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American Consulting Corp. v. United States

decided: December 29, 1971.

AMERICAN CONSULTING CORPORATION
v.
UNITED STATES OF AMERICA, DEFENDANT-APPELLANT



Forman, Seitz and Aldisert, Circuit Judges.

Author: Forman

Opinion OF THE COURT

FORMAN, Circuit Judge.

The single issue raised on this appeal is whether steel consultants with whom the American Consulting Corporation (hereafter American) contracted, constituted its employees or independent contractors under the Federal Insurance Contributions Act (hereafter FICA or the Act).*fn1 Though susceptible of simple statement, many complex elements enter into its resolution.

American was conceived by its president, Mr. Jack Coletti, who began to work for the United States Steel Company in the 1920's as a feeder, sticker, catcher and occasionally as an assistant roller, concededly not top jobs in the steel industry. When he was later disqualified on account of an eye disability, he sought employment overseas, but several attempts to obtain positions convinced him that his experience in the trade was limited and that it was necessary for him to hire qualified men to assist him in handling his job. Once while working in South Wales, he was asked to find workers to equip and operate a steel mill in Ennyville. Both for this and later for another plant in Wolverhampton, England, he managed to recruit the necessary personnel from among those who had been his superiors at United States Steel. For this service payment was made to Mr. Coletti from which he paid the workers and retained the balance. This form of compensation created the precedent for all future transactions in which workers were recruited through his services. Sensing the need of foreign steel plants for skilled workers, and his ability to meet their demands, he incorporated American under the laws of Pennsylvania in 1957 for that purpose.

From then on, Mr. Coletti contacted steel producers in countries such as Mexico, Sweden, Australia, Japan and India, and entered into contracts with them for the supply of skilled steel workers, or a team of them, in the particular areas of steel production where technical assistance was needed. Some of the workers were located by Mr. Coletti through his contacts in the steel industry. Others, who had heard of American by word of mouth or through newspaper advertisements, approached him for placement. Mr. Coletti then entered into a contract with each man for a position with a steel producer in the country where his individual skill was requested. These contracts ranged in duration from eighteen months to two years, and in several were renewed once or more following their termination. The consultants' services included participation in the construction and operation of hot and cold steel mills, and in technical instruction of foreign personnel in the methods of assembly and operation. The consultants so placed uniformly possessed technical skills considerably superior to Mr. Coletti's.

American paid FICA taxes for the consultants until 1959, when it was advised by a newly acquired accountant that they were independent contractors, not employees, whereupon it ceased payment. In 1965, however, the Internal Revenue Service ruled that an employer-employee relationship did exist between American and the consultants, and in three assessments of April 2, 1965, June 25, 1965 and August 12, 1966, determined that $31,589.27 in delinquent FICA taxes and $4,852.00 interest thereon were owing for the years 1961 through 1964.

On December 31, 1966, American paid FICA taxes under protest for one consultant, Joseph Keenan, in the sum of $348.00, and filed a claim for refund thereon. While this claim was pending, the Internal Revenue Service, on February 1, 1967, served a notice of levy upon American's bank in Pittsburgh, and seized $8,224.46 thereunder, which was applied to the alleged deficiency for the period of January 1, 1961 through December 31, 1962. American's claim for refund of the $348.00 paid on behalf of Joseph Keenan was disallowed on April 17, 1967 and a suit for its refund was thereafter brought on April 27, 1967 in the United States District Court for the Western District of Pennsylvania. The Government filed a counterclaim several months later, crediting American with the $348.00 paid and the $8,224.46 seized, and demanding judgment for $27,868.81 plus interest.

American then filed a claim for refund of the seized $8,224.46, and following its disallowance on August 1, 1968, instituted a second suit for refund on August 26, 1968. The two actions were consolidated and tried to the court without a jury. In an opinion and order of April 15, 1970, the District Judge held that American's consultants were independent contractors and not employees, and entered judgment in favor of American in the sum of $8,572.46 with interest.*fn2

Resolution of the present issue turns upon a determination of the consultants' legal status under § 3121(d) (2) of the Act, which defines an employee as:

"any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee."

This provision was enacted in the 1950 amendments to the Act, following the Supreme Court's decisions in United States v. Silk,*fn3 and Bartels v. Birmingham.*fn4 In those cases the Court attempted to resolve inconsistencies in the decisions of lower courts as to which criteria prevailed in distinguishing between employees and independent contractors. The Court in Silk enunciated a factual standard designed to take account of economic realities and the "declared policy and purposes of the Act. . . ."*fn5 In so doing, it recognized that the right to control is "a factor in the determination of whether the worker is an employee or independent contractor,"*fn6 but rejected the power of control test, which has been popular with lower courts,*fn7 as the sole determinant of the issue. This reasoning was repeated in Bartels, in which the Court stated:

"In United States v. Silk, supra, we held that the relationship of employer-employee . . . was not to be determined solely by the idea of control which an alleged employer may or could exercise over the details of the service rendered to his business by the worker or workers. Obviously control is characteristically associated with the employer-employee relationship, but in the application of social legislation employees are those who as a matter of economic reality are dependent upon the business to which they render service. In Silk, we pointed out that permanency of the relation, the skill required, the investment in the facilities for work, and opportunities for profit or loss from the activities were also factors that should enter into judicial determination as to the coverage of the Social Security Act. It is the total situation that controls."*fn8 (Emphasis supplied).

Shortly after these decisions, Congress enacted the so-called "Status Quo" Resolution, which was later embodied in § 3121(d) (2). It is clear both from the Resolution and the addition of § 3121(d) (2) to the Act that Congress intended to reassert the validity of traditional common law principles in opposition to a new economic reality test. From a reading of the two cases, however, it appears that although the Court rejected the power of control test as the governing criterion in distinguishing between employees and independent contractors, it did not manifest an intent to abrogate the common law standards by which this issue had been previously resolved. Rather, the Court demonstrated a shift in focus toward a factually oriented approach involving an examination of all of the elements in the employment relationship, which in totality would realistically illuminate its nature.*fn9

This court has in the past invoked principles grounded in both economic realities and the common law,*fn10 and concluded that:

"at least insofar as this Circuit is concerned . . . the employee versus independent contractor issue under the [National Labor Relations] Act is to be determined by the application of common law principles of agency."*fn11

This conclusion is equally applicable to the present controversy under the Federal Insurance Contributions Act. In the application of the common law principles the "right to control" test remains an important index of the relationship, but no one factor is controlling.*fn12 All of the elements involved in the employment must be balanced in terms of their significance within the entire employment relationship. In the present case, this court is also bound to affirm the District Judge's findings of fact unless they are clearly erroneous under Rule 52(a) of the Federal Rules of Civil Procedure.

The Government contends that an employer-employee relationship existed under the common law guidelines on the basis that: (1) American had the power to transfer the consultants from place to place, and to discharge them at will for improper conduct or incompetence; (2) the consultants were subject to instructions and directions from American in the manner of performance of their work; (3) some consultants considered Mr. Coletti their "boss"; (4) the contracts between American and the consultants stipulated that they refer to themselves as employees except in legal and tax matters; (5) a permanent and continuing relationship existed between American and the consultants; (6) the consultants were paid on a time rather than a lump sum basis; (7) American provided paid vacations, medical treatment, travel expenses, housing and taxes overseas; (8) the consultants neither advertised nor held themselves out to the public as such; and (9) they could not hire their own helpers or work for anyone else while they were under contract with American.

If actually present, these factors would go far to support the contention that the consultants were employees. The Government's characterization of the relationship, however, relies heavily on provisions in the consultants' contracts.*fn13 But they are not the determinants of the relationship which actually existed,*fn14 and a substantially different relationship emerges from an examination of all of the evidence including the contracts between American and the foreign steel companies.

Turning briefly to one such contract, American in 1961 agreed to furnish a team of consultants to Hindustan Steel, Ltd., an Indian steel plant, for two years.*fn15 American reserved an option to place more men on the job when it felt production would benefit thereby, and agreed to replace any consultant who proved incompetent or undesirable to Hindustan. Contract renewals were to be made through American, and not directly with the consultants.*fn16 American's contractual obligation was limited to the furnishing of a qualified team. It was not to be responsible for any damage caused by the consultants, but they were to be responsible to Hindustan for damage caused by gross negligence.*fn17

Hindustan agreed to pay a lump sum of $500,000 in dollars and $170,000 in rupees for the consultants' services. The first sum was to be deposited in monthly installments to American's account in Pittsburgh, and the second to American's account in India.*fn18 American's compensation consisted of the difference between the lump sum payment from Hindustan and the amounts the consultants contracted to accept.

Hindustan assumed the responsibility for the consultants' round trip transportation, overseas and within India, by sea, air or rail; for all costs incidental to travel, such as passports, visas, inoculations and freight;*fn19 for drinking water, telephones,*fn20 taxes levied by the Indian government,*fn21 medical treatment, hospitalization,*fn22 vacations,*fn23 insurance for accident or death,*fn24 and the return of remains to the United States.*fn25

It is apparent at the outset that many of the costs which the Government alleges were paid by American were in fact assumed by Hindustan. The consultants were aware that Hindustan and the other steel plants paid for these expenses. In the few cases where they did not, the consultants themselves, and not American, undertook to pay for them. Three consultants, John Kois, Herman Lang, and Joseph Keenan stated that Hindustan paid for their traveling expenses. A fourth, William Stamper, received airline tickets from an Air-India office in New York but was uncertain who paid for them. Two consultants, Mr. Kois and Harry W. Lonkowske, also received automobiles for travel within the nations where they were located.

Hindustan paid for Mr. Kois' passport, while Mr. Stamper and Clyde Call paid for their own. Mr. Lonkowske was reimbursed for this and other incidental costs by American, but was unsure of the true source of the money.

Although they did not indicate the source of the payments, Messrs. Kois, Keenan and Lonkowske continued to receive compensation during sickness and vacations as provided in the American-Hindustan contract. Hospitalization for Mr. Call was paid by the plant where he was located.

The Government's assertion that American bore virtually all incidental costs must fail in light of the testimony regarding the above details viewed in the whole, notwithstanding that, in one instance, American did pay for the transportation of Mr. Keenan's personal effects to India.

With respect to housing, Hindustan agreed to supply the consultants with furnished bungalows at a rental applicable to employees.*fn26 The contracts between American and the consultants disclose that in most cases the consultants, and in a few American, would pay for rent. Mr. Coletti testified that the consultants who worked in the hot mill insisted that Hindustan pay for their housing, and that it was paid in rupees from Hindustan's deposits to American's account in India.*fn27 One consultant, Mr. Lang, testified that Hindustan paid his rent and that he paid for utilities. Two others, Messrs. Keenan and Kois, stated that they paid for their apartments. On the whole, the evidence does not support a finding that the cost of housing was assumed by American.

As another indication of the existence of an employer-employee relationship between American and the consultants, the Government contends that payment for their services was on a time basis rather than by a lump sum distributed in monthly installments. The record discloses that in negotiations with Hindustan, American first determined the payment Hindustan would make over the complete period during which the consultants' work was to be performed, and then negotiated with the individual consultants the compensation within the aggregate amount in its contract. In dealing with Japanese plants Mr. Coletti first determined the range of compensation acceptable to the consultants for their services and then calculated the cost of the contracts with the Japanese firms. From the beginning the consultants' agreements contemplated payment for the complete duration of their work overseas.

American distributed the consultants' compensation immediately upon receiving the monthly installment of the lump sum payment from the foreign steel companies. The payment proceeded in chainlike fashion to the consultants.

The Government's further argument that the fees constituted a salary because American distributed them is not persuasive in the circumstances of this case. As mentioned previously, American's custom of disbursing consultants' compensation originated with Mr. Coletti's early experience in England, and does not of itself show that the consultants received a salary rather than a lump sum payment. In light of the circumstances which prevailed where the consultants were located at great distances from the United States, Mr. Coletti's testimony is persuasive that American merely accommodated the consultants in their requests that it deposit part of their payment in their respective banks in the United States and distribute part to them on location. American's action in this respect does not rise to a significant indication of an employer-employee relationship. Hence, the evidence on the whole supports the District Judge's finding that the compensation agreed upon by the consultants contemplated the entire period of their services abroad, and was paid in monthly installments.

The Government's assertions that the consultants generally did not hold themselves out to the public as such, could not work for others while under contract with American, and that two or three considered Mr. Coletti their "boss" are indeed borne out by the record. Yet the significance of the failure to advertise publicly is neutralized by evidence that the highly specialized market was very small and that it was customary for the parties to establish contact largely by means of reputation and word of mouth.

That the consultants could not contemporaneously offer themselves to work for others was inherent in the very nature of their commitments, which contemplated full dedication to their several specialized tasks. In fact, these circumstances were such that the notion of making themselves available for other timetaking projects could not be drawn into issue.

While the belief and intentions of the parties as to their status are relevant considerations, they are not determinative of the issue.*fn28 The record in fact disclosed contradictory testimony on this point.

In addition, the provision in the American-consultant contracts stating that the consultants were to refer to themselves as employees except in legal and tax matters,*fn29 and emphatically stressed by the Government, does not carry the conviction of employee characterization it seeks to achieve. Apart from the obvious ambiguity in the language of the provision itself, the record leaves the intent of the parties obscure. Nothing dilutes Mr. Coletti's testimony that the consultants were well aware that it was inserted only for purposes of "public relations" to enhance American's reputation as a supplier of specialists. Nor do several instances of contract renewals ranging generally from one to two years which the Government emphasizes support its contention that the District Judge committed clear error in finding that no permanent relationship existed between the parties. Unquestionably the Government has brought forward a number of factors which on their face appear characteristic of an employment relationship. But they do not mechanically compel the conclusion that the consultants were employees in the light of the record which, when closely scrutinized, reveals a substantial number of elements to the contrary.

American's lack of a right to control or supervise the consultants' performance in any substantial aspect is manifest in the record. All of the consultants' day-to-day work was done under the control and supervision of the management of each of the foreign steel plants. It determined working hours and days, the location on which the work was to be done, and vacation schedules. It supplied all of the tools, equipment, and materials necessary for performance, as well as automobiles, gas, and drivers for the temporary transfer of men from one location to another within foreign nations. In addition, the foreign steel plants provided all assistants and helpers necessary for the consultants in their work. The Government emphasizes the fact that the consultants on the whole could not hire assistants. In the context of these circumstances, however, where it was contemplated that workers would be supplied by the foreign plants,*fn30 the failure of the consultants to hire helpers is not significant in construing the relationship between American and the consultants.

American, furthermore, did not have the right to instruct or direct the consultants in any way regarding the manner or means of their performance. The record discloses that Mr. Coletti visited foreign plants in order to stimulate new contacts and renew contracts with them, not to instruct or direct the consultants, as the Government contends. The consultants testified consistently that they did not receive instructions from Mr. Coletti, although he did on a few occassions send suggestions to consultants when they encountered difficulty in the mills.*fn30a The consultants considered it advice which they were free to accept or reject. Mr. James Cassini, for example, testified that after receiving a suggestion from Mr. Coletti concerning the technical instruction of Hindustan's personnel, he continued to follow his own judgment in teaching methods. In another case, Mr. Kois testified that after his transfer to Australia, Mr. Coletti asked him to persuade the Australian plant to invite him for a visit. The fact alone that Mr. Coletti had to turn to Mr. Kois to help him obtain access to the plant demonstrates how little control American had over Mr. Kois. Ironically, Mr. Kois was not successful in his attempt to persuade the Australian firm and Mr. Coletti never made the visit.

The Government's reliance on Schwing v. United States,*fn31 in which tailors who did piecework for a retailer of men's clothing were held to be employees, is misplaced. The employer in Schwing retained some control by supervising the quality of the work and assuming the responsibility to correct defective tailoring. American, on the other hand, was distinctly exempt from any responsibility for defective work of the consultants.*fn32 In addition, the court expressly rejected any reliance on the common law rules of agency which subsequently have been accepted as the controlling standard for the resolution of conflicts in this area.

The record conclusively supports American's assertion that it had no right to control either the method and means or the times and location of the consultants' performance. While the Government correctly asserts that the extent of the right to control must be examined in light of the degree of control required by the particular area of work,*fn33 not even the right to a bare minimum of control over the consultants' work has been demonstrated here.

American's lack of a right to control over the consultants is further demonstrated by its inability to effect transfers without their consent and the consent of the foreign plants, notwithstanding a "transfer" provision in the consultants' contracts.*fn34 For example, Mr. Call initially approached Mr. Coletti for a position in Sweden. Mr. Coletti had an opening only in India, which he refused. In another case, Mr. Kois was working in Japan, and Mr. Coletti asked him to transfer to another city. He declined. After Mr. Kois had worked in Japan for a year, American suggested that he transfer to India for the remainder of his two-year contract, but Mr. Kois instead accepted a position in Australia which he preferred. He transferred at the request of the Australian plant and not by American's order, as the Government has suggested. Moreover, its argument that American's right to control transfers was demonstrated by an instruction to Mr. Kois to travel to Australia by plane despite his desire to go by boat is not persuasive. Mr. Kois could not have reached Australia at the stipulated time if he had taken a ship. Having agreed to placement in Australia on a certain date, it was not a significant measure of the legal relationship for Mr. Coletti to encourage him to use the means of transportation which would get him there on time. Again, Mr. Lang returned to the United States without the knowledge or permission of American, and Mr. Lonkowske was moved from one city to another by Hindustan, without permission from American.

While American's contracts with the consultants did contain a provision for their transfer, the testimony on the whole indicates that in actual practice the consultants were free both to initially select the location of their choice, and to refuse transfers by American.

Finally, American's lack of a right to control over the consultants is shown by its inability to discharge them without the consent of foreign plants. American did attempt to remove a few consultants after receiving reports that they were not performing competently or were causing difficulties among the consultants, but could not because the foreign plants were opposed. In one instance Mr. Coletti attempted to discharge Mr. Keenan, but failed because Hindustan's management was satisfied with his work. In another case, Mr. Coletti attempted to remove Mr. Cassini when he was reported to both American and Hindustan to have been responsible for mill breakage. Hindustan acquiesced initially, but later determined that another consultant was actually responsible for the damage, and removed him to a different position, while Mr. Cassini was reinstated. American's inability to discharge consultants is also supported by the testimony of Messrs. Kois, Call and Lonkowske, who stated that any complaints had to be directed to the management of the foreign plant, and that it alone had the power to remove a consultant. The Government's emphasis on one instance in which Mr. Lonkowske attempted to suspend and to refuse advance compensation to a consultant, Mr. Richard Altmeyer, after discovering that he would not work and was preparing to leave India is not persuasive of American's right to discharge since Mr. Coletti asked him to remain and he eventually left of his own volition.

American was not only powerless to discharge consultants but likewise could not order a consultant to remain if the management of a foreign plant rejected him. Thus, Mr. Cassini was requested by American to return to India after a month's vacation in the United States. Two days before he was to leave, Hindustan sent Mr. Coletti a cablegram stating that he should not return. Mr. Coletti so informed Mr. Cassini and he remained in the United States.

On the basis of a full review, the record discloses that American's contractual authorization to discharge consultants was illusory. In actual practice American could not discharge a consultant whose services were satisfactory to a foreign plant, but was bound to remove him upon the representation by the foreign plant that his services were unsatisfactory and replace him, if so requested.*fn35

The conclusion is compelled that American possessed no significant right to control the consultants once they were placed with an overseas steel manufacturer, and that American's business was simply to furnish skilled steel workers to plants which had requested them. At the times Mr. Coletti visited foreign steel plants his contacts with the consultants were on the whole casual.

Viewed in the context of the entire relationship, American's activities abroad and interest in the consultants' performance reflect and are consonant only with a desire to achieve and maintain a reputation as a supplier of skilled steel workers. This function was distinct from that of the consultants, whose services were performed for the benefit of the foreign steel plants and not American.

Far from being similar to the operation of a firm referred to as "Koppers" at trial, as argued by the Government, American's function was in decided contrast thereto. Koppers was an American concern which built and thereafter managed and operated a steel plant in Turkey. Its workers, some of whom were Americans, were considered its employees. In the present case, on the contrary, American simply furnished skilled advisers. The building and operation of the steel plants were directed and managed by the foreign firms.

Although this court has not previously considered a case involving the factual circumstances present here, substantially more control was found in those cases where an employment relationship was determined to exist.*fn36

The present case is most similar to Saiki v. United States,*fn37 in which experts in the determination of the sex of newly-hatched chicks were held to be independent contractors of the corporation which engaged them. The business of the corporation was to supply trained chick sexers to hatcheries in fourteen states. It advertised its business and executed contracts with hatcheries for the furnishing of the sexers. It then entered into contracts with individuals, who were trained by it, assigning them to different areas. The work was performed without any supervision from the corporation, although the most senior worker in an area acted as an area "supervisor." Each worker supplied his own tools. The contracts between the corporation and the chick sexers provided that the corporation could instruct and direct them, and that they could not work for any other concern while under contract. Although it was provided that the workers were responsible to the corporation for faulty performance, actually they adjusted mistakes directly with the hatcheries in most cases. The workers' compensation, which was on a commission basis, was paid by the hatcheries, and the corporation received a percentage of it. It was sometimes collected from the hatcheries and distributed by the area supervisor, and at other times collected by the workers themselves. The court distinguished between the business of the corporation, which it held was to supply chick sexers, and the function of determining sex performed by the workers. On the basis of all of these circumstances, it found insufficient control exercised over the sexers to establish them as employees stating that:

"'* * * the courts have repeatedly held that an employer has a right to exercise such control over an independent contractor as is necessary to secure the performance of the contract according to its terms, in order to accomplish the results contemplated by the parties in making the contract, without thereby creating such contractor an employee.'"*fn38

We think that this reasoning is equally applicable to the present case. Similarly, American was simply a specialized employment agency engaged in placing consultants in foreign service.*fn39

The Government's contention that an employer-employee relationship existed fails and the conclusion of the District Court is supported by the record as a whole. Hence its judgment and order of April 15, 1970 is affirmed.

Chief Judge SEITZ concurs in the result because the clearly erroneous standard of review is applicable. However, given the unusual factual situation and the objectives of the Act, had he been the ...


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