raises the following issue on appeal:
whether the Trial Court erred in affirming the decision by the Commissioner’s Designee
classifying the individuals who provided pet grooming service at Concord between the
years 2006 and 2011 as covered employees rather than independent contractors, under
Tenn. Code Ann. § 50-7-207(e).
In HRP of Tennessee, Inc. v. State, Dept. of Employment Sec., No. E2005-01176-
COA-R3-CV, 2006 WL 1763673 (Tenn. Ct. App. June 28, 2006), no appl. perm. appeal
filed, this Court discussed the standard of review in cases involving employee
classification for unemployment insurance tax purposes as follows:
The sole issue presented for our review is whether the trial court
erred in concluding that HRP was not subject to unemployment insurance
tax assessment for services performed by the nurses on its registry because
the nurses were independent contractors rather than employees of HRP.
***
The appellate review of an administrative law judge’s decision is
governed by the Uniform Administrative Procedures Act, codified at
T.C.A. § 4-5-101, et seq. Freedom Broad. of Tenn., Inc. v. Tennessee
Dep’t. of Revenue, 83 S.W.3d 777, 780 (Tenn. Ct. App. 2002) (citing
Sanifill of Tenn., Inc. v. Tennessee Solid Waste Disposal Control Bd., 907
S.W.2d 807, 809 (Tenn. 1995)). As set forth at T.C.A. § 4-5-322(h), the
Act provides in pertinent part the following:
The court may affirm the decision of the agency or remand the case
for further proceedings. The court may reverse or modify the decision if the
rights of the petitioner have been prejudiced because the administrative
findings, inferences, conclusions or decisions are:
(1) In violation of constitutional or statutory provisions;
(2) In excess of the statutory authority of the agency;
(3) Made upon unlawful procedure;
(4) Arbitrary or capricious or characterized by abuse of
discretion or clearly unwarranted exercise of discretion; or
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(5)(A) Unsupported by evidence that is both substantial and
material in the light of the entire record.
An agency’s findings of fact may not be reviewed de novo by the
appellate courts, and the latter should not substitute its judgment for that of
the agency; however, the “construction of a statute and application of the
law to the facts is a question of law that may be addressed by the courts.”
Sanifill, 907 S.W.2d at 810. The facts in the matter now before us are
apparently not in dispute. The question of whether HRP is subject to
unemployment insurance taxation under relevant statutory authority is
determined by an application of the law to the facts and is, accordingly, a
question of law.
HRP, 2006 WL 1763673, at *2.
It is undisputed in the present appeal that, under these facts, the pet groomers must
have performed “included service” in order to be considered employees. Tenn. Code
Ann. § 50-7-207(e)(2014), which contains the statutory exceptions for included service,
provides as follows in relevant part:
(1) Service performed by an individual shall be deemed to be included
service for purposes of this section regardless of whether the common law
relationship of master and servant exists, unless and until it is shown to the
satisfaction of the administrator that:
(A) The individual has been and will continue to be free from control and
direction in connection with the performance of the service, both under any
contract for the performance of service and in fact;
(B) The service is performed either outside the usual course of the business
for which the service is performed or is performed outside of all the places
of business of the enterprise for which the service is performed; and
(C) The individual is customarily engaged in an independently established
trade, occupation, profession or business of the same nature as that
involved in the service performed;
Both parties on appeal agree, as did the Trial Court, that Clause (B) of the so-
called “ABC” test is at the center of the dispute. In Beare Co. v. State, 814 S.W.2d 715,
719 (Tenn. 1991), our Supreme Court discussed Clause (B) as follows:
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Under clause (B) of T.C.A. § 50-7-207(e)(1) the taxpayer must
establish that the services performed by the workers in question were
“performed either outside of the taxpayer’s usual course of business or
performed outside of all of the taxpayer’s places of business....” T.C.A. §
50-7-207(e)(1)(B) (emphasis added.). Thus, the taxpayer has two
alternative ways to satisfy the “B” prong of the test.1 There is adequate
evidence contained in the record to support the conclusion that the services
performed by the hoppers are outside the usual course of Beare’s business.
Simply put, the reason is that the loading and unloading by the hoppers is
primarily the responsibility of the shipper or carrier, not that of the Beare
Company. In a letter made an exhibit to his deposition, the President of the
International Association of Refrigerated Warehouses stated:
I understand from our members that traditionally
[hoppers] are not considered employees of refrigerated
warehouses. Truck shipments to and from refrigerated
warehouses usually involve the loading and unloading of the
trucks by the truck drivers and the truck drivers’ assistants
who are employees who are independent contractors of the
trucking companies. The refrigerated warehouses generally
do not offer the service of loading or unloading of trucks
because that service is usually included in the trucking rate,
thus a part of the trucking service. Since many truck drivers
have no helpers on their trucks, I understand that they usually
hire helpers to load and unload the trucks when they arrive at
a warehouse facility. I also understand that refrigerated
warehouses usually do not get involved with the arrangement
between the truck drivers and the [hoppers] who hang around
the warehouse facility to solicit such employment from the
truck drivers.
(footnote in original).
1
The Commissioner found that one of the conditions contained in clause (B) was satisfied, but not both.
Apparently, the Commissioner read the disjunctive word “or” to mean “and.” Specifically, it was
determined below that Beare met the first alternative test, that the work performed by the hoppers was not
in the usual course of Beare’s business. The Commissioner found that the loading and unloading of the
trucks was a function usually performed by the carrier, not the warehouse. Having reached that
conclusion, it was unnecessary for the Commissioner to address whether the services were performed
outside all the places where Beare does business.
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Concord argues that the groomers were independent contractors. According to
Concord, its business primarily is a school rather than a shop. Concord cites the lack of
salary or W-2s issued to its groomers as evidence in support of its contention. The
Department, on the other hand, cites Concord’s owner’s testimony that Concord is a pet
grooming business. The Department also points out how customers call Concord rather
than individual groomers to set up appointments.
In order to prevail, Concord has to establish that the exception from Tenn. Code
Ann. § 50-7-207 applied to its pet groomers. Specifically, under Clause (B), Concord
had to prove that (1) the pet groomers performed their service outside of Concord’s place
of business, or that (2) the pet groomers’ services were outside the usual course of
Concord’s business. Substantial and material evidence in the record on appeal reveals the
opposite. The testimony of Concord’s owner herself is that Concord is, at least in large
part, a pet grooming business. The pet groomers performed their services for Concord at
Concord’s place of business. By failing to establish all three prongs of the ABC Test,
Concord therefore failed to establish that its pet groomers were independent contractors
rather than covered employees. Therefore, Concord is liable for unpaid unemployment
insurance taxes from the relevant time period. We conclude, as did the Trial Court, that
the agency’s decision was supported by evidence both substantial and material. Finding
no error by the Trial Court, we affirm the judgment of the Trial Court.
Conclusion
The judgment of the Trial Court is affirmed, and this cause is remanded to the
Trial Court for collection of the costs below. The costs on appeal are assessed against the
Appellant, Concord Enterprises of Knoxville, Inc., and its surety, if any.
____________________________________
D. MICHAEL SWINEY, CHIEF JUDGE
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