Mail Boxes, Etc., U.S.A. v. Industrial Com'n of Arizona
| Decision Date | 26 August 1993 |
| Docket Number | No. 1,CA-IC,1 |
| Citation | 178 Ariz. 222,871 P.2d 1158 |
| Parties | MAIL BOXES, ETC., U.S.A., Petitioner Employer, State Compensation Fund, Petitioner Carrier, v. The INDUSTRIAL COMMISSION OF ARIZONA, Respondent, Patrick Loser, Respondent Employee. 92-0030. |
| Court | Arizona Court of Appeals |
This is a special action review of an Arizona Industrial Commission award establishing a sole proprietor's average monthly wage for purposes of a permanent disability award. One issue is presented: whether the Administrative Law Judge (ALJ) erred by relying on hypothetical earnings of a fictitious employee to establish the respondent employee's (claimant's) average monthly wage. Because the ALJ erroneously applied Ariz.Rev.Stat.Ann. ("A.R.S.") section 23-901(5)(i) (Supp.1992) in establishing claimant's average monthly wage, we set aside the award.
In April 1989, claimant purchased a franchise from the petitioner employer, Mail Boxes, Etc., U.S.A. (Mail Boxes). On April 10, 1989, he contacted the petitioner carrier, State Compensation Fund (Fund), to obtain workers' compensation insurance for his business, including sole proprietor coverage for himself.
On December 12, 1989, claimant fell and sustained industrial injuries to both knees. He filed a workers' compensation claim, which was accepted for benefits. On June 18, 1990, his average monthly wage was fixed at the amount of $1650 per month. Approximately one year later, his claim was closed with a permanent impairment. This closure notice computed the average monthly wage at $0 per month for purposes of permanent disability benefits. The claimant timely requested a hearing. At two ensuing hearings, testimony came from the claimant, two certified public accountants, and the Fund's underwriting department representative.
Claimant testified that after purchasing the Mail Boxes franchise, he immediately obtained workers' compensation coverage from the Fund. He stated that he read the application for sole proprietor coverage before he signed it and understood that in the event of injury the compensation benefit he would receive would be based on a figure of $1650 per month. He also stated that the franchise was his primary source of income and that he worked Monday through Saturday, approximately 55 hours per week, with additional time during the Christmas holidays.
Claimant further testified that his knee injuries required medical treatment, including surgery, and resulted in permanent impairment. He stated that he sold his business in August 1990 because his injuries would have made it necessary for him to hire a store manager at approximately $8 per hour.
Claimant explained that when he purchased Mail Boxes, he paid the former owners approximately $4,000 and assumed a $40,000 note. He loaned the business approximately $20,000 from his personal funds. He stated that he reported no personal income on his 1989 federal income tax return and that there was no profit from his Mail Boxes business in 1989.
Larry Counts testified on behalf of the Fund's underwriting department. He stated that on April 11, 1989, the Fund bound coverage for claimant. Claimant then signed and returned a written application for sole proprietor coverage, which was accepted by the Fund. Counts explained that sole proprietor coverage is not mandatory but is allowed by statute. He stated that claimant was charged a premium based on an assumed average monthly wage of $1650 per month and that he paid approximately $300 per quarter for this coverage. He also stated that claimant was paid $11,266 in medical benefits and $6,669.60 in temporary disability benefits following his industrial injuries.
Deborah J. Fagan, a certified public accountant, testified that she became the accountant for claimant's business beginning in December 1989. She stated that sole proprietors do not earn wages but instead receive draws against the net profit of the business. Sole proprietors do not receive wages because they cannot be their own employees; as a sole proprietor, the business and the claimant are the same entity.
Fagan further testified that in December 1989, claimant drew $3400 out of his business as a partial loan repayment of the initial $20,000 investment he made when he purchased the business; that from April through December 1989, claimant showed a net loss of $3976; and that during the same period he made capital expenditures of $10,716.20. Fagan stated that, considering the capital expenditures, claimant actually had a 1989 profit of $6740.20.
Steven M. Kopp, a certified public accountant, testified on behalf of the Fund. He stated that he had reviewed claimant's business records for April 1989 through August 1990. Contrary to Fagan, he concluded that the claimant had no earned income in 1989. He explained that a sole proprietor's wages are actually the earned income of the business. After reviewing claimant's federal income tax returns, financial statements and general ledger, Kopp stated that these documents reflected a loss in 1989.
Kopp testified that the $3400 payment to claimant in December 1989 did not represent earned income; instead, it was part of the initial $20,000 loan that claimant made to the business in April 1989. He stated that any money claimant took out of the business in 1989, including funds used for various capital expenditures, was part of this original loan because the business had no earned income.
Kopp further testified that the claimant made a profit in December 1989, but it was insufficient to offset losses incurred from April through November 1989. He stated that although Mail Boxes lost money in both 1989 and 1990, claimant made a profit when he sold the business. However, this profit was return on an investment, not earned income for the business.
On December 13, 1991, the ALJ entered an award setting claimant's average monthly wage at $1650 per month for purposes of permanent disability benefits. After the award was summarily affirmed on administrative review, the Fund brought this special action.
The Fund argues that A.R.S. section 23-901(5)(i) and claimant's insurance contract both manifest a clear intent that compensation for permanent disability is to be computed on the basis of the lesser of the assumed average monthly wage or claimant's actual average monthly wage at the time of injury. Arizona Revised Statutes Annotated section 23-901(5) provides in pertinent part:
(i) The sole proprietor of a business subject to the provisions of this chapter may be deemed to be an employee entitled to the benefits provided by this chapter on written acceptance, by endorsement, at the discretion of the insurance carrier of an application for coverage by the sole proprietor. The basis for computing premium payments and compensation benefits for the sole proprietor shall be an assumed average monthly wage of not less than six hundred dollars nor more than the maximum wage provided by § 23-1041 and is subject to the discretionary approval of the insurance carrier. Any compensation for permanent partial or permanent total disability payable to the sole proprietor shall be computed on the lesser of the assumed monthly wage agreed to by the insurance carrier on the acceptance of the application for coverage or the actual average monthly wage received by the sole proprietor at the time of injury.
(Emphasis added.)
In accordance with this statute, claimant's application for sole proprietor coverage stated:
The sole proprietor of a business subject to the provisions of this chapter may be deemed to be an employee entitled to the benefits provided by this chapter on written acceptance by endorsement at the discretion of the insurance carrier of an application for coverage by the sole proprietor. The basis for computing premium payments and compensation benefits for the sole proprietor shall be an assumed average monthly wage of not less than $600 nor more than the maximum wages provided by Section 23-1041 and is subject to the discretionary approval of the insurance carrier. Any compensation for permanent partial or permanent total disability payable to the sole proprietor shall be computed on the lesser of the assumed monthly wage agreed to by the insurance carrier on the acceptance of the application for coverage or the actual average monthly wage received by the sole proprietor at the time of injury.
(Emphasis added.) This application for coverage was signed by the claimant on April 25, 1989 and was approved and accepted by the Fund on May 17, 1989.
Applying the statutory and contractual provisions to the facts in this case, the ALJ found:
15. Evidence at hearing indicates applicant did not draw out monies for himself that would indicate wages paid. Evidence did establish that for year 1989, applicant's business did sustain losses in excess of $3,000.00. While business did generate profit in month of December, such is an unusual month in Mail Box business and cannot be construed as being representative of moneys [sic] earned on an average monthly basis. Business was sold 20 months after date of injury at a profit of $2000.00. Such also should not be used as a basis for wages earned as of date of injury.
16. Applicant's testimony reflected that if applicant had hired a general manager to perform work applicant was engaged during course of employment, such general manager could be hired for $8.00 per hour. Applicant further testified on average he worked 50 hours per week. Based upon objected to but unrefuted...
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