The opinion of the court was delivered by: Renee Cohn Jubelirer, Judge
Argued: September 14, 2011
BEFORE: HONORABLE BONNIE BRIGANCE LEADBETTER, President Judge HONORABLE BERNARD L. McGINLEY, Judge HONORABLE RENEE COHN JUBELIRER, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge HONORABLE PATRICIA A. McCULLOUGH, Judge HONORABLE JOHNNY J. BUTLER, Judge
OPINION BY JUDGE COHN JUBELIRER
Tobey-Karg Sales Agency, Inc. (Tobey-Karg) petitions for review of the Order of the Pennsylvania Department of Labor and Industry (Department) denying TobeyKarg‟s Petition for Reassessment of a Notice of Assessment (Petition) filed by the Office of Unemployment Compensation Tax Services (OUCTS). The Notice of Assessment (Notice) issued by OUCTS characterized Tobey-Karg‟s sales representatives as employees, not independent contractors, and assessed Tobey-Karg for past unpaid Unemployment Compensation (UC) contributions, interest, and penalties on wages not previously reported to the Department. On appeal, Tobey-Karg argues that the Department erred in denying its Petition because: (1) the Department erred in concluding that Tobey-Karg did not prove its entitlement to the exclusion set forth in Section 4(l)(2)(B) of the Unemployment Compensation Law (Law),*fn1 43 P.S. § 753(l)(2)(B), where it failed to establish that Tobey-Karg‟s sales representatives were "customarily engaged in an independently established trade," id.; and (2) the Department violated Tobey-Karg‟s due process rights under the Fourteenth Amendment of the United States Constitution by, inter alia, not providing notice of the basis of the Department‟s charges or claims so that it could properly defend itself during the hearing. For the following reasons, we reverse the Department‟s Order.
Tobey-Karg, a Pittsburgh-based business, is involved in the sale of heating, ventilation, and air-conditioning (HVAC) equipment to builders and contractors, and "has exclusive sales agreements with ten to twelve HVAC manufacturers." (Department‟s Findings of Fact (FOF) ¶¶ 1-2, 4.) Individuals with prior knowledge and experience are used as its sales representatives, with whom Tobey-Karg executes a Sales Representative Agreement (SRA). (FOF ¶¶ 5, 34.) OUCTS conducted a random audit of Tobey-Karg‟s records and determined that the sales representatives were not independent contractors, but employees, and pursuant to Section 304 of the Law, 43 P.S. § 784,*fn2 OUCTS issued the Notice, assessing Tobey-Karg with UC contributions, interest, and penalties in the amount of $5,732.67. The Notice indicated that Tobey- Karg‟s liability had not been reported to the Department on the required UC quarterly reports from the first quarter of 2004 through the third quarter of 2007. Tobey-Karg filed the Petition seeking reassessment, and a hearing was held before an Administrative Law Judge (ALJ) on October 16, 2008, to determine whether the sales representatives were employees or independent contractors.*fn3
The Department offered the testimony of Dawn R. Spolarich, the OUCTS representative who audited Tobey-Karg. Tobey-Karg presented the testimony of, inter alia, co-owner Creed Hess and Michael Sears, a sales representative, and documentary evidence. Based on the testimony and evidence, the Department issued a determination in which it set forth findings of fact, including the following. Sales representatives are assigned primary customers, but they are not restricted to a particular geographic area to generate sales to new customers. (FOF ¶¶ 6-7.) In finding new customers, sales representatives review advertisements for potential jobs or will receive solicitations to bid from contractors. (FOF ¶¶ 8-9.) The sales representatives: decide which jobs to bid; obtain the project bid documents (including plans and specifications) to determine what equipment is needed for the job, although they do not receive those documents from Tobey-Karg; determine what products they wish to bid on a project; and obtain price quotes from the manufacturers before submitting their bid. (FOF ¶¶ 10-14.) The bids are not awarded to the sales representative, but to Tobey-Karg; however, the sales representatives will place the orders for the equipment. (FOF ¶¶ 15-16.) The sales representatives are paid solely on commission, but have a draw account with TobeyKarg which, if taken, must be repaid from the sales representative‟s commission. (FOF ¶¶ 17, 21.) "Sales representatives can and do sell products from companies other than those having exclusive agreements with Tobey-Karg," and the sales representatives pay a part of their commission for these outside sales to Tobey-Karg. (FOF ¶¶ 18-19.) The sales representatives: (1) are not paid until the culmination of the sale and the customer pays for the order, which can "take weeks, months or even years"; (2) do not have set hours of work, sales quotas, or a dress code; (3) are not required to submit sales reports or attend sales meetings; (4) are not provided sick, vacation, or holiday pay; (5) are not given any tools or training, which sales representatives receive directly from the manufacturers; (6) must pay their own expenses and are not reimbursed by Tobey-Karg; and (7) receive federal 1099 tax forms, which are used for independent contractors. (FOF ¶¶ 22-33, 41-42.)
The Department found that the SRA "prevent[s] sales representatives from taking business from Tobey-Karg upon termination of the agreement,"*fn4 and "Section 2, Paragraph A,*fn5 provides that pricing is not at the sole discretion of the sales representative." (FOF ¶¶ 35-36.) However, Mr. Hess stated "that Tobey-Karg does not establish pricing for" its sales representatives and the "sales representatives set pricing based upon market conditions." (FOF ¶¶ 37-38.) "Section 1, Paragraph B [states] that a sales representative will not enter into any agreement for sale, service, installation or handling of any kind, any products similar to those of the exclusive manufacturers without prior written approval of Tobey-Karg." (FOF ¶ 39.) Finally, the SRA requires that when it is terminated, "all correspondence, blueprints, quotations, plans and other written information reasonably necessary to carry on sales shall be transferred and delivered to Tobey-Karg." (FOF ¶ 40.)
The Department concluded, based on its factual findings, that Tobey-Karg had failed to meet the exclusionary provisions of Section 4(l)(2)(B) for services performed by the sales representatives. The Department held that Tobey-Karg satisfied the first prong of Section 4(l)(2)(B)(a) -- that the sales representatives were free from control and direction over the performance of their work -- but did not prove the second prong of Section 4(l)(2)(B)(b) -- that the sales representatives were customarily engaged in an independently established trade or occupation. (Department‟s Op. at 10-11.) In concluding that the sales representatives were employees, the Department relied upon the analysis found in Electrolux Corporation v. Department of Labor and Industry, Bureau of Employer Tax Operations, 705 A.2d 1357, 1362 n.5 (Pa. Cmwlth. 1998), and the facts that: (1) sales representatives must receive written approval before entering "into an agreement for sale, service, installation or handling of any kind, any products similar to those of the exclusive manufacturers without prior written approval of TobeyKarg"; (2) the SRA requires that when it is terminated, "all correspondence, blueprints, quotations, plans and other written information reasonably necessary to carry on sales shall be transferred and delivered to Tobey-Karg; and (3) sales representatives were required to pay Tobey-Karg a portion of their commissions from outside sales, i.e., sales of products not from Tobey-Karg‟s exclusive manufacturers. (Department‟s Op. at 10-11.) Tobey-Karg now petitions this Court for review.*fn6
Section 4(l)(2)(B) of the Law provides, in relevant part:
(B) . . . . Services performed by an individual for wages shall be deemed to be employment subject to this act, unless and until it is shown to the satisfaction of the department that--(a) such individual has been and will continue to be free from control or direction over the performance of such services both under his contract of service and in fact; and (b) as to such services such individual is customarily engaged in an independently established trade, occupation, profession or business.
43 P.S. § 753(l)(2)(B). Once it is shown that a person has performed services for wages, the burden shifts to the employer to show that the worker is an independent contractor. Bureau of Employment Security v. Hecker & Company, 409 Pa. 117, 122, 185 A.2d 549, 552 (1962). "[A] claimant can be classified as self-employed [o]nly when the employer establishes that a claimant (a) has been and will continue to be free from control or direction over the performance of his or her services [a]nd (b) is customarily engaged in an independent trade." Kardon v. Unemployment Compensation Board of Review, 396 A.2d 487, 488 (Pa. Cmwlth. 1979). Whether a claimant is an employee or an independent contractor is a question of law subject to our review. Sharp Equipment Company v. Unemployment Compensation Board of Review, 808 A.2d 1019, 1023 n.6 (Pa. Cmwlth. 2002). Here, the Department found that TobeyKarg satisfied subsection (a) and, therefore, the only issue is the "customarily engaged in an independently established trade" prong of subsection (b). 43 P.S. § 753(l)(2)(B).
Tobey-Karg argues that the Department erred in concluding that its sales representatives are employees under the Law because the Department disregarded the testimony of Mr. Spears and substantial case law interpreting Section 4(l)(2)(B) and based its determination on Electrolux, a case that had very specific facts that are distinguishable from the present matter. Furthermore, it maintains that this matter is more akin to Danielle Viktor, Ltd. v. Department of Labor and Industry, Bureau of Employer Tax Operations, 586 Pa. 196, 892 A.2d 781, (2006), than Electrolux. TobeyKarg asserts that, contrary to the Department‟s holding, its sales representatives can and do re-sell a substantial amount of outside products and that the sales representatives voluntarily submit those orders through Tobey-Karg because, then, Tobey-Karg handles all of the administrative matters associated with the contract. According to Tobey-Karg, the Department has misconstrued multiple provisions of the SRA, particularly Section 1, Paragraph B (related to obtaining written approval to sell similar products), and Section 6, Paragraph D (requiring sales representatives to turn documents related to existing and ongoing sales into Tobey-Karg). Tobey-Karg maintains that, despite the Department‟s characterization, Section 1, Paragraph B, requires written approval only for sales of items that are similar to those of Tobey-Karg‟s exclusive manufacturers and does not require approval for any sale. Moreover, Tobey-Karg contends that Section 6, Paragraph D, does not, as the Department held in its opinion, mean that sales representatives are not able to take work away from Tobey-Karg or cannot work in HVAC sales if the SRA is terminated. Rather, it merely requires that the information, i.e., documents, blueprints, etc., that are necessary for Tobey-Karg to complete the contractual obligations related to existing, ongoing, and completed sales remain with Tobey-Karg.
The Department contends that it properly concluded that the sales representatives were employees because the essence of the second prong is that the person is engaged in business without interference from any other person or entity and this is not the case for Tobey-Karg‟s sales representatives. The Department points out that Tobey-Karg did not present any evidence that its sales representatives make any sales separate from Tobey-Karg such that they did not pay part of their commissions to Tobey-Karg. The Department asserts that, under the SRA, the sales representatives cannot sell similar products without Tobey-Karg‟s assent and without sharing their profits with Tobey-Karg; therefore, the sales representatives are not free from interference of another person or entity.
In considering whether an employer has satisfied the second prong of Section 4(l)(2)(B), that the individuals were customarily engaged in an independent trade, we must consider whether: (1) "the individual was capable of performing the activities in question to anyone who wished to avail themselves of the services"; and (2) "the nature of the business compelled the individual to look to only a single employer for the continuation of such services." Venango Newspapers v. Unemployment Compensation Board of Review, 631 A.2d 1384, 1388 (Pa. Cmwlth. 1993). Thus, in Venango, we held that because the worker could work for another employer, the worker was an independent contractor, not an employee. Id. In making this determination, no one factor is dispositive; rather, "the unique facts of each case must be examined in order to resolve ...