S. Constr. & Insulation v. Iowa Workforce Dev.

1

SOUTH CONSTRUCTION AND INSULATION, LLC, Plaintiff-Appellant, v. IOWA WORKFORCE DEVELOPMENT, Defendant-Appellee.

No. 23-0494

Court of Appeals of Iowa

May 22, 2024

Appeal from the Iowa District Court for Bremer County, Rustin Davenport, Judge.

A limited liability company challenges the dismissal of its petition for judicial review. AFFIRMED.

Luke C. Jenson of Jenson Law Firm, PLC, Waterloo, for appellant.

Brenna Bird, Attorney General, and John R. Lundquist, Assistant Attorney General, for appellee.

Heard by Tabor, P.J., and Greer and Schumacher, JJ.

GREER JUDGE

With little direction from our caselaw, when the only two members of a limited liability company (LLC) have equal shares of membership units but receive unequal shares of remuneration is Iowa Workforce Development (IWD) able to consider the extra amount received by the one member wages? And is the amount of those wages equal to the excess that one member received above and beyond the remuneration of the other? Because we find that the answer to both of these questions is yes, we affirm.

I. Background Facts and Prior Proceedings.

Justin and Randa South are married and the only two members of South Construction and Insulation, LLC (South Construction), which performs construction, insulation, and weatherization services. Justin and Randa each own fifty percent of South Construction's membership units. In 2016 through 2020, Justin and Randa each received the following remuneration from the LLC:

Year

Justin

Randa

2016

$30,700.00

$0.00

2017

$38,550.00

$7,647.00

2018

$50,000.00

$17,500.00

2019

$51,195.65

$18,200.00

2020

$103,195.65

$38,850.00

Phrased differently, Justin received between 5.04 times (in 2017) and 2.66 times as much remuneration (in 2020) as Randa, despite their equal division of membership units.

In January 2022, IWD completed an unemployment insurance tax audit of South Construction focused on the status of three persons working for the company. Along with questions involving whether some persons working for the company were employees or independent contractors, IWD requested information about remuneration payments made to the members of South Construction and the ownership interests of those members. South Construction reported "draws" made to Justin and Randa but did not report any wages paid. Based on the information provided by South Construction, IWD calculated what it considered reportable out-of-proportion remuneration for a period of the previous five years. ^[1]

Year

Justin

Randa

Reportable Out-of-Proportion Remuneration

2016

$30,700.00

$0.00

$30,700.00

2017

$38,550.00

$7,647.00

$30,903.00

2018

$50,000.00

$17,500.00

$32,500.00

2019

$51,195.65

$18,200.00

$32,995.65

2020

$103,195.65

$38,850.00

$64,345.65

To arrive at the remuneration it then characterized as wages, IWD subtracted Randa's remuneration from Justin's; determining the difference was not in proportion to his interest, thus making it reportable out-of-proportion remuneration or wages under the statute. Specifically, IWD found South Construction liable for unemployment insurance contributions beginning January 1, 2016, because it "paid sufficient wages in employment to qualify as a construction employer under Iowa law." It calculated the total amount of back unemployment taxes South Construction owed to be approximately $27,146.96 without consideration of interest and penalties because "LLC member wages were not reported to [IWD]."

South Construction challenged this characterization and the calculation. A contested case hearing was held before an administrative law judge (ALJ) in June 2022. At the hearing, Justin agreed that IWD's numbers for his and Randa's remuneration each year were accurate and that he and Randa held equal membership interests in South Construction. However, he insisted that he was not an employee of the company,^[2] but that he was paid because he was "seeking compensation from the earnings of [his] business." Noting he took "enough to live on to pay bills," he determined the amount of remuneration paid each year based on "the work, myself, day-to-day operations." He added that there was a "difference in what each of us [he and Randa] do, and they'll be a different draw for each of us then." At the same time, he explained that there was no agreement between him and Randa regarding the amount of remuneration. Randa stated that the remuneration paid was intended to be a "draw" and agreed that she and Justin do not have any agreement as to how much they each receive as remuneration. The ALJ affirmed the IWD audit finding that the payments to Justin in excess of those to Randa were wages, writing, "every year, Justin South has income in excess of the remuneration Randa South receives. That means South Construction remunerated Justin South in excess of that which would have been paid to him based solely on his membership interest." The ALJ then concluded that "[t]hat excess remuneration was for services performed by a member of an LLC.... [I]t must be treated as wages."

South Construction petitioned for judicial review in July. The district court dismissed the petition in February 2023, writing first that "[a] person can receive money from an LLC as a member, which is not compensation for services, and also receive money from an LLC as an employee, which is compensation for services." Then, the court found that "because [Justin] was always paid more than [Randa], the largest amount of remuneration to [Justin] that can be considered draws in any given year is 100% of the remuneration [Randa] received." In addition, it noted that the burden to prove that the money paid was for membership interest was placed on South Construction and South Construction did not meet that burden. Thus, it affirmed IWD's determination that the out-of-proportion remuneration was wages. Lastly, it accepted IWD's calculation of wages, rejecting South Construction's proposed alternative calculation as "divorced from the meaning of remuneration and . . . unworkable." South Construction appeals, alerting us there are no published appellate opinions to answer its questions.

II. Standard of Review.

Judicial review of an agency decision is governed by Iowa Code section 17A.19 (2022). See Hagen v. Serta/Nat'l Bedding Co., LLC, 1 N.W.3d 1, 5 (Iowa 2024). We apply the standards in section 17A.19 and determine whether our application of them produces the same result as that reached by the district court. Chavez v. MS Tech. LLC, 972 N.W.2d 662, 666 (Iowa 2022). If we reach the same result, we affirm the judgment of the district court. Mike Brooks, Inc. v. House, 843 N.W.2d 885, 889 (Iowa 2014). However, "[we] must reverse agency action when any one of several enumerated circumstances [in section 17A.19(10)] exists and 'substantial rights of the person seeking judicial relief have been prejudiced' as a result." Mosher v. Dep't of Inspections &Appeals, 671 N.W.2d 501, 508 (Iowa 2003) (quoting Iowa Code § 17A.19(10)). "The burden of demonstrating the required prejudice and the invalidity of agency action is on the party asserting invalidity." Iowa Code § 17A.19(8)(a).

III. Analysis.

As a limited liability company,^[3] South Construction challenges both IWD's (1) determination that the out-of-proportion remuneration was characterized as wages and (2) the method of calculation of the out-of-proportion amount.^[4] It claims that IWD's decision regarding the classification as wages was based on an erroneously broad interpretation of section 96.1A(40)(b)(5) and is inconsistent with IWD's prior practice of applying the statute, so it is without justification for its application as employed here. See id. § 17A.19(10)(c), (h). South Construction also contends IWD took a position not required by law that will have a negative impact on the private rights affected that is "grossly disproportionate to the benefits accruing to the public interest from that action that it must necessarily be deemed to lack any foundation in rational agency policy." See id. § 17A.19(10)(k). As a final point, it claims that the decision and the method of calculation are "otherwise unreasonable, arbitrary, capricious, or an abuse of discretion." See id. § 17A.19(10)(n).

A. Definition of Wages.

What are wages? South Construction contends that the out-of-proportion remuneration Justin received was not for services performed but instead was a membership draw, so it cannot be considered wages. Preliminarily we note that we do not have the benefit of South Construction's operating agreement (if one exists). See id. § 489.102(15) (providing that an operating agreement may be "oral, in a record, implied, or in any combination thereof"). But at oral argument before this court, South Construction confirmed it is a member-managed LLC. See id. § 489.407 (describing management differences involving an LLC). And under section 489.407(6)^[5] where remuneration is mentioned, "[a] member [is not entitled] to remuneration for services performed for a member-managed limited liability company, except for reasonable compensation for services rendered in winding up the activities of the company." There is no record of "winding up" activity over the years LLC funds were distributed here. So, it might seem that Justin was not entitled to remuneration for services performed, or in other words a wage, but this code section applies only to payments for management services, which are not allowed in a member-managed LLC. See also 5 Matthew G. Dore, Iowa Practice Series: Business Organizations § 13:18 (West Nov. 2023 Update) ("Members are not entitled to remuneration for management services in a member-managed company except for 'reasonable compensation for services rendered in winding up the activities of...