Hill v. Kansas Dept. of Labor
| Decision Date | 26 June 2009 |
| Docket Number | No. 99,726.,99,726. |
| Parties | Ted HILL, Individually, and OT Cab, Inc., Appellants, v. KANSAS DEPARTMENT OF LABOR, DIVISION OF WORKERS COMPENSATION, Appellee. |
| Court | Kansas Court of Appeals |
Stephen M. Kerwick and Gary L. Ayers, of Foulston Siefkin, LLP, of Wichita, for appellants.
Darren E. Root and A.J. Kotich, of Kansas Department of Labor, of Topeka, for appellee.
Before CAPLINGER, P.J., BUSER, J., and BUKATY, S.J.
The Workers Compensation Division (Division) of the Kansas Department of Labor (KDOL) found OT Cab, Inc. and its owner, Ted Hill (collectively, petitioners) knowingly and intentionally failed to maintain workers compensation insurance for OT Cab's drivers in violation of K.S.A.2008 Supp. 44-532(b), and found petitioners jointly and individually liable for a $10,000 civil penalty pursuant to K.S.A.2008 Supp. 44-532(d). In subsequent appeals, the Secretary of the Department of Labor and the district court affirmed the Division's final order. Petitioners appeal, alleging the district court erroneously (1) determined OT's cab drivers were employees rather than independent contractors; (2) interpreted K.S.A.2008 Supp. 44-532(d) to require imposition of a fine whenever a violation of K.S.A.2008 Supp. 44-532(b) is found; and (3) concluded OT Cab, Inc. and its owner, Ted Hill, were jointly and individually liable for the civil penalty.
We affirm the district court's determination that the cab drivers were employees of OT Cab rather than independent contractors under the "right to control" test. Further, we hold that because OT Cab knowingly and intentionally failed to procure workers compensation insurance for its employees as required by K.S.A.2008 Supp. 44-532(b), the Division was required to impose a mandatory civil penalty pursuant to K.S.A.2008 Supp. 44-532(d) in the amount specified in the statute.
Finally, we find the district court erred in disregarding OT Cab's corporate entity based upon the company's failure to maintain workers compensation insurance in violation of K.S.A.2008 Supp. 44-532(b). Violations of the Kansas Workers Compensation Act (KWCA) are remedied by the imposition of civil and/or criminal penalties provided by K.S.A.2008 Supp. 44-532(c) and (d) and need not be remedied by application of the "interests of justice" theory for piercing the corporate veil. Thus, we reverse and remand this case to the Division for imposition of a civil penalty against OT Cab in the amount of $25,000 pursuant to K.S.A.2008 Supp. 44-532(d).
Factual and procedural history
When Ted Hill purchased OT Cab in April 2004, the company employed a full-time manager, a dispatcher, full-time drivers, and part-time drivers. Due to decreasing profits, Hill terminated the employment of the dispatcher and part-time drivers. However, he retained the manager on a part-time basis and also retained two full-time drivers under service agreements purportedly changing the drivers' status to that of independent contractors as of January 1, 2005.
Historically, OT Cab had provided workers compensation insurance to its employees and it had a valid policy in effect from July 9, 2004, through June 20, 2005. Hill cancelled the policy effective January 1, 2005, based on his belief that OT Cab was not required to provide coverage for the drivers, who were independent contractors.
On June 1, 2005, an anonymous caller informed the Division that OT Cab did not have workers compensation insurance and that the owner claimed its employees were independent contractors. After investigation, the Division sent petitioners a statement of charges alleging petitioners knowingly and intentionally failed to maintain workers compensation insurance in violation of K.S.A.2008 Supp. 44-532. The Division also suggested assessment of a $25,000 civil penalty.
OT Cab reinstated its workers compensation insurance policy as of November 17, 2005, after the KDOL's Employment Security Division determined in an unrelated matter that OT Cab's drivers were employees rather than independent contractors. According to Hill, the annual premium for the new policy was $3,400.
Following an evidentiary hearing, the administrative hearing officer (AHO) issued a comprehensive initial order containing several key fact findings. Citing OT Cab's ownership and maintenance of the cabs, its requirement that drivers keep records and receipts, and its retention of the right to hire and fire drivers, the AHO found that OT Cab's drivers were employees rather than independent contractors. Further, the AHO concluded Hill knowingly and intentionally failed to maintain insurance in violation of K.S.A.2008 Supp. 44-532(b).
After considering unspecified mitigating factors, the AHO imposed a $10,000 civil penalty pursuant to K.S.A.2008 Supp. 44-532(d) and found Hill and OT Cab jointly and individually liable for the penalty.
Petitioners jointly sought review with the Secretary of the KDOL, who summarily affirmed the AHO's findings and conclusions except for his imposition of a $10,000 civil penalty. The Secretary ruled that when the Division exercises its discretionary authority and imposes a civil penalty in an amount other than the $25,000 penalty provided by K.S.A.2008 Supp. 44-532(d), the Division is required to articulate the reasons for the amount imposed. Because the AHO failed to do so, the Secretary remanded the order with directions to determine whether to assess a civil penalty, and if so, the amount of the penalty. If the amount of the penalty was other than the amount provided under the plain meaning of the statute, the AHO was to provide "a clear articulation as to the reasons" for the specific amount chosen.
On remand, the AHO articulated the reasons for imposition of a $10,000 civil penalty and again imposed that amount jointly and individually against the petitioners. The Secretary denied petitioners' subsequent request for review and ruled that the AHO's initial order and supplemental order would constitute the Division's final order. Petitioners jointly petitioned for judicial review in district court.
In its memorandum decision and order affirming the Division's final order, the district court restated the AHO's factual findings and determined OT Cab's drivers were employees rather than independent contractors. Further, the court determined the AHO did not abuse his discretion or act unreasonably, arbitrarily, or capriciously in assessing a $10,000 civil penalty jointly and individually against Hill and OT Cab.
Petitioners appeal, asserting the district court erred in (1) determining that the cab drivers were employees of OT Cab rather than independent contractors; (2) avoiding the issue of whether K.S.A.2008 Supp. 44-532(d) requires imposition of a fine whenever a violation of K.S.A.2008 Supp. 44-532(b) is found; and (3) affirming the Division's imposition of joint and individual liability upon OT Cab and Hill absent a finding of fraudulent activity or the use of the corporate entity as a facade.
Before considering the specific issues raised by the petitioners, it is helpful to review the statutory basis for the imposition of workers compensation insurance. With some exceptions not relevant here, the KWCA applies to all employers that employ employees and have an annual payroll exceeding $20,000. K.S.A. 44-505. Employers subject to the KWCA are required to maintain workers compensation insurance. K.S.A.2008 Supp. 44-532(b). When the director of the Division has reason to believe that an employer subject to the KWCA has knowingly and intentionally failed to maintain workers compensation insurance as required, the director issues a statement of charges to the employer and conducts a hearing in accordance with the Kansas Administrative Procedure Act (KAPA), K.S.A. 77-501 et seq. An employer found in violation of K.S.A.2008 Supp. 44-532(b) is subject to criminal and civil penalties. K.S.A.2008 Supp. 44-532(c), (d).
The employer may seek review by the KDOL's Secretary of the Division's initial order. K.S.A.2008 Supp. 75-5708; K.S.A. 2008 Supp. 77-527. Additionally, any civil penalty imposed or final action taken by the Division is subject to judicial review in the district court of Shawnee County. The judicial review of the Division's final action or imposition of a civil penalty is governed by the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA), K.S.A. 77-601 et seq. K.S.A.2008 Supp. 44-532(f); Ninemire v. Kansas Dept. of SRS, 284 Kan. 582, 585, 162 P.3d 22 (2007). The district court may grant relief from the Division's action if, inter alia, it determines the Division has erroneously interpreted or applied the law; the action is not supported by substantial evidence; or the action is otherwise unreasonable, arbitrary, or capricious. K.S.A. 77-621(c)(4), (7), (8).
In reviewing a district court's decision reviewing an agency action, this court must first determine whether the district court followed the requirements and restrictions placed upon it and then make the same review of the administrative agency's action as did the district court. Jones v. Kansas State University, 279 Kan. 128, 139, 106 P.3d 10 (2005). The party asserting the agency's action is invalid bears the burden of proving the invalidity and must overcome a rebuttable presumption of validity that attaches to the administrative agency's action. K.S.A. 77-621(a)(1); Jones, 279 Kan. at 139-40, 106 P.3d 10.
Petitioners first assert the district court erred as a matter of law by applying an incorrect legal standard to determine that OT Cab's drivers were employees rather than independent contractors. Specifically, petitioners suggest the court failed to apply "the most recent and controlling Kansas case law" as expressed in Travelers Indemnity Co. of Ill. v. Challenger Fence Co., 34 Kan. App.2d 276, 119 P.3d 666 (2005).
As discussed below, we believe the...
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