Opinion
DOCKET NO. A-3749-11T2
2013-10-01
JAMES W. LUCAS, Appellant, v. BOARD OF REVIEW, DEPARTMENT OF LABOR and VOXRED INTERNATIONAL, L.L.C., Respondents.
James W. Lucas, appellant, argued the cause pro se. Alan C. Stephens, Deputy Attorney General, argued the cause for respondent Board of Review (John J. Hoffman, Acting Attorney General, attorney; Lewis A. Scheindlin, Assistant Attorney General, of counsel; Mr. Stephens, on the brief). Respondent Voxred International, L.L.C. has not filed a brief.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Ashrafi and St. John.
On appeal from the Board of Review, Department of Labor, Docket No. 266,534.
James W. Lucas, appellant, argued the cause pro se.
Alan C. Stephens, Deputy Attorney General, argued the cause for respondent Board of Review (John J. Hoffman, Acting Attorney General, attorney; Lewis A. Scheindlin, Assistant Attorney General, of counsel; Mr. Stephens, on the brief).
Respondent Voxred International, L.L.C. has not filed a brief. PER CURIAM
Appellant James W. Lucas appeals from a final decision of the Board of Review finding him disqualified from benefits from November 29, 2009, on the ground that he lacked sufficient base year weeks or base year wages in employment, N.J.S.A. 43:21-4(e). Our examination of the record satisfies us that the Board's final decision was properly premised on facts in the record and is consonant with relevant statutory provisions. Accordingly, we affirm.
I.
The record discloses the following facts and procedural history leading to the administrative determination under review.
Lucas filed a claim for unemployment benefits on November 29, 2009. A determination by a deputy claims examiner mailed on December 23, 2009, held Lucas ineligible for benefits from November 29, 2009, on the ground that his employer was a limited liability company "with a 1065 filing return." Lucas appealed the determination and a hearing was held before the Appeal Tribunal on March 9, 2010. On March 30, 2010, the Appeal Tribunal affirmed the deputy's determination that Lucas's benefit claim was invalid under N.J.S.A. 43:21-4(e) because he lacked sufficient base year weeks or base year wages. Lucas appealed to the Board and, on September 27, 2010, the Board affirmed the decision of the Appeal Tribunal.
Lucas appealed the Board's decision to us. On June 29, 2011, on the Board's application, we remanded the matter to the Board for a new hearing and decision. The Board reopened the matter, set aside its prior decision, and remanded it to the Appeal Tribunal for a new hearing to take testimony. The Board requested information concerning Lucas's job title, the nature of his job, the amount of compensation received, and corresponding amount of interest he held in the partnership from 2002 through December 31, 2008. The Board also requested the organizational information concerning Voxred International, LLC, (Voxred) a copy of its 1065 federal tax return forms, and any W-2 forms, and copies of form K-1.
In the remand decision, the Board referred to the employer of Lucas, Voxred International, L.L.C., as a partnership. The employer was a limited liability company and not a partnership.
Form 1065 is an information return used to report the income gains, losses, deductions, credits, etc., from the operation of a partnership. A partnership does not pay tax on its income but "passes through" any profits or losses to its partners. Partners must include partnership items on their individual tax or information returns. IRS,www.irs.gov/instructions/i1065/ ch01.html (last visited September 25, 2013).
A limited liability company (LLC) may be classified for federal income tax purposes as a partnership, a corporation, or an entity disregarded as an entity separate from its owner by applying the rules in the Department of Treasury regulations. Treas. Reg. §301.7701-3 (as amended in 2006). However, pursuant to the entity classification rules, a domestic entity with more than one member will default to a partnership. Thus, an LLC with multiple owners can either accept its default classification as a partnership, or file Internal Revenue Service Form 8832 to elect to be classified as an association taxable as a corporation. N.J.A.C. 12:16-11.2.
The Board directed testimony and documentation "showing the number of partners for each year and the percentage of ownership of each partner during the entire course of time the claimant was a percentage holder and provided services." Additionally, "copies of payroll records, including [Federal Unemployment Tax Act] quarterly tax reports, and payroll forms showing social security and income taxes withheld and remitted to the federal government, should be obtained for all years from 2002 to 2008." The Board directed that "the chief auditor shall have the opportunity to provide a witness regarding the department's treatment of shareholders in a partnership for the collection of employer contributions."
Neither partnerships nor limited liability companies have shareholders. Partnership interests are owned by its partners and ownership interests in LLCs are owned by its members.
Voxred was formed as a Delaware limited liability company on September 6, 2001. Voxred registered with the State of New Jersey, Division of Revenue, as an "L.L.C. (1065 filer)" by application dated May 20, 2002. Voxred filed for bankruptcy and its plan of liquidation under Chapter XI of the U.S. Bankruptcy Code was approved by the United States Bankruptcy court by order dated October 1, 2009. Lucas stated he delayed filing his claim for unemployment benefits until after Voxred had been liquidated and he was no longer a member.
Upon remand to the Appeal Tribunal, a hearing was held on December 13, 2011. The Appeal Tribunal determined that the income received by Lucas from Voxred was not wages. That decision was appealed to the Board. The Board agreed with the Appeal Tribunal that the claim of Lucas dated November 29, 2009 should be invalid. The Board determined that "the claimant was a member of a partnership L.L.C. and such employment is exempt from unemployment benefits as the claimant was an employer and had no wages as defined by law. Hence, his work was not in employment and the claim dated November 29, 2009 is invalid." It is from that decision that Lucas appeals.
There is no significant factual dispute between the parties. At all relevant times, Lucas owned more than a ten percent membership interest in Voxred. From 2001 through 2007, Voxred reported to the Internal Revenue Service on Form 1065. Lucas reported pursuant to Schedule K-1, partner's share of income, deductions, credits, etc. In 2008, Voxred again filed Form 1065, and Lucas filed a K-1 showing his individual share of income, losses, deductions, credits and liabilities derived from Voxred. His 2008 K-1 evinced his partnership interest in Voxred as 10.253813%. Lucas also filed a W-2 for 2008 showing wages from Voxred of $100,000 and unemployment and temporary disability taxes were withheld from his earnings for that year.
Lucas previously had a twenty-five percent membership interest.
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Chief Auditor Christine Serenco testified that for unemployment and disability tax purposes, an LLC which files an Internal Revenue Service Form 1065 is a partnership under Department regulations. The regulations provide:
(a) A limited liability company (LLC) is composed of one or more authorized persons who complete and file a certificate of formation with the Division of Revenue. An LLC must have one or more members and may commence operations at any date or time after filing the certificate of formation.
(b) An LLC consisting of two or more members shall be classified as a partnership unless classified otherwise for Federal income tax purposes.
(c) An LLC consisting of one member shall be classified as a sole proprietorship unless the LLC elected a corporate classification for Federal income tax purposes by completing IRS Form 8832; or if the member is a corporation. In the event that the member is a corporation, and where the LLC is disregarded for Federal income tax purposes, the member shall be considered the employer with regard to all individuals performing services for the LLC.
[N.J.A.C. 12:16-11.2.]
The Board determined that Lucas, even though he was a working member of Voxred, is ineligible to receive unemployment compensation after Voxred ceased doing business and his work for Voxred ended. Since Voxred was treated as a partnership for tax purposes and since Lucas was a member, he was not an employee of Voxred, but an employer and therefore was not "in employment." Lucas argues that the policy of excluding a working member of an LLC violates the Administrative Procedure Act (APA), N.J.S.A. 52:14B-1 to -15, as administrative rule-making pursuant to N.J.S.A. 52:14B-23. See Metromedia, Inc. v. Director, Division of Taxation, 97 N.J. 313, 331-32 (1984). Lucas also contends that this policy violates the Unemployment Compensation Law (UCL), N.J.S.A. 43:21-1 to 24.30, and the agency's reasonable interpretation of the UCL as reflected in its regulations. Lucas asserts the denial of his unemployment compensation is also inconsistent with public policy considerations.
II.
Our scope of review of an agency decision is limited. In re Stallworth, 208 N.J. 182, 194 (2011) (quoting Henry v. Rahway State Prison, 81 N.J. 571, 579 (1980)). In challenging an agency conclusion, the claimant carries a substantial burden of persuasion and the determination of the administrative agency carries a presumption of correctness. Gloucester Cnty. Welfare Bd. v. N.J. Civil Serv. Comm'n, 93 N.J. 384, 390-91 (1983). We also accord substantial deference to the agency's interpretation of a statute it is charged with enforcing. Bd. of Educ. of Neptune v. Neptune Twp. Educ. Ass'n, 144 N.J. 16, 31 (1996); see also Merin v. Maglaki, 126 N.J. 430, 436-37 (1992). Further, "[w]e are obliged to defer to the Board when its factual findings are based on sufficient credible evidence in the record." Lourdes Med. Ctr. of Burlington Cnty. v. Bd. of Review, 197 N.J. 339, 367 (2009) (internal citations omitted). We overturn an agency determination only if it is arbitrary, capricious, unreasonable, unsupported by substantial credible evidence as a whole, or inconsistent with the enabling statute or legislative policy. Barry v. Arrow Pontiac, Inc., 100 N.J. 57, 71 (1985) (quoting Gloucester Cnty. Welfare Bd., supra, 93 N.J. at 391).
Lucas contends the agency's position that he is ineligible for unemployment benefits violates the APA. The APA defines an administrative rule as "each agency statement of general applicability and continuing effect that implements or interprets law or policy, or describes the organization, procedure or practice requirements of any agency." N.J.S.A. 52:14B-2(e). "If an agency determination or action constitutes an 'administrative rule,' then its validity requires compliance with the specific procedures of the APA that control the promulgation of rules." Airwork Serv. Div. v. Director, Div. of Taxation, 97 N.J. 290, 300 (1984), cert. denied, 471 U.S. 1127, 105 S. Ct. 2662, 86 L. Ed. 2d 278 (1985). However, generally "agency decisions and findings in contested cases" are not administrative rules. N.J.S.A. 52:14B-2(e)(3).
In Metromedia, supra, 97 N.J. at 328-32, the Court discussed the distinction between an administrative rule and an administrative adjudication and outlined factors to consider when evaluating whether an agency determination, "to be valid, had to comply with the requirements governing the promulgation of administrative rules as provided by the APA." Id. at 328. "The procedural requirements for the passage of rules are related to the underlying need for general fairness and decisional soundness that should surround the ultimate agency determination." Id. at 331.
The Metromedia Court concluded
that an agency determination must be considered an administrative rule when all or most of the relevant features of administrative rules are present and preponderate in favor of the rule-making process. Such a conclusion would be warranted if it appears that the agency determination, in many or most of the following circumstances, (1) is intended to have wide coverage encompassing a large segment of the regulated or general public, rather than an individual or a narrow select group; (2) is intended to be applied generally and uniformly to all similarly situated persons; (3) is designed to operate only in future cases, that is, prospectively; (4) prescribes a legal standard or directive that is not otherwise expressly provided by or clearly and obviously inferable from the enabling statutory authorization; (5) reflects an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter; and (6) reflects a decision on administrative regulatory policy in the nature of the interpretation of law or general policy. These relevant factors can, either singly or in combination, determine in a given case whether the essential agency action must be rendered through rule-making or adjudication.
[Id. at 331-32.]
"The Metromedia criteria, although originally formulated in a context that distinguished rule-making from adjudication, essentially provide a test of when rule-making procedures are necessary in order to validate agency actions or determinations." Woodland Private Study Group v. State, Dep't of Envtl. Prot., 109 N.J. 62, 68 (1987). These "factors are relevant whenever the authority of an agency to act without conforming to the formal rule making requirements is questioned." Doe v. Poritz, 142 N.J. 1, 97 (1995). They "need not be given the same weight, and some factors will clearly be more relevant in a given situation than others: 'All six of the Metromedia factors need not be present to characterize agency action as rule[-]making, and the factors should not merely be tabulated, but weighed.'" Ibid. (quoting In re Request for Solid Waste Util. Customer Lists, 106 N.J. 508, 518 (1987)).
It has been the Department's position that income derived from a partnership is not considered to be "wages" regardless of whether or not employment security taxes were paid. While a partnership may be an employment unit, it is not a legal entity which is distinct and separate from its owners as in a corporation. A general partner is not an employee of the partnership, but an employer and therefore is not "in employment." See Lazar v. Board of Review, Division of Employ. Sec., 77 N.J. Super. 251, 259 (App. Div. 1962). Lucas acknowledges that since Voxred is an LLC consisting of two or more members, under Department regulations it is classified as a partnership since it did not opt otherwise for federal income tax purposes. N.J.A.C. 12:16-11.2(b).
The Board found that Lucas, who was one of the members of Voxred, is deemed a partner and not considered "in employment" in accordance with N.J.A.C. 12:16-11.2. Therefore, his income derived from Voxred as a member is not considered "covered employment" and may not be used to establish a claim upon cancellation of the LLC and termination of work. Consequently, his claim is invalid in accordance with N.J.S.A. 43:21-4(e).
However, Lucas contends that the Department's position, where it does not recognize an employment relationship where the employer is an LLC and the employee is a working member of an LLC, can only be accomplished pursuant to the promulgation of a rule in compliance with the APA. Basic principles of the UCL inform our analysis of this issue.
Under the UCL, a key predicate to eligibility for benefits upon becoming unemployed is the employer-employee relationship. Self-employed persons, or independent contractors, are not eligible for benefits, nor must they pay unemployment compensation taxes. A determination that the relationship between a business and a person providing services to that business is "employment" has two significant consequences. First, the employer and the employee must contribute a specified percentage of the employee's wages to the Unemployment Compensation Fund. N.J.S.A. 43:21-7. Second, one who is classified an employee rather than an independent contractor may collect unemployment benefits, if otherwise eligible and not otherwise disqualified. See generally N.J.S.A. 43:21-4 (eligibility conditions); N.J.S.A. 43:21-5 (disqualification criteria).
However, a self-employed person, or a working partner, is exempt from the UCL because the law does not recognize an employment relationship where the employer and employee are one and the same. A self-employed person is generally ineligible for unemployment benefits. See Lazar, supra, 77 N.J. Super. at 261 (citing with approval a decision finding self-employed person not eligible for benefits when he terminated his business venture); 76 Am. Jur.2d Unemployment Compensation § 63 (2005) ("Self-employment is not generally considered 'employment' in unemployment compensation statutes, and no benefits arise due to work performed while self-employed.").
Likewise, a partner or joint-venturer is not considered eligible for benefits, even if he or she receives regular remuneration from the partnership or joint venture for services. See Koza v. N.J. Dep't of Labor, 307 N.J. Super. 439, 444 (App. Div. 1998) (group of musicians were members of joint venture who were not employees under the Unemployment Compensation law); 76 Am. Jur.2d Unemployment Compensation § 48 (2005) ("A working partner is not, for the purposes of an unemployment compensation statute, an employee."). Cf. Mazzuchelli v. Silberberg, 2 9 N.J. 15, 22 (1959) (regarding workers' compensation, "it has been generally held elsewhere that a working partner may not obtain compensation benefits from the partnership by resort to the entity theory, since the partner-employee would also be an employer[]"). By contrast, a partnership is considered a separate entity liable for unemployment compensation taxes for the benefit of non-partner employees. Finston v. Unemployment Comp. Comm'n, 132 N.J.L. 276, 278-80 (Sup. Ct. 1944), aff'd sub nom. Naidech v. U.C.C. of New Jersey, 134 N.J.L. 232 (E. & A. 1946).
After enactment of the New Jersey Limited Liability Company Act (LLC Act), N.J.S.A. 42:2B-1 to 70, the Department adopted the regulation that determined treatment of LLC members under the UCL based on the LLC's tax treatment. If the LLC opted for tax treatment as a partnership, then it would be deemed a partnership for purposes of unemployment compensation taxes. On the other hand, if the LLC opted for taxation as a corporation, it would be treated as a corporation.
The regulation is consistent with the plain language of the LLC Act, that "[f]or all purposes of taxation," N.J.S.A. 42:2B-69(a), the LLC should be treated as a partnership, unless it opts for other treatment. Thus, an LLC's working members stand on equal footing with working partners of a partnership regarding their exposure to unemployment compensation taxes; they are exempt. And, because they are exempt from taxation, it is reasonable for the agency to determine they are exempt from benefits. Once an LLC is deemed a partnership for unemployment compensation purposes — because it has opted to be treated as a partnership for taxation purposes — then the LLC members, like partners, are deemed ineligible for benefits.
However, this determination does not end our inquiry, as it still leaves unresolved the issue presented by Lucas of whether the position of the Department could only be effected by rule in compliance with the APA. We conclude that the Department's decision and finding in this case is not an administrative rule. N.J.S.A. 52:14B-2(e)(3). Application of the Metromedia factors to the Department's LLC policy leads us to conclude that the Department did not engage in rule-making, even though some factors supporting rule-making, to be sure, are present.
In weighing the factors not supporting rule-making, we observe the policy is not designed to operate prospectively, is a standard that is clearly and obviously inferable from the UCL, and does not reflect an administrative policy that (i) was not previously expressed in any official and explicit agency determination, adjudication or rule, or (ii) constitutes a material and significant change from a clear, past agency position on the identical subject matter. Metromedia, supra, 97 N.J. at 331-32. We therefore hold that upon applying and weighing the Metromedia factors, the Department's position that Lucas was ineligible for benefits constituted a legal standard that is clearly and obviously inferable from the enabling statutory authorization of the UCL, not rule-making, and was not subject to APA requirements.
We find Lucas's remaining contentions to be without sufficient merit to warrant discussion in the opinion. R. 2:11-3(e)(1)(E).
We conclude there was no error in the Board's determination that Lucas, as a working member of an LLC who ceased work when the LLC discontinued operations, is ineligible for unemployment benefits.
Affirmed.
I hereby certify that the foregoing is a true copy of the original on file in my office.
CLERK OF APPELLATE DIVIDION