TODD D. DEGRAW and LARRY D. DEGRAW, Employees/Appellants, v. ZENITH EXTERIORS, INC., and GENERAL CAS. COS., Employer-Insurer, and ST. CROIX ORTHOPEDIC P.A., and BLUE CROSS BLUE SHIELD OF MINN., Intervenors.

 

WORKERS= COMPENSATION COURT OF APPEALS

MARCH 8, 2004

                                                                             

HEADNOTES

 

EMPLOYMENT RELATIONSHIP - INDEPENDENT CONTRACTOR; STATUTES CONSTRUED - Minn. Stat. § 176.042.  Where the independent contractors at issue were not ultimately "liable for a failure to complete the work or service" as specified under subdivision 2(5) of the statute, where they did not "receive[] 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" as specified in subdivision 2(6) of the statute (emphasis added), and where it was difficult to envision any likely circumstances under which they could suffer a loss under their contracts as specified in subdivision 2(7) of the statute, the compensation judge's conclusion that the independent contractors at issue satisfied all nine provisions of Minn. Stat. § 176.042, subd. 2, so as to be excluded from coverage as employee's under subdivision 1 of that section was clearly erroneous and unsupported by substantial evidence.

 

Reversed.

 

Determined by Pederson, J., Rykken, J., and Johnson, C.J.

Compensation Judge:  Carol A. Eckersen

 

Attorneys:  Eric R. Lee, Milavetz, Gallop & Milavetz, Coon Rapids, MN, for the Appellants.  M. Shannon Peterson, McCollum, Crowley, Moschet & Miller, Minneapolis, MN, for the Respondents.

 

OPINION

 

WILLIAM R. PEDERSON, Judge

 

Larry and Todd DeGraw appeal from the compensation judge=s determination that they are ineligible for workers= compensation benefits as employees of Zenith Exteriors, Inc., under Minn. Stat. ' 176.042.  We reverse.

 

BACKGROUND

 

On November 21, 2001, Larry and Todd DeGraw were injured while installing exterior siding on a new home in Monticello, Minnesota.  The DeGraws are father and son and share equally in the profits of a siding installation business known as Lolar Siding.  On November 21, 2001, Lolar Siding [Lolar] was employed as a subcontractor by Zenith Exteriors, Inc. [Zenith], a company that is in the business of providing and installing exterior siding on residential homes.^[1]  For several years prior to their injuries, the DeGraws had developed a working relationship with Zenith, and since about September of 1999 Lolar had worked almost exclusively with Zenith.^[2]

 

Larry DeGraw maintained an office and a fax machine in his home for the business of Lolar.  He used the fax machine to receive siding assignments and to send invoices that he prepared on Lolar stationery.  He deducted in his tax returns the use of his home as a business expense, and both he and Todd DeGraw deducted their truck expenses as self-employment expenses on their income tax returns.  Although Lolar maintained no nonhome business facilities relating to its work, it did provide hand tools, power tools, generators, compressors, and scaffolding for its jobs.^[3]  Key Land Homes also required all of its subcontractors to procure a general liability insurance policy and workers= compensation coverage before performing work on any of its job sites.  Zenith made the same requirement of its subcontractors.  Lolar had purchased a general liability policy, and the DeGraws each had purchased a workers= compensation policy that excluded coverage for themselves.  The DeGraws did hire, direct, and pay for contract labor during 2001, and those helpers were presumably covered by the DeGraws= workers= compensation policies.  Lolar was not required to consult with Zenith or to obtain Zenith=s approval before hiring others to assist in performing a job.^[4]  In addition to the cost of this equipment and insurance, Lolar also incurred certain expenses for taxes and licenses, extraneous supplies and safety equipment, and cell phones.^[5]  During 2001, Larry DeGraw also reported $319.00 in advertising expenses, for either business cards or an ad in a newspaper.  The largest expense for the DeGraws was the expense of their vehicles, and any travel expense related to their work was Lolar=s.

 

Gary Ites, Zenith=s sole full-time employee, testified at trial that he is responsible for obtaining plans from general contractors, bidding the work, providing materials to the job sites, scheduling the jobs, scheduling the siders, inspecting the work, paying the siders, and obtaining lien waivers from the siders.  Mr. Ites coordinates up to twelve projects at a time and works with Lolar and other siders on a regular basis.  Siders are selected based on their skill and their availability when a job is at hand.  Mr. Ites testified that, when a house is ready to be sided, he looks to his scheduling board to see where a particular sider is on a current job to determine when he will be available for the next job.  In Lolar=s case, Mr. Ites would fax to Lolar a drawing of the home, the requirements of the job, its location, and the date the material will be on the job site.  Upon completion of the work, Lolar would fax its invoice to Zenith for payment.  Mr. Ites testified that Lolar was responsible for satisfactorily completing each siding job within industry standards.  If the work was not up to standards, Lolar was required to make it right at no additional charge to Zenith.  However, Mr. Ites also acknowledged that, if Lolar failed to complete a job, Lolar would not be liable to Zenith for damages for non-completion or for obtaining a replacement to complete the job.  Zenith would simply pay Lolar for what had been completed and put on another siding crew to finish the job.

 

Siding contractors, including Lolar, were paid by Zenith primarily on a per-job basis  according to the Aindustry standard@ of a flat rate per square foot of siding and per linear foot of soffit and fascia installed.  Contracts also included certain established fees for various types of finishing work peculiar to each job.  In addition, however, Lolar performed hourly work for Zenith  on jobs where repairs became necessary after Lolar had completed its work or, with prior approval from the general contractor or Zenith, where additional work became necessary to accommodate the overall construction project.  Material for the jobs was provided by Zenith.  Lolar was not involved in selecting the siding or negotiating its price.

 

In April of 2003, the DeGraws filed claim petitions for workers= compensation benefits, based on their injuries of November 21, 2001.  Zenith denied liability, contending that the DeGraw=s were independent contractors and not employees.  The petitions were consolidated, and the matter came on for hearing on July 30, 2003, for the limited purpose of resolving the employment status issue.  At trial, the parties stipulated that the DeGraws worked in the building construction industry and that the provisions of Minn. Stat. ' 176.042 applied to this case.  In a decision issued August 5, 2003, the compensation judge determined that the DeGraws were independent contractors and not employees of Zenith.  The DeGraws appeal.

 

DECISION

 

The parties have agreed that the issue of Larry and Todd DeGraw=s employment status at the time of their injuries is to be determined under Minn. Stat. ' 176.042.  That statute, 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 or has filed business or self-employment income tax returns with the federal Internal Revenue Service based on that work or service in the previous year;

 

(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.

 

Minn. Stat. ' 176.042.

 

This court first had occasion to consider Minn. Stat.' 176.042 in Thomas v. Carpet Design Center, 61 W.C.D. 128 (W.C.C.A. 2000).  In Thomas, we construed this statute as representing Aa major expansion of workers= compensation coverage in the construction industry.@  We noted that subdivision 1 Abegins with the premise that construction workers who are otherwise independent contractors are nevertheless deemed to be employees, entitled to protection of the act, as long as they are performing services that are part of their employer=s trade or business.@  Thomas v. Carpet Design Center, 61 W.C.D. 128, 135 (W.C.C.A. 2000) (emphasis in original).  Subdivision 2, moreover, provides an exception to this presumptive employee status if the employer establishes that all of the listed conditions for independent contractor status have been satisfied.  We stated in Thomas that

 

[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.

 

Id., 61 W.C.D. at 135-36.

 

In the present case, the compensation judge concluded that Zenith had met its burden of proving all nine of the conditions set forth in subdivision 2 of the statute and that the DeGraws were therefore not employees under the statute.  The DeGraws argue that the Thomas case compels the conclusion that they were employees under Minn. Stat. ' 176.042 at the time of their injuries and that the judge=s decision to the contrary is unsupported by substantial evidence in view of the entire record as submitted.  We agree that the record does not reasonably establish that Zenith has satisfied all of the conditions of Minn. Stat. ' 176.042, subd. 2.

 

The judge determined that the DeGraws were Aresponsible for the satisfactory completion of work or services,@ pursuant to Minn. Stat. ' 176.042, subd. 2(5), to the extent that the DeGraws were responsible for providing siding installation that met the industry standard to constitute a satisfactory completion of their services.  While the record supports this conclusion by the judge, the record does not reasonably establish that the DeGraws were Aliable for a failure to complete the work or service@(emphasis added), as also specified by subdivision 2(5), because Aliable@ in this context suggests liability for damages.  Mr. Ites acknowledged that, if they were to walk off a job before its completion, the DeGraws would not be responsible for damages for noncompletion of the work or for obtaining a replacement to complete the job.  Mr. Ites indicated that the DeGraws would be paid for the work completed and that he would hire another siding crew to finish the job.^[6]  Zenith argues that Lolar=s purchase of a general liability insurance policy is further evidence that Lolar was responsible for the satisfactory completion of the work.  Again, while the general liability policy may support the conclusion of Lolar=s responsibility in the event of an Aoccurrence@ under the policy, it does not relate to any contractual liability for failure to complete the work.

 

Minn. Stat. ' 176.042, subd. 2(6), requires that, in order to be excluded from employee status, the independent contractor Areceives 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@ (emphasis added).  The judge concluded that the DeGraws were paid on a per-job basis, not at an hourly rate.  While this is primarily true, it is also true that the DeGraws were entitled to compensation on an hourly basis for certain repair work in cases where siding was damaged by another contractor and under circumstances where the general contractor or Zenith authorized additional work.  In such circumstances, Zenith, not the DeGraws, assumed the financial responsibility for the unexpected or unusual labor.  Under these circumstances, it cannot be said that the DeGraws were paid for their work on a per-job basis Aand not on any other basis@as contemplated by subdivision 2 (6).

 

Minn. Stat. ' 176.042, subd. 2(7), relates to whether the independent contractor may realize a profit or suffer a loss as a result of his or her services.  The compensation judge concluded that the DeGraws could realize a profit or suffer a loss on a job because their profit depended on Atheir expenses, such as a vehicle, materials and wages paid.@  It is difficult to envision any likely circumstances under which the DeGraws could suffer a loss under their contracts with Zenith.  They received income relative to siding installation for work performed and only for work performed.  Their compensation was based upon an Aindustry standard@ whereby they could determine quite accurately, before the job commenced, what they would be paid by Zenith.  As the judge noted, the DeGraws had nothing to do with purchasing the siding and were at no risk for a profit or loss if siding costs were different from those anticipated.  Variable expenses associated with vehicles, materials, and wages were incurred only if the DeGraws worked, in which case their pay would almost certainly exceed their costs.  It is true that they could earn more by working more, but A[o]pportunity for higher earnings from piecework . . . does not indicate an opportunity for profit or loss.@  Minn. R. 5224.0340, subp. 5.^[7]  Under the essentially exclusive arrangement that the DeGraws had with Zenith, we see little or no opportunity for loss to the DeGraws.

 

We conclude that substantial evidence does not support the judge=s finding that Lolar  Siding satisfied all of the conditions of Minn. Stat. ' 176.042, subd. 2.  Lolar had an essentially exclusive and continuing relationship with Zenith Exteriors and, apart from that relationship, did not make its services available to the general public or in any other way hold itself out as being Ain business@ in the sense contemplated by Minn. Stat. ' 176.042, subd. 2.  The primary obligation of Lolar under its contracts with Zenith was the provision of labor, such labor being necessary to the fundamental business purpose for which Zenith existed.  Here, we conclude that Zenith did not meet its burden of satisfying the provisions of paragraphs 5, 6, and 7 of subdivision 2, and therefore we conclude that the DeGraws qualified as employees under subdivision 1 of the statute.  Accordingly, we reverse the decision of the compensation judge.