STATE
OF
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE
EMPLOYMENT SECURITY DEPARTMENT
IN THE MATTER OF: DOCKET NO: 01-2007-16436
Intermountain Cleaning Service Inc. TAX CASE
Employer INITIAL ORDER
ES No: 754537-00-0
Hearing Held: This matter came
before Administrative Law Judge Brian O. Watkins on
Persons
Present: the Petitioner, Intermountain Cleaning Service Inc., represented by its
attorney, John A.
Maxwell, Meyer of Fluegge & Tenney, P.S.; the Employment Security
Department, represented by Mark Purves, Tax
Specialist; and three witnesses for the Petitioner, Milton Cooper, Daniel Fate,
and Dale Wilson.
Record:
The hearing was recorded by Carman Prante,
Capitol Pacific Reporting,
STATEMENT OF THE CASE:
At issue in this appeal is whether
an Order of Notice of Assessment issued pursuant to RCW 50.24.070 properly
holds the employer liable for contributions, penalties and interest in an
amount of $4,261.89.
The
narrower question presented is whether wages the Petitioner paid to its
president, Milton Cooper, during 102004 through 102007 should be subject to
unemployment tax.
Havingfully considered the
entire record, the undersigned Administrative Law Judge enters the
following Findings of Fact, Conclusions of Law and Initial Order:
FINDINGS OF
1. The Petitioner operates a residential and commercial
cleaning service in the
2. The Petitioner
incorporated in 1992 with three officers: Dale Wilson (president), Milton Cooper
(vice president), and Daniel Fate (both the secretary and the treasurer).
3.
In 1992, the Petitioner employed one
non-corporate-officer employee, so it registered
with the Employment Security Department to pay unemployment
taxes for her.
4.
In 1992, the Petitioner's officers met informally
and agreed that the Petitioner would not provide unemployment insurance
for its corporate officers. Despite this agreement, the secretary-treasurer at the time signed and submitted a form entitled
"Voluntary Election to Extend
the Coverage of the Washington Employment Security Act" ("the
Voluntary Election Form"). The
intent of the Voluntary Election form is to provide employers with a means of
extending unemployment insurance coverage to corporate officers and other
persons normally exempt from unemployment insurance coverage.
5.
The secretary treasurer testified at hearing. He
cannot recall signing or submitting the Voluntary Election Form. After examining the form at the hearing, he was
able to ascertain that he filled out some, but not all of the form. The
form was obviously completed by at least two people. One signature is from
Charlene Nichols, a Department representative, and handwriting similar to hers
appears in other parts of the form.
6. The Voluntary
Election Form provided, at paragraph 7, as follows:
This application MUST be signed by
someone authorized to bind the employer. Voluntary Coverage is effective until
terminated by the employer or cancelled by
the agency. Coverage must remain in effect for a MINIMUM OF TWO CALENDAR YEARS. A request for termination by
the employer must be in writing and postmarked by January 15, immediately
following the end of the last year of desired coverage.
In the event that your taxes become delinquent, the agency reserves the
right to cancel your Voluntary Coverage. [sic]
7.
Despite the
secretary-treasurer's erroneous filing of the Voluntary Election form, the
Petitioner reported to the Department in all subsequent report filings that its
corporate officers were not covered by unemployment insurance.
8.
Approximately one year later, the
secretary-treasurer resigned and sold his stock in the company to other
officers. This left only two corporate officers.
9.
In July 1999,
the president resigned to form another company. This left only one corporate
officer, Milton Cooper. Mr. Cooper became the Petitioner's president.
10.
Since 1992,
the Petitioner filed 52 quarterly unemployment tax reports. On each report, the
Petitioner indicated that its corporate officers (or singular officer after'99)
were exemptfrom unemployment insurance coverage. At the time of
each filing, the Petitioner's president believed the Petitioner had
opted out of unemployment insurance coverage for
its corporate officers.
11.
Under the Petitioner's corporate articles and bylaws, the
secretary-treasurer was not authorized to legally bind the Petitioner's corporation. The
Petitioner's bylaws gave only
the
Petitioner's president and vice president such authority.
12.
No corporate officer employed by the
Petitioner has filed an unemployment claim.
The Order and Notice of Assessment came about in
2007 when the Department selected the Petitioner for a random
unemployment tax audit.
13.
During the tax audit, the Department discovered
the 1992 Voluntary Election Form, and saw that the Petitioner had marked
on its 2006 reports that the Petitioner's single
officer was exempt from
unemployment tax. The Department's auditor then expanded the audit to
14.
The Department's auditor noted the Petitioner had
not reported its corporate officer's
wages for the 12 quarters beginning 1 Q2004 and ending with 1 Q2007 ("the
period at issue"). This is true.
The Petitioner never reported wages for any of its corporate officers
during any quarter that the Petitioner filed unemployment tax reports.
15.
The Department assessed the Petitioner $4,261.89,
representing taxes late payment penalties, and interest for the taxable
wages the Petitioner paid to its president in 2004, 2005, 2006, and the first
quarter of 2007.
16.
During the
period at issue, the Petitioner's president knew that the Petitioner considered
him exempt from unemployment insurance coverage. He knew this because he
reviewed and approved the written quarterly reports.
CONCLUSIONS OF LAW:
1.
The provisions of RCW 50.24.070 are
applicable and will be found on the attachment.
2.
Personal services of whatever nature performed
for wages or under any contract calling for the performance of personal services, written or oral, express or
implied an individual for remuneration will be considered employment,
and subject to the unemployment compensation
tax unless one of the employment exceptions found in Chapter 50.04 RCW
is met.
3.
One
exception to the general rule above is the corporate officer exception found in
RCW 50.04.165. They are generally exempt from unemployment insurance coverage.
Using the Lexis Legislative Archive, I was able to view the version of RCW
50.04.165 in effect in 1992 - FN 1- ,
when the Petitioner registered with the Department:
FN11 note in passing that the only difference between the 1991 and 1993 versions of RCW 50.04.165 is that the legislature removed subsection (2) in 1993.
RCW 50.04.165 Employment----Corporate
officers----Election of coverage
(1)
Services performed by corporate officers as defined in
subsection (2) of this section, covered by chapter 50.44 RCW, shall not
be considered
services in employment. However, a corporation may elect to cover not less than all of its
corporate officers under RCW 50.24.160-. If
an employer does not elect to cover its corporate officers under RCW 50.24.160, the employer must
notify its corporate officers in writing that they are ineligible for
unemployment benefits. If the employer fails to notify any corporate officer,
then that person shall not be considered to be a corporate officer for the
purposes of this section.
(2)
The officers of a corporation shall consist of a
president, one or more vice presidents as may be prescribed by the bylaws, a
secretary, and a
treasurer.
HISTORY:
1991 c 72 57; 1986 c 110 1; 1983 1st ex.s. c 23 4; 1981 c 35 13.
RCW 50.04.165 (1991).
4.
Coverage for a corporate officer is optional for each
employer. RCW 50.24.160 provides
the method for electing coverage:
RCW 50.24.160 Election of coverage. (Effective
until
[1977 ex.s.
c 292 § 12; 1972 ex.s. c 35 § 1; 1971 c3 § 14; 1959 c
266 § 6; 1951 c 265 § 8; 1951 c 215 § 9;
1945 c 35 § 104; Rem. Supp. 1945 § 9998-242.]
5.
The evidence in this case shows that when the Petitioner's
original officers formed the corporation,
they orally agreed they would not provide unemployment insurance coverage for its officers. Nonetheless, Daniel Fate mistakenly
signed and filed a Voluntary Election Form for coverage of officers in 1992.
For the next 15 years, the Petitioner filed quarterly reports indicating
its corporate officers were not covered.
Did
Daniel Fate have authority to enter into
the voluntary election agreement with the Department?
6.
At hearing, the Petitioner argued Mr. Fate lacked
authority to enter into an agreement with
the Department to provide unemployment insurance coverage for the Petitioner's officers because the Petitioner's bylaws provide
that the authority to enter into contracts rests with the president and vice president. For the Voluntary Election
Form to have legal effect, Mr. Fate
must have been "someone authorized to bind the employer." This authority was required by the language of the
Voluntary Election Form at paragraph seven and is also shown to be the
Department's longstanding formal policy. WAC 192-300-170.
7.
Daniel Fate was the Petitioner's secretary and
treasurer for approximately one year. The
Petitioner's corporate bylaws grants the power to
contract on behalf of the corporation to
only its president and vice president. The bylaws provide no contracting power
to the secretary or the treasurer.
There is no evidence the Petitioner's Board or any other officer holding contracting authority authorized Mr.
Fate's action. Mr. Fate did not have express authority to enter into the voluntary election agreement. The act of
signing the agreement was beyond his authority.
8.
Also significant here is that the submission of the
voluntary election form was not an irrevocable act. The form provided termination language:
"Voluntary
Coverage is effective until terminated by the employer or cancelled by
the agency. Coverage must remain in effect for a MINIMUM OF TWO CALENDAR YEARS. A
request for termination by the employer must be in writing and postmarked by
January 15 immediately following the end of the last year of desired coverage. In the event that
your taxes become delinquent, the agency reserves the right to cancel you Voluntary
Coverage."
Exhibit 8.
9.
Although the Petitioner never filed a formal letter
requesting termination of coverage, the
52 tax reports indicating corporate officer exemption that the Petitioner filed
with the Department should satisfy the
requirement that the employer revoked its election for coverage in writing. The unfortunate mistake made
by the Petitioner's short-term secretary in 1992 should not haunt this employer for years and cost the Petitioner
thousands of dollars.
10.
Moreover,
even if the Voluntary Election Form were deemed to be properly executed when filed, the Department's remedy is stated as a
warning in the voluntary election form: "In the event that your taxes become delinquent, the agency
reserves the right to cancel your
Voluntary Coverage." The form does not indicate it is the Department's
sole remedy for an employer's failure
to pay taxes on officer wages, but, as the voluntary election form shows,
it is one remedy the Department may exercise.
11.
Under the totality of the circumstances of this case, the
proper remedy here is cancellation of coverage rather than the assessment of
thousands of dollars of back taxes the Petitioner was never aware it was obligated to pay.
12.
In view of the above, the payments the Petitioner made to
its president in 2004 through 202007 are not subject to unemployment insurance
tax. Unemployment insurance
coverage for the Petitioner's corporate officer is cancelled both retroactively
and prospectively. The Order and Notice of
Assessment issued
Now therefore it is
ORDERED:
The Order and
Notice of Assessment issued
The Petitioner is not liable to pay
unemployment tax, penalties, or interest on wages the Petitioner paid to its president
during the period of 1 Q2004 through 202007.
Unemployment insurance coverage for the
Petitioner's corporate officer is cancelled both retroactively and prospectively.
Dated
and Mailed on
Brian
O. Watkins
Administrative Law Judge
Office of Administrative Hearings