JEFFREY E. THOMAS, Employee/Appellant, v. CARPET DESIGN CTR. and GENERAL CAS. INS. CO., Employer-Insurer, and BLUE CROSS/BLUE SHIELD OF MINN., Intervenor.
WORKERS= COMPENSATION COURT OF APPEALS
OCTOBER 16, 2000
EMPLOYMENT RELATIONSHIP - INDEPENDENT CONTRACTOR. Where the requirements of Minn. Stat. ' 176.042, subd. 2, were not all met, the compensation judge erred in concluding that the petitioner, an independent contractor in floor installation, was not an employee of the respondent pursuant to Minn. Stat. ' 176.042, subd. 1.
Determined by: Wilson, J., Johnson, J., and Rykken, J.
Compensation Judge: Paul V. Rieke
DEBRA A. WILSON, Judge
Jeffrey Thomas appeals from the compensation judge=s decision that he is ineligible for workers= compensation benefits for his work injury because he was an independent contractor under the pertinent statute and rules. We reverse.
In 1992, Jeffrey Thomas began working as a salaried salesperson for Carpet Design Center [Carpet Design], a floor covering business that also sells lighting and ceramic tile. With regard to floor covering, Carpet Design has Amajor accounts@ with forty or fifty home builders, who send their customers to Carpet Design, with flooring allowances, to choose floor coverings for installation in their new homes. On occasion, Carpet Design works directly with the builders and also handles remodeling projects.
According to Paul Reinertson, president and co-owner of Carpet Design, at least 85% of Carpet Design=s floor covering business includes installation, which is performed by any of the fifteen to forty installers used by Carpet Design for that work. Mr. Reinertson testified that it was his intent to use independent contractors for flooring installation in order to ensure profitability. The installation work is scheduled by Carpet Design to meet the needs of the builders. The installers are generally paid by the Asquare@ (square foot) for flooring actually installed, with additional hourly pay for certain preparation work, such as grinding or sanding plywood floor seams. Carpet Design apparently sets the pay rates based on what competitors are paying, but in some cases installers have their own price lists. Flooring installers use their own hand tools, saws, and staples, and they generally use their own vehicles to transport the flooring itself from Carpet Design=s warehouse to the job site. After completing the work, the installers submit invoices to Carpet Design, which pays the installers and then charges the builders for the flooring, as installed, without breaking down the price between material and installation and including a markup on both. Carpet Design issues lien waivers covering both material and installation and offers a one-year warranty on both. One builder, Rottlund Homes, requires Carpet Design to pay installers as employees on an hourly basis. For those projects, Carpet Design withholds taxes and social security from payments to the installers, who are issued a W-2 form at the end of the year for that work. However, the ultimate basis for payment is essentially the same - - by the square. When an installer submits his or her invoice for Rottlund work, Carpet Design converts the payment into an hourly wage by dividing the total installation fee by $25.00 or $30.00 an hour, thereby arriving at a figure for hours worked.
By sometime in 1996, Mr. Thomas was doing both sales and wood and laminate floor installation for Carpet Design, having learned the installation process through seminars offered by Carpet Design=s flooring vendors. While working in both capacities, Thomas=s primary full-time job was sales, and he generally performed the installation work on nights or weekends. Carpet Design considered Thomas an employee for the sales work but an independent contractor for installation. As an installer, Thomas was required by Carpet Design to carry general liability insurance. Thomas and other installers were also asked to complete a AWorkers= Compensation Status Determination Test,@ a questionnaire prepared in response to the 1996 enactment of Minn. Stat. ' 176.042, which deals with the employment status of workers in the construction industry.
In July of 1996, Thomas formed a subchapter S corporation, Thomas Quality Homes, for the purpose of building single family homes to supplement his income. With respect to Thomas Quality Homes, Thomas functioned as a general contractor. Thomas Quality Homes had a letterhead and a business checking account but no office or other facilities. Thomas himself had a fax machine in his home, which operated on his home telephone number and which his wife also used in connection with her daycare business. At some point, Thomas began using Thomas Quality Homes invoices to bill for floor installation work he performed for Carpet Design, and he asked Carpet Design to make the checks for installation work payable to the corporation. Thomas testified that he made this request, on advice of his accountant, to simplify things for the accountant and for no other reason. Thomas also testified that Thomas Quality Homes was a Aflow through@ corporation, meaning that the Acash would simply flow right through it back to me.@ Thomas Quality Homes invoices listed Thomas=s home telephone number and cell phone number.
In October of 1997, Carpet Design terminated Thomas as a salesperson because of complaints by a builder that Thomas=s work through Thomas Quality Homes gave rise to a Aconflict of interest.@ Thomas continued, however, to perform laminate and wood floor installation for Carpet Design thereafter, working essentially full time in that capacity. When he was terminated from his sales position, Thomas lost health insurance benefits, the right to participate in a 401k plan, the right to reimbursement for his cell phone costs, and the use of a company vehicle, a pickup truck. However, Thomas purchased the truck from Carpet Design and used it in his installation work - - to pick up and transport materials to the job site - - as well as for personal purposes. He testified, in fact, that he used that truck and another he owned for Aeverything.@
On three or four occasions, Thomas was assisted in his work for Carpet Design by a friend and neighbor, Peter Tremaine. Thomas testified that Tremaine helped him to carry materials and clean up but that Tremaine did not do any installation. Thomas did not pay Tremaine for his help but would return the favor by assisting Tremaine in his landscape business or by mowing his lawn. Thomas did not ask Carpet Design=s permission to have Tremaine along on the job, and Carpet Design did not pay Tremaine, either.
While Thomas worked primarily for Carpet Design, he also installed the floors in two out of the three homes built by Thomas Quality Homes, in the homes of several relatives, and on a couple of occasions for a floor store called Redmann=s. The record indicates that Thomas obtained the jobs for Redmann=s on direct referral from Carpet Design, which apparently had no work for him on the dates in question. When installing floors for his relatives and for Thomas Quality Homes, Thomas purchased the flooring materials from Carpet Design, because flooring manufacturers sell flooring only to retail flooring businesses. Other than the jobs noted above, Thomas apparently performed floor installation only for Carpet Design. He did not advertise his services as an installer, but he did have federal employer identification numbers, both for himself individually and for Thomas Quality Homes. Thomas testified that Carpet Design required all installers to obtain federal employer identification numbers.
On September 17, 1998, Thomas severed his index finger and part of his thumb while installing a floor for Carpet Design in a home built by Goff Homes. When he subsequently filed a claim petition for workers= compensation benefits, Carpet Design denied liability, contending that Thomas was an independent contractor and not an employee. The matter came on for hearing before a compensation judge on April 4 and 5, 2000, for the limited purpose of resolving the employment status issue. Evidence included the testimony of Thomas, Reinertson, two other employees of Carpet Design, and several workers used by Carpet Design for installing countertops, carpet, and ceramic tile. Documentary evidence included invoices and checks for installation work performed by Thomas, Thomas=s 1997 and 1998 W-2 forms, and AWorkers= Compensation Status Determination Test@ forms completed by Thomas and by two other installers.
In a decision issued on April 20, 2000, the compensation judge determined that Thomas was an independent contractor under both the pertinent rules and the statute. Thomas appeals.
STANDARD OF REVIEW
In reviewing cases on appeal, the Workers= Compensation Court of Appeals must determine whether Athe findings of fact and order [are] clearly erroneous and unsupported by substantial evidence in view of the entire record as submitted.@ Minn. Stat. ' 176.421, subd. 1 (1992). Substantial evidence supports the findings if, in the context of the entire record, Athey are supported by evidence that a reasonable mind might accept as adequate.@ Hengemuhle v. Long Prairie Jaycees, 358 N.W.2d 54, 59, 37 W.C.D. 235, 239 (Minn. 1984). Where evidence conflicts or more than one inference may reasonably be drawn from the evidence, the findings are to be affirmed. Id. at 60, 37 W.C.D. at 240. Similarly, A[f]actfindings are clearly erroneous only if the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed.@ Northern States Power Co. v. Lyon Food Prods., Inc., 304 Minn. 196, 201, 229 N.W.2d 521, 524 (1975). Findings of fact should not be disturbed, even though the reviewing court might disagree with them, Aunless they are clearly erroneous in the sense that they are manifestly contrary to the weight of the evidence or not reasonably supported by the evidence as a whole.@ Id.
A[A] decision which rests upon the application of a statute or rule to essentially undisputed facts generally involves a question of law which [the Workers= Compensation Court of Appeals] may consider de novo.@ Krovchuk v. Koch Oil Refinery, 48 W.C.D. 607, 608 (W.C.C.A. 1993).
The Commissioner of the Department of Labor and Industry promulgated the independent contractors rules, Minn. R. ch. 5224.0010 et seq., in 1983. The compensation judge first analyzed the present case under Minn. R. 5224.0020, the portion of the rules dealing with artisans. Concluding that the safe harbor criteria under this rule were not all substantially met, for either employee or independent contractor status, the judge went on to apply Minn. R. 5224.0330 and Minn. R. 5224.0340, which contain general criteria for determining whether a worker is an employee or an independent contractor, and he concluded that, under those rules, Thomas was an independent contractor in his installation work for Carpet Design. The judge also determined that Thomas was an independent contractor within the meaning of Minn. Stat. ' 176.042 and that he was ineligible for workers= compensation benefits on that basis. Substantial evidence may support the judge=s conclusion that Thomas qualified as an independent contractor under the rules promulgated by the department. However, we are unable to affirm the judge=s determination that Thomas was an independent contractor under the statute.
Minn. Stat. ' 176.042, effective July 1, 1996, reads as follows:
176.042 Independent contractors
Subdivision 1. General rule; are employees. Except as provided in subdivision 2, every independent contractor doing commercial or residential building construction or improvements in the public or private sector is, for the purpose of this chapter, an employee of any employer under this chapter for whom the independent contractor is performing service in the course of the trade, business, profession, or occupation of that employer at the time of the injury.
Subd. 2. Exception. An independent contractor, as described in subdivision 1, is not an employee of an employer for whom the independent contractor performs work or services if the independent contractor meets all of the following conditions:
(1) maintains a separate business with the independent contractor=s own office, equipment, materials, and other facilities;
(2) holds or has applied for a federal employer identification number;
(3) operates under contracts to perform specific services or work for specific amounts of money and under which the independent contractor controls the means of performing the services or work;
(4) incurs the main expenses related to the service or work that the independent contractor performs under contract;
(5) is responsible for the satisfactory completion of work or services that the independent contractor contracts to perform and is liable for a failure to complete the work or service;
(6) receives compensation for work or service performed under a contract on a commission or per-job or competitive bid basis and not on any other basis;
(7) may realize a profit or suffer a loss under contracts to perform work or service;
(8) has continuing or recurring business liabilities or obligations; and
(9) the success or failure of the independent contractor=s business depends on the relationship of business receipts to expenditures.
This provision has not yet been construed or applied on the appellate level. However, it is evident that the legislation contemplates a major expansion of workers= compensation coverage in the construction industry. The statute begins with the premise that construction workers who are otherwise independent contractors are nevertheless deemed to be employees, entitled to the protection of the act, as long as they are performing services that are part of their employer=s trade or business. An exception to this presumptive employee status exists if all of the conditions of subdivision 2 are satisfied. However, a review of these conditions indicates clear legislative intent that workers who qualify as employees under subdivision 1 are not to be deemed independent contractors under subdivision 2 unless those workers are actually in business to provide residential or commercial construction or improvement services. That is, the statutory conditions for independent contractor status are designed to differentiate between those who are merely providing labor, specialized or not, and those who are actually running a business, with the usual trappings associated with business operations. Considerations relevant to whether a worker is Ain business@ in this sense may vary somewhat depending on the nature of the work at issue. However, all of the specific conditions for independent contractor status listed in subdivision 2 must be interpreted and applied in keeping with the overall intent of the statute. Moreover, because employee status is the general rule under subdivision 1, the employer bears the burden of proving that the conditions for independent contractor status, listed in subdivision 2, have been satisfied.
Some of the requirements of subdivision 2 are arguably present here. For example, Thomas admittedly has federal employer identification numbers. Minn. Stat. ' 176.042, subd. 2(2). He also operated under contracts with Carpet Design Ato perform specific services@ - - wood and laminate floor installation - - and it was reasonable for the judge to conclude that Thomas controlled Athe means of performing the service or work.@ Id., subd. 2(3). It is less than clear that Thomas contracted to provide his installation services Afor specific amounts of money,@ id., in that total pay for his work could only be estimated prior to completion of a job. In any event, whether or not some of the conditions listed in subdivision 2 were satisfied in this case, many were not.
Thomas used his own air compressor, hand tools, saws, and vehicles in connection with his floor installation work. Ownership of hand tools is, however, apparently standard in the industry, and Thomas used his vehicles not only for floor installation but for Aeverything,@ not unlike many ordinary employees who need vehicles for some facets of their employment. While Thomas did have a fax machine in his home, he had no separate telephone number for that machine or for other business use, his wife used the fax for her daycare operations, and there is little evidence that Thomas used the fax in connection with his installation work, as opposed to in connection with Thomas Quality Homes. Similarly, while Thomas used Thomas Quality Homes letterhead for installation invoices that he submitted to Carpet Design, there is no evidence in the record that Thomas had any office, at home or otherwise, that Thomas had any business licenses relative to installation, or that Thomas advertised his availability for installation services in any way, either through the Yellow Pages, trade journals, newspapers, signage, business cards, or even by word-of-mouth. Furthermore, Thomas kept no inventory or materials, other than staples. While the existence of Thomas Quality Homes complicates the analysis, the record simply will not support the conclusion that Thomas Amaintain[ed] a separate [floor installation] business with [his] own office, equipment, materials, and other facilities@ as specified by Minn. Stat. ' 176.042, subd. 2(1) (emphasis added).
We also find insufficient evidence in the record to support the conclusion that Thomas incurred the Amain expenses@ of floor installation, within the meaning of Minn. Stat. ' 176.042, subd. 2(4). The president and co-owner of Carpet Design conceded that the main expense of a flooring project is material, an expense Thomas did not and could not incur; flooring manufacturers would not sell flooring to him. However, even leaving aside the issue of whether flooring material can be considered an expense as contemplated by this provision, Carpet Design had other expenses related directly to floor installation work, including employee time costs associated with any necessary moving of appliances in homes in which flooring was to be installed; employee time costs associated with scheduling jobs, scheduling installers, paying installers, and billing builders for the work performed by installers ; employee time costs and vehicle expenses related to occasional delivery of flooring material to the job sites; costs associated with the purchase and maintenance of an Aedger,@ a very expensive piece of equipment available for occasional use by installers without charge to them; and costs attributable to advertising the availability of installed flooring. In comparison, Thomas had unspecified expenses relating to ownership of hand tools and saws; unspecified expenses for gasoline and vehicle maintenance relative to using his trucks on the job; expenses for purchase of staples, which he estimated cost about $5.00 a job; and an expense for the purchase of general liability insurance. The importance of Thomas=s expense for general liability insurance is substantially negated by the fact that it was Carpet Design that required Thomas to carry this insurance. Just as importantly, a comparison between Carpet Design=s expenses and Thomas=s expenses clearly indicates that it was Carpet Design, not Thomas, that incurred the kind of expenses that are typically associated with a business operation. At the very least, Carpet Design did not meet its burden of proving that Thomas incurred the Amain expenses@ associated with floor installation work.
The record may support the conclusion that Thomas was Aresponsible for the satisfactory completion of work or services,@ pursuant to Minn. Stat. ' 176.042, subd. 2(5), to the extent that he was expected to make any necessary repairs to his work or be subject to a potential Acharge back@ if Carpet Design sent someone else to remedy defects in his installation. However, as Carpet Design conceded, dissatisfied builders would come to Carpet Design, not to Thomas, with any complaints about installation, and it is evident that it was Carpet Design=s reputation that was at stake in those instances. Moreover, the record does not reasonably establish that Thomas was Aliable for a failure to complete the work or service,@ as also specified by subdivision 2(5) (emphasis added), because Aliable@ in this context suggests liability for damages. There is no evidence in this record that Thomas was responsible, financially or otherwise, to find someone else to complete a flooring project in his stead or to pay any extra costs that might be associated with any delays caused by his inability to complete a job.
Thomas was arguably paid by Carpet Design primarily on a per-job basis, even though he did not bid on jobs and there was no set total price, agreed upon in advance, for any given installation project. However, Thomas was entitled to additional pay, on an hourly basis, on projects in which floor grinding, unusual cleanup, or extra nailing was required. In other words, as between Carpet Design and Thomas, it was Carpet Design, not Thomas, that assumed the risk, and the corresponding financial responsibility, for any unexpected or unusual labor. Under these circumstances, it cannot be said that Thomas was paid for his work on a per-job basis Aand not on any other basis@ as contemplated by subdivision 2(6).
The remaining three conditions set forth in subdivision 2 all go to other financial opportunities and risks of business operations, that is, the opportunity for profit or loss, Minn. Stat. ' 176.042, subd. 2(7), the existence of continuing or recurring business liabilities or obligations, id., subd. 2(8), and the dependency of business success or failure on the relationship of business receipts to expenditures, id., subd. 2(9). These factors overlap to some extent and may logically be considered together.
Thomas received income relative to floor installation for work performed and only for work performed. While he could earn more by working more, A[o]pportunity for higher earnings from piecework .... does not indicate the opportunity for profit or loss.@ Minn. R. 5224.0340, subp. 5. Thomas apparently did not set or negotiate either the per-square charge or the hourly fee for his work; both were established by Carpet Design. Thomas also had virtually no fixed expenses, other than for general liability insurance, and, as previously indicated, the importance of this expense in terms of statutory analysis is largely outweighed by the fact that it was Carpet Design that required Thomas to carry the insurance in the first place. Furthermore, having no significant fixed business expenses, Thomas had no real opportunity for loss, in a business context, as his expenditures could not as a practical matter exceed his Areceipts,@ or income. He did not incur variable expenses, such as gasoline and staple costs, unless he worked, in which case his pay would always certainly exceed his costs. As for recurring Abusiness liabilities or obligations,@ under subdivision 2(9) (emphasis added), we see virtually nothing in the record relative to Thomas=s floor installation work that would qualify, except, again, the obligation to carry liability insurance.
We emphasize here again that Thomas may indeed be an independent contractor under the rules and pre-1996 case law principles. However, for certain workers in the construction industry, such independent contractor status is no longer determinative of entitlement to workers= compensation benefits. Because Thomas was not operating a floor installation business as contemplated by Minn. Stat. ' 176.042, subd. 2, he qualifies as an employee under subdivision 1 of that provision, and the judge=s conclusion to the contrary must be reversed.
 Now known as Carpet Max Design Studio.
 The builder was evidently unhappy that Thomas Quality Homes was competing with him for home construction projects. He agreed, however, that no conflict would be present by virtue of Thomas=s continued floor installation work for Carpet Design.
 The owners of Redmann=s called Doug Erickson, the dispatcher for Carpet Design, to inquire about available installers, and Erickson referred them to Thomas. Erickson testified that the Redmanns are his friends.
 Business in the sense of a commercial enterprise or venture. See The American Heritage Dictionary 220 (2d college ed. 1991).
 Pursuant to Minn. R. 5224.0340, subp. 7, a worker=s ownership of hand tools, instruments, clothing, and similar items is not indicative of independent contractor status where such ownership Ais common practice in their particular trade.@ While we are construing the statute here, not the independent contractor rules, the rules may provide guidance where the factors in the rules are similar or identical to those in the statute.
 While the compensation judge indicated at several points in his decision that Thomas had a home office, there is no evidence in the record to support any such conclusion, and Thomas testified to the contrary.
 See, e.g., Minn. R. 5224.0340, subp. 3.
 Carpet Design argues that flooring material may not be considered an Aexpense@ because Carpet Design sells the material to the builders. However, Carpet Design charges builders for the total flooring project without differentiating between labor and materials. That both labor and materials are ultimately profit items does not mean that they do not qualify as expenses initially.
 The record indicates that Carpet Design had at least one employee who spent the bulk of his time scheduling installers and installations.
 Thomas in fact testified that he had owned these basic carpentry tools for many years.
 See, e.g., Minn. R. 5224.0020, subp. 2G, indicating that employee status for an artisan is indicated if Athe artisan is not responsible for damages for noncompletion or for obtaining a replacement to complete the job@ (emphasis added).
 See, e.g., Minn. R. 5224.0340, subp. 5 (factors to consider in determining whether opportunity for profit or loss exists include continuing or recurrent financial liabilities or obligations and whether profit or loss in the work depends on the relationship of receipts to expenditures). It is worth noting, however, that this rule speaks in terms of Afinancial liabilities or obligations,@ while the statute uses the phrase Abusiness liabilities or obligations,@ in keeping with the more specific business orientation of the statute.
 See also Gerke v. Upstairs Constr. Co., slip op. (W.C.C.A. Apr. 21, 1997) (Avirtually all workers who are paid on a piece-work or by the project basis can earn more by performing more work . . . yet payment to such workers is generally characterized not as >profit= but as simple earning or wages@).
 We suppose that Thomas could potentially incur a loss - - that is, money out of pocket - - by hiring assistants and then paying them more that he received for the work from Carpet Design. However, to use this scenario as a basis to find the opportunity for loss defies common sense. It is also important to note here that Carpet Design hired Thomas for the work, not an installation service, and there is no evidence that Thomas had the right to send someone else to perform a job in his place. Reinertson in fact acknowledged that Carpet Design chose installers based on ability. Also, Thomas never in fact paid anyone else to help him in his flooring installation work.