Oral Argument January 28, 2015.
Appeal from Spokane Superior Court. Docket No: 13-2-03197-8. Judge signing: Honorable Annette S Plese. Judgment or order under review. Date filed: 03/03/2014.
James J. Workland (of Workland Witherspoon ), for appellant.
Robert W. Ferguson, Attorney General, and Marya E. Colignon, Assistant, for respondent.
Authored by Stephen M. Brown. Concurring: Kevin M. Korsmo. Dissenting: Laurel H. Siddoway.
Stephen M. Brown, J.
[187 Wn.App. 784] ¶ 1 Dr. Armand DeFelice appeals the Employment Security Department commissioner's decision affirming an order and notice of assessment requiring Dr. Armand to pay $1,896.37 in unemployment insurance back taxes, penalties, and interest. Dr. Armand contends the commissioner erred when it found Drs. Loretta and Louise were in his employment and not partners excluded under the Employment Security Act, Title 50 RCW. Because substantial evidence supports the commissioner's factual findings and the conclusions of law are consistent, we affirm the commissioner's decision and deny Dr. Armand's attorney fees request.
¶ 2 In 1966, Dr. Armand began a dental practice and registered it as a sole proprietorship. On February 1, 1990, Dr. Armand entered into an association agreement with Dr. Loretta. On January 2, 2004, Dr. Armand entered into another association agreement with Dr. Louise. Both association agreements provided that Dr. Armand " agrees to have Associate associate with him for the purpose of practicing dentistry on [Dr. Armand's] patients." Admin. Record (AR) at 241, 247. The association agreements specifically stated all dentists " agreed that the doctors are not partners." AR at 241, 247. The association agreements provided for the manner of termination.
¶ 3 The association agreements specified each dentist's responsibilities. While each dentist remained responsible for determining how much to charge for their respective services, charges were billed under Dr. Armand's name and payments were deposited into his account. In addition, Dr. Armand had to provide necessary facilities and equipment and pay the rent and all expenses. Both Drs. Loretta and [187 Wn.App. 785] Louise received 35 percent of the fees they produced. This amount later increased to 40 percent.
¶ 4 In 2012, after it was discovered Dr. Armand was not paying unemployment insurance taxes, the Employment Security Department (Department) audited the dental practice to determine whether the dental practice had to pay back taxes, penalties, and interest. Thus, the principal focus of the audit was to ascertain whether Drs. Loretta and Louise were employees of Dr. Armand's dental practice. The audit covered the years 2010, 2011, and the first quarter of 2012.
¶ 5 The auditor, Angela Hughes, reviewed various tax returns, quarterly and annual reports, check registers, and general ledger accounts. Ms. Hughes requested any agreements between the dentists; the dental practice's bookkeeper complied. Ms. Hughes never asked if the association agreements were still valid and enforceable. Ms. Hughes' review revealed (1) the dental practice was registered as a sole proprietorship with both the Department and the Washington Department of Revenue, (2) Dr. Armand listed the dental practice on his tax returns as a sole proprietorship, and (3) payments made to Drs. Loretta and Louise were reported as miscellaneous income on Internal
Revenue Service (IRS) Form 1099s. She concluded Drs. Loretta and Louise were employees of the dental practice and unemployment insurance taxes should have been paid. The Department issued Dr. Armand an order and notice of assessment requiring him to pay $1,896.37 in back taxes, penalties, and interest. Dr. Armand first administratively appealed.
¶ 6 At the administrative hearing, Dr. Armand testified the association agreements were no longer valid as the three dentists had orally entered into a partnership. He stated Drs. Loretta and Louise receive 40 percent of their [187 Wn.App. 786] production, their share of the dental practice's profits. The remaining 60 percent of production is applied to overhead. Dr. Armand then took home what was left after overhead was paid, which he claimed was about 40 percent of his production.
¶ 7 The administrative law judge (ALJ) concluded Drs. Loretta and Louise were employees of the dental practice and affirmed. Dr. Armand petitioned the Department's commissioner for review of the ALJ's decision; the commissioner adopted the ALJ's findings of fact and conclusions of law and affirmed the ALJ. Dr. Armand sought superior court review. The superior court affirmed, finding substantial evidence supported the commissioner's decision. Dr. Armand appealed.
¶ 8 The issue is whether the Department's commissioner erred in deciding Drs. Loretta and Louise were " in employment" under Washington's Employment Security Act as found by the ALJ, and in approving the order to pay unemployment insurance back taxes, penalties, and interest. Dr. Armand contends Drs. Loretta and Louise are his partners and, thus, he argues, they are not in his employment.
¶ 9 Because unemployment taxes " exist to aid a class of people that society has chosen to protect," an employer's claim of exemption is closely scrutinized. W. Ports Transp., Inc. v. Emp't Sec. Dep't, 110 Wn.App. 440, 451, 41 P.3d 510 (2002). The Administrative Procedure Act (APA), ch. 34.05 RCW, governs judicial review of a final decision of the Employment Security Department commissioner. Tapper v. Emp't Sec. Dep't, 122 Wn.2d 397, 402, 858 P.2d 494 (1993). " The [ ]APA allows a reviewing court to reverse an administrative decision when, inter alia : (1) the administrative decision is based on an error of law; (2) the decision is not based on substantial evidence; or (3) the decision is arbitrary or capricious." Id. (citing RCW 34.05.570(3)).
[187 Wn.App. 787] ¶ 10 We sit in the same position as the superior court, applying APA standards directly to the agency record. Id. ; see RCW 34.05.558. While we review the commissioner's decision, when the commissioner adopts the ALJ's findings and conclusions, we review the underlying ALJ findings and conclusions supporting the decision. Smith v. Emp't Sec. Dep't, 155 Wn.App. 24, 32, 226 P.3d 263 (2010); Tapper, 122 Wn.2d at 406. The commissioner's decision is considered prima facie correct. Smith, 155 Wn.App. at 32. The burden of demonstrating the decision's invalidity is on the party asserting invalidity. W. Ports Transp., Inc., 110 Wn.App. at 449.
¶ 11 " We review questions of law de novo, giving substantial weight to the agency's interpretation of the statutes it administers." Smith, 155 Wn.App. at 32. The commissioner's findings of fact are reviewed for substantial evidence in light of the whole record. Id. " 'Substantial evidence' is evidence that would persuade a fair-minded person of the truth or correctness of the matter." Id. at 32-33. We defer to factual decisions, with the evidence viewed in the light most favorable to the party who prevailed in the highest forum that exercised fact-finding authority, here, the Department. William Dickson Co. v. Puget Sound Air Pollution Control Agency, 81 Wn.App. 403, 411, 914 P.2d 750
As such, we " will not substitute [our] judgment on witnesses' credibility or the weight to be given conflicting evidence." W. Ports Transp., Inc., 110 Wn.App. at 449. " When reviewing mixed questions of law and fact, [appellate courts] accept the [c]ommissioner's unchallenged factual findings, apply the substantial evidence standard to the challenged findings of fact, independently determine the applicable law, and apply the law to the facts." Id. at 450 (stating application of law to facts is de novo). An agency's decision is arbitrary and capricious if the decision is " willfully unreasonable, without consideration [187 Wn.App. 788] and in disregard of facts or circumstances." Id. It is not arbitrary and capricious if the decision is " exercised honestly and upon due consideration, even where there is room for two opinions." Id.
¶ 12 Dr. Armand incorrectly contends the evidence solely shows a partnership existed between him and Drs. Loretta and Louise. In determining whether an employer is responsible for contributions to the unemployment fund, the first question is whether an individual is in " 'employment.'" Penick v. Emp't Sec. Dep't, 82 Wn.App. 30, 38, 917 P.2d 136 (1996). " Employment" is defined as " personal service, of whatever nature, unlimited by the relationship of master and servant as known to the common law or any other legal relationship, ... performed for wages or under any contract calling for performance of personal services, written or oral, express or implied." RCW 50.04.100. If Drs. Loretta and Louise were partners, they would not be in " employment" as defined by the Employment Security Act.
¶ 13 " [T]he association of two or more persons to carry on as co-owners a business for profit forms a partnership." RCW 25.05.055(1). Required is joint ownership of the business and a joint right of control over the business' affairs. Bengston v. Shain, 42 Wn.2d 404, 409, 255 P.2d 892 (1953). " A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment" as wages to an employee. RCW 25.05.055(3)(c)(ii); see also Bengston, 42 Wn.2d at 409 (" The mere sharing of the net proceeds of a business venture with an employee, without more, does not of itself convert the relationship between the parties concerned into a partnership." ).
¶ 14 The burden of proving a partnership is on the party asserting its existence. Bengston, 42 Wn.2d at 409. Just because the parties call their arrangement a partnership does not make it a partnership. State v. Bartley, 18 Wn.2d 477, 481, 139 P.2d 638 (1943). Essential to the creation of a partnership is an express or implied partnership [187 Wn.App. 789] contract. Eder v. Reddick, 46 Wn.2d 41, 49, 278 P.2d 361 (1955). Whether a partnership contract exists depends on the parties' intentions, manifested by all facts and circumstances, including the parties' actions and conduct. Bartley, 18 Wn.2d at 482; see also Douglas v. Jepson, 88 Wn.App. 342, 347, 945 P.2d 244 (1997). While a partnership's existence can be established by circumstantial evidence, " circumstantial evidence does not tend to prove the existence of a partnership, unless it is inconsistent with any other theory." Eder, 46 Wn.2d at 49. Another important test in determining whether a partnership is formed is sharing losses. Gottlieb Bros. v. Culbertson's, 152 Wash. 205, 209, 277 P. 447 (1929); see also Bengston, 42 Wn.2d at 409 (" A partnership is formed by agreement to place money, effects, labor and skill ... in a lawful business and to divide the profits and bear the losses in certain proportions." ).
¶ 15 Dr. Armand challenges 16 of the commissioner's findings of fact and 4 conclusions of law. The majority of Dr. Armand's error assignments involve disputes with the commissioner's findings regarding the association agreements. He argues the association agreements were orally modified and/or revoked and a partnership formed. But the record contains other facts that do not support his argument.
¶ 16 In 1966, Dr. Armand registered his dental practice as a sole proprietorship with the Department and the Washington Department of Revenue. In 1990, Dr. Armand and Dr. Loretta entered into an association agreement, which specifically stated Dr. Loretta was not a partner. In 2004, Dr. Armand and Dr. Louise entered into a substantially similar association agreement, which again explicitly stated Dr. Louise was not a partner. These association agreements provided for each of the dentist's responsibilities, providing for the manner of termination in [187 Wn.App. 790] paragraphs seven and eight. However, terminable-at-will contracts may be unilaterally modified provided reasonable notice is given; once given, the old contract is effectively displaced. See Duncan v. Alaska USA Fed. Credit Union, Inc., 148 Wn.App. 52, 76-78, 199 P.3d 991 (2008).
¶ 17 The commissioner, by adopting the ALJ's findings and conclusions, found the association agreements remained effective and rejected Dr. Armand's partnership claims. We do not reexamine evidence weight and witness credibility determinations on review. Sufficient evidence supports the commissioner's determinations. Calling a business arrangement a partnership does not make it a partnership. For example, Dr. Armand continued to retain control over billing patients. For income, Dr. Armand received whatever was left over after he paid Drs. Loretta and Louise their 40 percent of production and overhead expenses. Dr. Armand argues there is equal sharing of profits because he too received 40 percent of his production. But his share is calculated differently than Drs. Loretta and Louise and is not exact. Drs. Loretta and Louise did not share losses. Drs. Loretta and Louise always took home 40 percent of their production regardless of whether the patients actually paid their bills.
¶ 18 Notably, the dental practice registration remained unchanged with the Department and the Washington Department of Revenue. If Drs. Loretta and Louise were considered partners, they would have had an account at the Department because the Department requires employers to report changes in owners and partners at the same time the quarterly tax and wage report is due. WAC 192-310-010(2)(a). The Washington Department of Revenue requires [187 Wn.App. 791] an owner to obtain new registration and license documents when there is a change in ownership. WAC 458-20-101(11)(a)(iii) (stating a change in ownership occurs with the " addition of one or more partners where the general partnership continues as a business organization and the change in the composition of the partners is equal to or greater than fifty percent" ). Instead, Dr. Armand continued to report the income and expenses of the dental practice on his individual income tax return as a sole proprietorship. Dr. Armand continued to report payments made to Drs. Loretta and Louise as miscellaneous income on Form 1099s.
¶ 19 Regarding the failure to file an IRS Form 1065, the commissioner used that failure as cumulative circumstantial evidence not showing a partnership. While Dr. Armand and the commissioner debate filing requirements, we note the penalty, not the filing requirement, may be waived for small partnerships. Rev. Proc. 84-35, 1984-1 C.B. 509. In light of the other circumstantial evidence demonstrating a partnership was not in existence, the issue of the failure to file a Form 1065 is not critical.
¶ 20 Dr. Armand argues the commissioner disregarded certain evidence tending to show a partnership existed. First, he points to his testimony at the administrative hearing regarding ownership of equipment where he stated the equipment is owned by all of the dentists. No documentation supported this assertion, and the commissioner was entitled to weigh its credibility. We do not reweigh the credibility of witnesses. W. Ports
Transp., Inc., 110 Wn.App. at 449. Second, he discusses the discretion and control Drs. Loretta and Louise exercised in caring for their patients. While control is relevant in establishing a partnership, doctors who are employees exercise control in treating their patients; professional discretion is an essential element of being a doctor. Third, he points to Dr. Louise's membership in the family limited liability company that owns the building where the dental practice leases space. But this is irrelevant to whether she is a [187 Wn.App. 792] partner in the dental practice. Fourth, Dr. Armand argues Ms. Hughes' failure to ask if the association agreements were still valid demonstrates bias. But the commissioner apparently found her process testimony more credible. Fifth, Dr. Armand argues the 40 percent production payments to Drs. Loretta and Louise show the association agreements were terminated, however, these could be explained as contract modifications. Sixth, while the creation of the PLLC in January 2013 and individual maintenance of insurance may tend to show the existence of a partnership, this circumstantial evidence is inconsistent with other evidence.
¶ 21 Given our analysis, we conclude the commissioner's findings of fact are supported by substantial evidence. Next, we conclude the commissioner's conclusions of law rejecting a partnership and deciding Drs. Loretta and Louise were in employment are supported by the findings of fact.
¶ 22 Drs. Loretta and Louise must be in " employment" in order to for Dr. Armand to be covered by the Employment Security Act. RCW 50.04.100. " '[E]mployment' exists if (1) the worker performs personal services for the alleged employer and (2) if the employer pays wages for those services (or pays under any contract calling for personal services)." W. Ports Transp., Inc., 110 Wn.App. at 451.
¶ 23 To meet the first prong of this test, " the personal services must clearly be performed for the alleged employer or for its benefit." Language Connection, LLC v. Emp't Sec. Dep't, 149 Wn.App. 575, 582, 205 P.3d 924 (2009). Dr. Armand's dental practice requires dentists in order to perform dental services. Drs. Loretta and Louise provided such services for Dr. Armand's benefit. Thus, Drs. Loretta and Louise performed personal services for Dr. Armand.
¶ 24 For the second prong, the contract called for the performance of personal services with Drs. Loretta and [187 Wn.App. 793] Louise receiving remuneration from Dr. Armand. " Wages" are " remuneration paid by one employer during any calendar year to an individual in its employment." RCW 50.04.320(1). " Remuneration" includes " all compensation paid for personal services." RCW 50.04.320(4). The money collected from the dental practice's patients was collected by Dr. Armand and deposited into Dr. Armand's account. Dr. Armand then paid Drs. Loretta and Louise out of this account. Drs. Loretta and Louise did not receive their payment when they finished a procedure. See Penick, 82 Wn.App. at 41 (holding employer paid wages when he collected payment from customers without ...