DeFelice v. State

187 Wash.App. 779

351 P.3d 197

Armand DeFELICE, Appellant

v.STATE of Washington, Employment Security Department, Respondent.

No. 32382–0–III.

Court of Appeals of Washington, Division 3.

May 26, 2015.

James Joseph Workland, Attorney at Law, Spokane, WA, for Appellant.

Marya Erin Colignon, Washington Attorney General's Office, Seattle, WA, for Respondent.

Opinion

BROWN, J.

¶ 1 Dr. Armand DeFelice¹ 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. 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.

FACTS

¶ 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 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 (the 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.² 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 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.

ANALYSIS

¶ 8 The issue is whether the Department's commissioner erred in deciding Dr. Loretta and Dr. Louise were “in employment” under Washington's Employment Security Act as found by the ALJ and 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 Wash.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 Wash.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) ).

¶ 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. Dept., 155 Wash.App. 24, 32, 226 P.3d 263 (2010) ; Tapper, 122 Wash.2d at 406, 858 P.2d 494. The commissioner's decision is considered prima facie correct. Smith, 155 Wash.App. at 32, 226 P.3d 263. The burden of demonstrating the decision's invalidity is on the party asserting invalidity. W. Ports Transp., Inc., 110 Wash.App. at 449, 41 P.3d 510.

¶ 11 “We review questions of law de novo, giving substantial weight to the agency's interpretation of the statutes it administers.” Smith, 155 Wash.App. at 32, 226 P.3d 263. 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, 226 P.3d 263. 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 Wash.App. 403, 411, 914 P.2d 750 (1996). As such, we “will not substitute [our] judgment on witnesses' credibility or the weight to be given conflicting evidence.” W. Ports Transp., Inc., 110 Wash.App. at 449, 41 P.3d 510. “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, 41 P.3d 510 (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 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 Wash.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 Wash.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 Wash.2d at 409, 255 P.2d 892 (“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 Wash.2d at 409, 255 P.2d 892. Just because the parties call their arrangement a partnership does not make it a partnership. State v. Bartley, 18 Wash.2d 477, 481, 139 P.2d 638 (1943). Essential to the creation of a partnership is an express or implied partnershipcontract. Eder v. Reddick, 46 Wash.2d 41, 49, 278 P.2d 361 (1955). Whether a partnership contract exists depends on the...