Bain v. Tax Reducers, Inc., H037452

Decision Date28 August 2013
Docket NumberH037452
CourtCalifornia Court of Appeals Court of Appeals
Parties Harold C. BAIN, Plaintiff and Appellant, v. TAX REDUCERS, INC., Defendant and Appellant.

Richard D. Schramm, Employment Rights Attorneys, Attorneys for Plaintiff/Appellant Harold C. Bain.

John P. McDonnell, Myers, Hawley, Morley, et al., Attorneys for Respondent/Appellant Tax Reducers, Inc.

Márquez, J.

Defendant and appellant Tax Reducers, Inc. (TRI), appeals from a judgment after a court trial in which the court awarded plaintiff and respondent Harold Bain damages for unpaid wages ( Lab.Code §§ 202, 203, 1194, & 1194.2 )1 and for breach of contract based on a judicially supervised settlement of Bain's wage claim. TRI argues that the court erred when it (1) held that Bain's statutory wage claims were not barred by the statute of limitations; (2) applied the presumption that every person who performs services is presumed to be an employee; and (3) imposed statutory penalties pursuant to both sections 203 and 1194.2.

Bain filed a cross-appeal challenging the court's rulings that James Brooks Griffin, TRI's president and majority shareholder, could not be held personally liable for Bain's wage claims.

On TRI's appeal, we hold that Bain's statutory wage claims under sections 202, 203, and 1194, which are subject to a three-year limitations period, were not time-barred because the limitations period was equitably tolled while Bain pursued his administrative claim before the Labor Commissioner. We conclude, however, that Bain's claim for the statutory penalty for failure to pay minimum wages under section 1194.2 was time-barred because it is subject to a one-year limitations period and Bain's complaint was not filed within one year of the date the action before the Labor Commissioner became final. Since Bain's claim for the section 1194.2 penalty was time barred, we hold the trial court erred when it imposed that penalty. We do not reach TRI's other contentions regarding the section 1194.2 penalty. We also hold that substantial evidence supports the trial court's finding that Bain was an employee under the multifactor test in S.G. Borello & Sons, Inc. v. Department of Industrial Relations (1989) 48 Cal.3d 341, 256 Cal.Rptr. 543, 769 P.2d 399 ( S.G. Borello ) and that there was no prejudicial error in the court's use of the presumption of employment. And we conclude that the trial court did not err in imposing a section 203 penalty for TRI's failure to timely pay final wages upon Bain's resignation.

On Bain's cross-appeal, we agree with the trial court that Griffin could not be held personally liable for Bain's wage claims; thus, the trial court did not err when it denied Bain's motion to amend the complaint to add Griffin as a defendant. Bain has also appealed the court's orders relating to attorney fees, which we discuss in a separate opinion filed concurrently herewith in Case No. H038002. (nonpub. opn.).

For the reasons stated below, we will modify the judgment to strike the $ 7,700 awarded to Bain as a penalty under section 1194.2. As so modified, we will affirm the judgment.

Description of TRI

TRI provides tax preparation and bookkeeping services to individuals and businesses. James Brooks Griffin has been the president and chief executive officer of TRI since 1997; Griffin owns two-thirds of the company's shares. TRI had three offices in Santa Clara County and decided to expand by purchasing another tax preparation practice. In December 2004, TRI purchased a tax preparation and accounting service in Los Altos known as Conard and Associates, which was owned by Paul Conard. Harold Bain worked for Conard from April 2002 until December 31, 2004. Since TRI agreed to bring Bain on in the same capacity as he worked for Conard, it is necessary to describe Bain's professional history with Conard as it relates to the question whether Bain was an employee or an independent contractor when he worked for TRI.

Bain's Working Relationship with Conard and Associates

Before going to work for Conard, Bain worked as an accountant. He attended training classes in tax preparation offered by the Voluntary Income Tax Assistance (VITA) program3 and helped people do their taxes as a VITA volunteer, but he did not have a tax preparation business before working for Conard.

Bain did not bring any fee-paying clients with him when he started working for Conard, but he had a "couple" of friends, whose taxes he had previously done for free, who became Conard's clients. Bain did not have tax clients of his own while he worked for Conard or TRI. The only outside "client" Bain had was the Los Altos Masonic Temple Association (LAMTA). Bain did LAMTA's tax return as part of his duties as a member of its board.

When Bain started working for Conard, they agreed that he would be an independent contractor and that Conard would pay him $ 1,100 for 32 hours of work per week. If Bain worked less than 32 hours in a week, Conard paid him on an hourly basis, based on the $ 1,100 weekly rate ($ 1,100 per week ÷ 32 hours = $ 34.38 per hour). If Bain worked 32 hours or more a week, Conard paid him the $ 1,100 weekly salary. Initially, Bain prepared an invoice for Conard and was paid every two weeks. Conard did not make any withholdings from Bain's pay and reported Bain's income as "non-employee compensation" on a 1099 form. Since Conard issued him a 1099 form, Bain reported his income to the IRS on a Schedule C (Profit or Loss From Business) form. Bain and Conard did not have a written agreement describing their relationship.

While working for Conard, Bain went through the examination and investigation process necessary to become an "enrolled agent" with the IRS. After obtaining that certificate, Bain was authorized to appear before the IRS. Bain's status as an enrolled agent did not require that he work as an independent contractor.

Bain's duties at Conard and Associates evolved over time and eventually included setting up and dissolving corporations, and consulting on and maintaining computer networks. Bain helped Conard with advertising, pricing, hiring employees, and selecting clients; he managed the office when Conard was gone.

In the summer of 2004, Bain and Conard attended a seminar on the tax implications of using employees versus independent contractors. During the seminar, they both realized that Bain was actually an employee of Conard and Associates, not an independent contractor. They agreed to continue their relationship as usual until the end of 2004 and that Conard would begin withholding taxes and treating Bain as an employee beginning January 1, 2005. On July 9, 2004, Bain stopped giving Conard invoices for his services and began reporting his time on the same timesheet used by Conard's employees.

Bain's Working Relationship with TRI

In December 2004, one month before the date Conard had agreed to begin treating Bain as an employee, Bain and Conard's other two employees learned that Conard had sold his practice to TRI. They were worried about their jobs, so they asked Bain to represent them at a meeting with the new owner and to ask whether they would still have jobs after January 1, 2005.

Bain met with Griffin in mid-December 2004. At that meeting, Griffin told Bain they would all have jobs after January 1, 2005, and would be paid the same as before. Griffin said he had no interest in terminating the others, but said he was not sure he would be able to retain Bain past tax season because he thought Bain was too expensive. Bain made a suggestion for increasing revenue to justify keeping him on. Bain and Griffin did not discuss whether Bain would be an independent contractor or an employee.

After TRI acquired Conard and Associates, Bain and the other former Conard employees continued working in the same office space Conard had occupied. By January 2, 2005, no one had received a job application from TRI. That day, Bain put together a packet consisting of a W–4 form (withholding certificate), an I–9 immigration form (Employment Eligibility Verification), and copies of his enrolled agent certificate, his Social Security card, and his passport. Bain placed the packet on Griffin's desk. Griffin denied receiving those documents.

In January 2005, Bain attended at least three meetings with Griffin and other staff in which Griffin presented new tax software, demonstrated the software, and gave a presentation on TRI, describing the Conard acquisition as a "high end tax preparation office." Bain went to the same meetings as other staff members, as Griffin told Bain to attend all staff meetings.

Griffin testified that tax preparation was the essential function of TRI's business. Bain's duties at TRI included preparing tax returns, bookkeeping services for clients, computer network maintenance, meeting with prospective new clients, researching tax questions, training other staff, attending continuing education meetings, answering phones, assembling tax returns, and filing.

After they started working for TRI, Griffin instructed Bain and the other former Conard employees to continue using the same weekly timesheets they had used while working for Conard. On the timesheets, the staff recorded the total number of hours worked each day, as well as information about the specific tasks accomplished, for both time that was billable to clients and nonbillable time. The billable time entries included the name of the client, the type of task performed, the date, and the amount of time attributable to each task. Thus, the timesheets were used both as a time card and to record information that was used to bill clients. Bain and the other staff members recorded their time daily and turned their timesheets in to Griffin weekly. Bain never invoiced TRI separately for his time. TRI paid the other staff members, but not Bain, every two weeks beginning in mid-January 2005.

After TRI acquired Conard and Associates, Bain no longer performed management functions; those were assumed by Griffin....

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