Midland Atlas Co., Inc. v. South Dakota Dept. of Labor, Unemployment Ins. Div.

• Decision Date: 23 May 1995
• Docket Number: No. 18999,18999
• Citation: 538 N.W.2d 232
• Parties: MIDLAND ATLAS COMPANY, INC., Appellant, v. SOUTH DAKOTA DEPARTMENT OF LABOR, UNEMPLOYMENT INSURANCE DIVISION, Appellee. . Considered on Briefs
• Court: South Dakota Supreme Court

Page 232

538 N.W.2d 232

MIDLAND ATLAS COMPANY, INC., Appellant, v. SOUTH DAKOTA DEPARTMENT OF LABOR, UNEMPLOYMENT INSURANCE DIVISION, Appellee.

No. 18999.

Supreme Court of South Dakota.

Considered on Briefs May 23, 1995.

Decided Sept. 27, 1995.

William E. Coester, Milbank, for appellant.

Drew C. Johnson, Agency Attorney, Aberdeen, for appellee.

MILLER, Chief Justice.

Midland Atlas Company, Inc. (Midland) appeals an order of the circuit court which affirmed the decision of the South Dakota Department of Labor that certain Midland sales representatives were employees rather than independent contractors for purposes of unemployment insurance tax liability. We reverse and remand.

FACTS

Midland publishes and sells county atlases. Homer G. Taggart, III, filed a claim for unemployment insurance benefits with the Unemployment Insurance Division (Division) of the South Dakota Department of Labor. Taggart claimed to have been a sales representative for Midland. The Division concluded that Taggart, and others similarly situated, were employees of Midland rather than independent contractors. Consequently, the Division held Midland liable for unemployment insurance taxes for Taggart and other sales employees.

Midland appealed and a hearing was held before an administrative law judge (ALJ). The ALJ concluded that Taggart had never performed services for Midland and proceeded to address the general question of the employment status of sales representatives for Midland. The ALJ found in pertinent part:

[Midland] enters into a written contract with individuals to sell atlases. The written contract provides the following:

-Representatives set their own hours and sales method of approaching customers

-Representatives are paid on a straight commission basis

-Representatives provide their own vehicles and pay all expenses--[Midland] does not reimburse any expenses

-[Midland] pays no fringe benefits including vacations, insurance premiums or a profit sharing plan

-Representatives have discretion on how to collect land information for [Midland]

-[Midland] retains the right to inspect the work and approve the final product of collecting land atlas information and sales methods

-Representatives can hire assistants

-[Midland] reserves the right to terminate the contract upon thirty days written notice or for good cause to terminate the contract immediately

-Representatives retain the right to carry other lines of work concurrent with [Midland's] work

-Representatives agree not to compete against [Midland] in any competing atlas related business for a period of two years after termination of the contract

-Representatives must maintain sufficient auto insurance

. . . . .

Before a person receives his commission, he must send [Midland] his production report. Production reports can be sent to [Midland] at anytime.

[Midland] furnishes representatives with a receipt book, information sheets, a blue print map and a sample atlas.

The ALJ turned to the statutory standard for exempting independent contractors from the unemployment insurance program. This statute provides:

Service performed by an individual for wages is employment subject to this title unless and until it is shown to the satisfaction of the department of labor that:

(1) The individual has been and will continue to be free from control or direction over the performance of the service, both under his contract of service and in fact; and

(2) The individual is customarily engaged in an independently established trade, occupation, profession or business.

SDCL 61-1-11. The ALJ concluded the first requirement was satisfied, i.e., Midland does not control or direct the performance of sales representatives. As for the second element, the ALJ ruled that those individuals who had independently established businesses outside of their sales work for Midland were independent contractors, exempt from the unemployment insurance program. The ALJ identified three individuals who had separate, established businesses:

One of [Midland's] former representatives, Steve Graves, does similar work for another business in Iowa. He performs this service as an independent contractor, has had his own business name since 1990 and also sells other products in addition to selling atlases.

One of [Midland's] current sales representatives, Art Arndt, is a professional sales person. In addition to selling atlases on behalf of [Midland] he owns Sonny's Lakeside Printing, and also performs services for Wilson Sign Company. He has a Minnesota sales tax license. He does not have a South Dakota sales tax license.

* * * * * *

Bob Brown sells atlases for [Midland] and usually decides what counties the sales representatives will work next. Ninety percent of Brown's services are done outside of South Dakota. From 1977 to about 1979 Brown not only sold atlases, but he also sold real estate, grain bins and equipment. Sometime in 1991 or mid-1992 Brown let his sales tax license lapse. Currently, Brown farms on a part-time basis.

In contrast, the ALJ ruled that those individuals, namely Maynard Pearson and Bob Caron, who had no other independently established business outside of their sales work for Midland, were employees within the meaning of the unemployment insurance program. As to these employees, the ALJ found:

Maynard Pearson currently sells atlases on behalf of [Midland]. When Pearson first worked for [Midland] in about 1983 he sold other companies' products. [Midland] did not object to Pearson doing this. Pearson also worked as an independent contractor for another business that published and produced atlases. Presently, Pearson does not sell any other products. Pearson's commission checks are made out to Buffalo Sales which is a corporation started by Pearson and his son. Bob Caron ^*, another sales representative, sells atlases for [Midland]. He has had a continuous working relationship with [Midland] since 1989.

Midland appealed the ALJ's decision. The trial court ruled the ALJ was incorrect in holding that individuals who have no independently established business cannot be independent contractors. The trial court remanded the case to the ALJ for reconsideration in light of the South Dakota Supreme Court's decision in South Dakota Dep't of Labor, Unemployment Ins. Div. v. Tri State Insulation, 315 N.W.2d 315 (S.D.1982). In Tri State, this Court held that salespeople for an insulation company were independent contractors and therefore exempt from the unemployment insurance program. Id. at 317-18.

After considering the Tri State case, the ALJ noted that the alleged employer in Tri State did not assign salespeople to particular territories or restrict their ability to sell for competing companies. In contrast, Midland specifically prohibits salespeople from selling competitors' atlases during their sales relationship with Midland and for two years following any termination. Midland also assigns salespeople to certain territories. The ALJ reasoned that the Midland salespeople were more analogous to the sales employees in Miller Liquid Feeds v. S.D. Dep't of Labor, Unemployment Ins. Div., 340 N.W.2d 185 (S.D.1983). Like Midland, the employer in Miller prohibited salespeople from selling competing products and assigned them to particular sales regions. Concluding that the Midland salespeople who worked only for Midland were not holding themselves in readiness to perform services in that business for others, the ALJ amended her original conclusions of law to read, "[Midland] has not established that the other individuals [Pearson and Caron] who perform services for [Midland] are customarily engaged in an independently established trade, occupation, profession or business." Consequently, the ALJ again ruled that Maynard Person and Bob Caron were employees rather than independent contractors for purposes of unemployment insurance.

The circuit court affirmed the ALJ's decision. Midland appeals.

DECISION

Midland does not challenge the ALJ's factual findings. Midland disputes the ALJ's conclusion that certain sales representatives are employees rather than independent contractors, because they are not "customarily engaged in an independently established trade, occupation, profession or business."

The ultimate determination of whether an individual is an employee or an independent contractor is a mixed question of law and fact fully reviewable by this Court. Egemo v. Flores, 470 N.W.2d 817, 820 (S.D.1991). We give no deference to the decision of the administrative agency or the trial court. In re Hendrickson's Health Care Service, 462 N.W.2d 655, 656 (S.D.1990) (citations omitted).

Because Midland does not dispute that sales representatives perform services for Midland for wages, the burden is on Midland to prove these individuals are independent contractors under both elements of SDCL 61-1-1. Hendrickson's Health Care, 462 N.W.2d at 658 (citing Carr v. S.D. Dep't of Labor, Unemployment Ins. Div., 355 N.W.2d 10 (S.D.1984); Weber v. S.D. Dep't. of Labor, Unemployment Ins. Div., 323 N.W.2d 117, 120-21 (S.D.1982)). The ALJ and trial court concluded that Midland satisfied the first element, because it did not exercise control or direction over the performance of the salespeople. None of the parties challenge this ruling on appeal.

The second element requires a showing by Midland that sales representatives are "customarily engaged in an independently established trade, occupation, profession or business." SDCL 61-1-11. In justifying her conclusion that Caron and Pearson fail the "independently established trade" requirement, the ALJ noted that Midland assigns salespeople to certain territories and prohibits them from selling for other atlas companies during their time with Midland and for two years afterward. Yet, these facts are present for all salespeople at Midland, including those whom the ALJ designated as independent contractors. Furthermore, assigned territories and industry non-compete clauses are...