Opinion
CLAIM NO. E218307
OPINION FILED SEPTEMBER 16, 1996
Upon review before the FULL COMMISSION in Little Rock, Pulaski County, Arkansas.
Claimant represented by the HONORABLE EDDIE H. WALKER, JR., Attorney at Law, Fort Smith, Arkansas.
Respondents represented by the HONORABLE BETTY DEMORY, Attorney at Law, Little Rock, Arkansas.
Decision of Administrative Law Judge: Affirmed.
OPINION AND ORDER
The claimant appeals an opinion and order filed by the administrative law judge on December 5, 1995. In that opinion and order, the administrative law judge found that the claimant sustained a loss in wage earning capacity equal to 20% rated to the body as a whole in excess of the permanent physical impairment established by the medical evidence. In addition, the administrative law judge found that the claimant's average weekly wage is $258.38. Therefore, the administrative law judge found that the respondents are entitled to a credit for overpayment of temporary total disability benefits against any other weekly indemnity benefits payable to the claimant.
After a de novo review of the entire record, we find that the claimant sustained a loss in his wage earning capacity equal to 20% rated to the body as a whole in excess of the permanent physical impairment established by the medical evidence. In addition, we find that the preponderance of the evidence indicates that the claimant's average weekly wage rate is $258.38. Therefore, we find that the respondents are entitled to a credit against future benefits to the extent that the respondents have paid disability compensation at a rate based on an average weekly rate that exceeded $258.38. Consequently, we find that the administrative law judge's decision must be affirmed.
The claimant was under contract to cut timber for the respondent, Bill Lovett, when, on August 13, 1992, the claimant sustained injuries to the head, cervical spine, and the lumbar spine when a limb from a falling tree struck him in the head. The claimant continued to work until October 26, 1992, when he was taken off-work by his physician, Dr. Raby. The claimant returned to work on January 11, 1993, and continued to work until he was again taken off-work by Dr. Raby on March 15, 1993. On July 16, 1993, the claimant underwent an anterior spinal arthrodesis with C plate instrumentation after excision of disc space at the L1-2 level of the spine. The parties stipulated that the claimant's healing period ended on August 18, 1994, and that the claimant has sustained a permanent physical impairment of 20% apportioned to the body as a whole.
When determining the degree of permanent disability sustained by an injured worker, the Commission must consider the degree to which the worker's future wage earning capacity is impaired. In addition to medical evidence demonstrating the degree to which the worker's anatomical disabilities impair his earning capacity, the Commission must also consider other factors, such as the worker's age, education, work experience, and any other matters which may affect the worker's future earning capacity, including the degree of pain experienced by the worker. Ark. Code Ann. § 11-9-522 (1987); Tiller v. Sears, 27 Ark. App. 159, 767 S.W.2d 544 (1989).
In the present case the claimant was 35 years old at the time of the hearing, and he has a high school education. He has worked in the timber industry for the majority of his adult life. A functional capacity evaluation performed at St. Vincent's infirmary in the summer of 1994, approximately one year before the hearing in this case, indicated that the claimant's ability to lift is subject to a 30 pound lifting restriction. According to Dr. Reginald Rutherford, this lifting restriction places the claimant in the light to medium work category. In addition, the claimant's 1994 functional capacity evaluation recommended that the claimant avoid repetitive bending, twisting, or jarring/vibration to the lower back. However, the claimant testified that he continues to hunt with a variety of weapons, including a deer rifle, a shotgun, a muzzle loader, and a crossbow. In addition, the claimant testified that he continues to mow with a riding lawn mower, and he continues to tend his own garden.
With regard to seeking employment after being released to return to work, the claimant testified that he has not reviewed the newspapers in his area for job advertisements, but he testified that he has applied for work driving a skidder, driving a logging truck, driving a truck in a poultry operation, and at a sporting goods store. The claimant's brief asserts that the claimant has not been offered work in light of his physical restrictions. However, the evidence does not support the claimant's contention. Claimant did not offer any evidence as to why he was not hired. Without evidence that he, in fact, sought employment from businesses that were actively seeking employees, evidence that he applied and was not offered a job is not persuasive. In that regard, evidence indicates that the claimant's inability to find work to date is based on economic conditions in the area, and not based on his physical limitations, as his brief suggests. In addition, the claimant's functional capacity evaluation, his ability to continue to operate his deer rifle, shotgun, and muzzleloader, and his ability to tend a garden are all consistent with relatively minor physical limitations resulting from his compensable injury.
The claimant will clearly not be able to operate a chainsaw, and he will therefore not be able to return to cutting timber for a living. However, the claimant's physical restrictions do permit continued work in the light to medium category of labor. In addition, the evidence indicates that the claimant has operated his own business for at least three years, including hiring other workers as needed, and in that regard, we find that the claimant has acquired knowledge and skills in business operation and management which will be transferrable to other types of work if the claimant actively pursues employment.
Accordingly, considering the claimant's relatively young age, his education level and work experience, the nature and extent of his back injury and his physical limitations therefrom, and all other matters properly in the record, we find that the claimant sustained an impairment to his earning capacity equal to 20% to the body as a whole in excess of the permanent physical impairment established by the medical evidence.
With regard to determining the claimant's average weekly wage, we initially note that the respondents have not challenged the claimant's status as an employee. The record indicates that the claimant worked a total of 42 1/2 weeks during 1992. Of that total, the claimant worked 32 weeks prior to the work-related injury and 10 1/2 weeks after his injury. Neither party disputes that the entire 42 1/2 weeks worked in 1992 represents the most appropriate period for calculating the claimant's average weekly wage. However, the parties disagree over the method of calculating the amount of "wages" the claimant earned during the 42 1/2 week period.
Arkansas Code Annotated § 11-9-518 (1987) states in relevant part:
(a)(1) Compensation shall be computed on the average weekly wage earned by the employee under the contract of hire in force at the time of accident and in no case shall be computed on less than a full-time workweek in the employment.
(2) Where the injured employee was working on a piece basis, the average weekly wage shall be determined by dividing the earnings of the employee by the number of hours required to earn the wages during the period not to exceed fifty-two (52) weeks preceding the week in which the accident occurred and by multiplying this hourly wage by the number of hours in a full-time workweek in the employment.
. . . .
(c) If, because of exceptional circumstances, the average weekly wage cannot be fairly and justly determined by the above formulas, the commission may determine the average weekly wage by a method that is just and fair to all parties concerned.
Arkansas Code Annotated § 11-9-102 (8) defines wages as follows:
"Wages" means the money rate at which the services rendered is recompensed under the contract of hire in force at the time of the accident including the reasonable cash value of board, rent, housing, lodging, or similar advantage received from the employer and including gratuities received in the course of employment from others than the employer when gratuities are received with the knowledge of the employer.
The claimant asserts that his relationship with Bill Lovett involved a "contract of hire," and that he was paid "wages" of $36,459.02 during 1992. However, after a de novo review of the entire record, we find that the claimant did not receive wages of $36,459.02 in 1992, as he asserts. In addition, we find that the claimant's average weekly wage cannot be fairly determined using the formulas in Ark. Code Ann § 11-9-518 (a)(1) or (a)(2). Therefore, we find that exceptional circumstances exist in the present case which require the Commission to determine the claimant's average weekly wage by a method that is just and fair to all parties.
In that regard, the claimant testified that his work involved cutting and trimming timber with a chain saw. Once he had cut and trimmed a tree, a skidder would come in and move the trimmed tree. The claimant testified that he did not own a skidder or a logging truck, and the claimant's testimony indicates that he did not operate a skidder or logging truck as part of his contract obligations in cutting timber. Instead the record indicates that the claimant's obligation was limited to cutting and trimming trees.
The claimant testified that he had been cutting timber for Bill Lovett for approximately one and one-half years when the injury occurred. According to the claimant, he owned and maintained his own chain saws, and he owned and maintained his own vehicle, a pick-up truck, that he used to reach the various tracts of timber. In addition, the claimant employed friends and relatives to assist him from time to time in cutting timber for Bill Lovett.
The claimant testified that he was paid by the ton, and that he received a Form 1099 from Bill Lovett each year. The claimant paid his own social security tax and his own self-employment tax. In addition, the claimant completed a federal income tax form 1040 Schedule C "Profit or Loss From Business (Sole Proprietorship)" each year to determine his business income. In making that calculation, the claimant reported authorized business expenses such as automobile expenses, depreciation, insurance (other than health), repairs and maintenance, utilities, wages paid by the sole proprietorship, and miscellaneous expenses.
According to the claimant's 1991, 1992, and 1993 federal income tax form 1040 returns, the claimant did not receive any wages, salaries, tips, etc., in excess of the business income calculated using Form 1040 Schedule C "Profit or Loss From Business (Sole Proprietorship)" during these tax years. The claimant had "Gross Receipts" totalling $36,459.02 in 1992, which, according to the claimant, were all received from cutting timber for Bill Lovett. After deducting business expenses totalling $25,478.04, the claimant calculated a net profit of $10,980.98 for his logging business in 1992, which the claimant reported as business income on his Form 1040. The claimant reported the following business expenses under Part II of Schedule C for the 1992 tax year:
Car and truck expenses $7430.82 Depreciation and section 179 expense deduction $3745.00 Insurance (other than health) $ 829.06 Interest other than mortgage $ 216.12 Repairs and maintenance $5189.60 Taxes and licenses $ 47.50 Utilities $ 258.02 Wages $7114.25 Seed $ 262.14 Timber $ 385-53 TOTAL $25478.04 [18] In short, we find that the preponderance of the evidence indicates that the claimant operated a sole proprietorship in the nature of a subcontract to Bill Lovett. In that regard, the claimant's tax records and testimony indicate the claimant was not recompensed solely for "services rendered." Instead, the claimant's logging business incurred substantial unreimbursed business expenses for equipment and for wages paid to other workers in fulfilling his timber cutting contract with Bill Lovett. In addition, the claimant acknowledged that he used his own chain saws and his own truck to fulfill the logging contract with Bill Lovett, and the record indicates that the claimant's logging business incurred substantial expense in maintaining that equipment and in paying wages to the claimant's employees. According to the claimant, all expenses were paid out of the sums of money received from Bill Lovett. Moreover, the record indicates that the claimant's 1992 business-related expenses for maintaining the business vehicle and chain saws and employing other individuals to work in the timber cutting operation consumed the majority of the gross revenues received from Bill Lovett in 1992.In addition, the claimant acknowledged that he did not receive a W-2 from Bill Lovett, but instead received a Form 1099. The claimant did not declare the sums of money that he received from Bill Lovett as "wages" under federal income tax law. Instead the claimant reported the sums as "Gross Receipts" for the sole proprietorship which he owned and operated. Moreover, the claimant testified that the "wages" paid by his logging business and reported on Schedule C of Form 1040 each year, were not paid to him, but were paid by him to the friends and family members that he hired to assist him in the contract with Bill Lovett. Thus, the claimant's tax records and his testimony both indicate that the claimant did not receive $36,459.02 in wages from Bill Lovett, as the claimant insists on appeal. To the contrary, the claimant reported only the profit or loss of the logging business, i.e., the "business income", as his personal income for federal tax purposes, and that income for the 42 1/2 weeks worked in 1992 represents the difference between gross receipts of $36,459.02 and business expenses of $25,478.04. Accordingly, for the reasons discussed herein, we find that the claimant operated a sole proprietorship in the nature of a subcontract to Bill Lovett.
This appears to be a case of first impression in Arkansas regarding what portion, if any, of business expenses to deduct from a sole proprietorship's gross income in calculating an average weekly wage. Although the claimant insists that no expenses should be deducted, other states addressing the issue have held that a sole proprietorship's net earnings should be used as the basis for determining a claimant's wages because inclusion of unreimbursed business expenses does not accurately reflect a claimant's actual earnings during the period. See, Oak Industries v. Industrial Commission of Arizona, 739 P.2d 829 (Ariz.Ct.App. 1987); Happle Solar Contractors v. Happle, 547 So.2d 1035 (Fla.Ct.App. 1989); D C Express, Inc. v. Sperry, 450 N.W.2d 842 Iowa 1990); LaFleur v. Hartford Insurance Company, 449 So.2d 725 (La.Ct.App. 1984);Baldwin v. Piedmont Woodyards, Inc., 293 S.E.2d 814 (N.C.Ct.App. 1982); Nortim, Inc. v. Workmen's Compensation Appeal Board, 615 A.2d 873 (Pa.Commw.Ct. 1992); Meredith Construction Company, Inc. v. Holcombe, 466 S.E.2d 108 (Va.Ct.App. 1996). Net earnings represents the difference between gross income and necessary business operating expenses. Duvio v. Continental Casualty Co., 446 So.2d 436 (La.Ct.App. 1984); Nortim, Inc., supra.; Florida Timber Products v. Williams, 459 So.2d 422 (Fla.Ct.App. 1984).
The business expense which has received the greatest degree of judicial attention is the expense associated with depreciation of equipment purchased and used by a sole proprietorship in carrying out its business purposes. One court has held that equipment depreciation, as calculated under the federal tax schedule, is not a true business "expense" but is merely allowed as a federal tax deduction on profit to promote investment and business. See, Broussard v. Zim's Alignment Service, Inc., 488 So.2d 395 (La.Ct.App. 1986); see also Fireplace Equipment v. Petruska, 796 P.2d 75 (Colo.Ct.App. 1990). However, other jurisdictions addressing this issue have rejected this reasoning and recognize depreciation as a necessary business expense related to long term capital expenditures. Moreover, the vast majority of jurisdictions addressing the issue now hold that depreciation expenses must be deducted from gross income to accurately calculate the actual income of a self-employed workers' compensation claimant. See, Elliot v. El Paso County, 860 P.2d 1363 (Colo. 1993);Florida Timber Products v. Williams, 459 So.2d 422 (Fla.Ct.App. 1984); D C Express, Inc. v. Sperry, 450 N.W.2d 842 (Iowa 1990); Backaus v. Murphy Motor Freight Lines, 442 N.W.2d 326 (Minn. 1989); Christian v. Riddle Mendenhall Logging, 450 S.E.2d 510 (N.C.Ct.App. 1994); Nortrim, Inc. v. Workmen's Compensation Appeal Bd., 615 A.2d 873 (Pa. Commnw. Ct. 1992); Meredith Construction Co., Inc. v. Holcombe, 466 S.E.2d 108 (Va.Ct.App. 1996).
In the present claim, after a de novo review of the entire record, we find that the fairest and most just method of calculating the claimant's average weekly wage is to reduce the claimant's 1992 gross earnings by an amount equal to business expenses paid during the period, including depreciation, and divide that figure by 42 1/2 weeks. In addition, we find that the preponderance of the evidence indicates that the gross receipts and business expenses itemized on Schedule C of the claimant's 1992 form 1040 accurately and fairly represent the actual business expenses incurred by the claimant's business during the course of his logging operation with Bill Lovett during that portion of 1992 that the claimant worked. In that regard, the claimant testified that all of his business' income during 1992 was generated from the logging contract, and the businessexpenses were also incurred exclusively from the claimant's logging contract with Bill Lovett.
With regard to the claimant's depreciation expense for 1992, the preponderance of the evidence in the record indicates that the claimant reported a depreciation expense consistent with federal law, and neither party has presented any evidence suggesting that the depreciation expense calculated under federal law ($3,745.00) deviates from the depreciation expense actually incurred by the claimant's logging business.
In addition, the record indicates that the full amount of 1992 vehicle expenses ($7,430.80) and the full amount of repairs and maintenance ($5,189.00) for 1992 must be deducted from gross receipts. Although the claimant has suggested that he received some personal benefit associated with these expenses, the vehicle, repair, and maintenance expenses reported in Schedule C purport to relate only to that portion of the claimant's total expenses which are actual business-related expenses for the vehicle and equipment as utilized for business purposes, and the claimant explained that his significant expenses reflect the fact that his operation can consume up to four chain saws per year. Moreover, the preponderance of the evidence in the record indicates that the claimant has accurately reported actual business expenses incurred in generating business income from the Bill Lovett logging contract. Therefore, we find that the claimant's "expenses", and his "repairs and maintenance" for his vehicle and his equipment ($7,430.82 + $5,189.60) are actual business expenses which were incurred in the contract to cut timber for Bill Lovett and which must be subtracted from the gross receipts received from that contract in determining the claimant's average weekly wage.
The claimant's 1992 Schedule C indicates that he also incurred expenses for seed ($262.14) which the claimant testified he used to re-grass areas disturbed by cutting. The claimant also reported an expense for a tract of timber ($385.53) which he purchased and then processed through Bill Lovett. In addition, the claimant's Schedule C indicates that the claimant incurred nonhealth-related insurance expenses for the business ($829.06), business-related interest expenses ($216.12), and business-related expenses for taxes and licenses ($47.50). The claimant also testified that he employed other individuals to assist in the logging operation ($7,114.25). The claimant's 1992 Schedule C indicates that each of these expenses were legitimate business expenses incurred as part of the logging operation, and neither party has presented any evidence indicating that these expenses were not incurred during the course of, and as required by, the logging operation with Bill Lovett. Therefore, we find that the preponderance of the evidence indicates that these expenses are also actual business expenses incurred in the contract to cut timber for Bill Lovett and are properly subtracted from the gross receipts derived from that contract.
Therefore, for the reasons discussed herein, we find that exceptional circumstances exist in this case, and we find that the claimant's gross receipts for 1992 ($36,459.02) must be reduced by his actual business expenses ($25,478.04) in calculating the claimant's average weekly wage. Dividing the difference between these two figures by the 42 1/2 weeks that the claimant worked in 1992, we find that the claimant's average weekly wage rate is $258.38. The respondents are therefore entitled to a credit against future benefits to the extent that the claimant has been paid disability compensation at a rate based on an average weekly wage exceeding $258.38. See, Roger Mixon v. Valley Implement, Full Workers' Compensation Commission, June 20, 1996 (Claim No. E315872).
In reaching our decision, we note that the claimant asserts in his reply brief, without citing any evidence in the record, that his workers' compensation insurance premiums were paid and accepted on the basis of the claimant's gross earnings. In that regard, the Florida Court of Appeals has indicated that, in proper cases, a claimant's average weekly wage rate may be based on the amount of insurance coverage contracted for, as distinguished from using the claimant's net earnings from a sole proprietorship. See, Mayflower Corp. v. Davis, 655 So.2d 1134 (Fl.Ct.App. 1994). However, in Davis the claimant paid his own policy premiums and the insurance contract stipulated the rate of coverage on the claimant. There is no evidence in the present case to indicate that the claimant paid the premiums for his workers' compensation coverage or that the insurance contract which covered the claimant contained a stipulated rate of coverage.
Therefore, after a de novo review of the entire record, and for the reasons discussed herein, we find that the claimant sustained an impairment to his wage earning capacity equal to 20% to the body as a whole in excess of the permanent physical impairment established by the medical evidence. In addition, we find that the claimant's average weekly wage rate is $258.38. Therefore, we find that the respondents are entitled to a credit to the extent that disability compensation has been paid to the claimant at a rate based on an average weekly wage exceeding $258.38. Accordingly, we find that the administrative law judge's decision must be, and hereby is, affirmed.
IT IS SO ORDERED.
Commissioner Humphrey dissents.