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Kyco Services LLC v. Department of Workforce Services

Court of Appeals of Utah

September 7, 2018

Kyco Services LLC, Petitioner,
Department of Workforce Services, Respondent.

          Original Proceeding in this Court

          Kendra Shirey, Chrystal Mancuso-Smith, and Robert E. Aycock, Attorneys for Petitioner

          Nathan R. White, Attorney for Respondent

          Judge Ryan M. Harris authored this Opinion, in which Judges David N. Mortensen and Jill M. Pohlman concurred.

          HARRIS, Judge:

         ¶1 As a general rule, employers must make unemployment insurance contributions for workers they employ. The Department of Workforce Services Board of Appeals (Board) determined that, for certain workers during certain pay periods, Kyco Services, LLC (Kyco) had failed to do so. Kyco seeks review of that determination in this court, and asserts that the workers in question were not its employees but, instead, were employed by a second company that it claims sometimes supplied Kyco with extra laborers for certain jobs. Because the evidence was sufficient to support the Board's determination that Kyco employed the workers, we decline to disturb it.


         ¶2 Kyco is a limited liability company that provides drywall services on construction projects. For larger jobs, Kyco would occasionally need additional workers, and on some of these occasions would utilize contract laborers provided by a separate company. As relevant here, in 2010 Kyco contracted with ITY, LLC (ITY1), apparently for the purpose of obtaining contract laborers as needed. At the time, ITY1 had a valid subcontractor's license, but that license expired in 2011 and was not renewed, prompting Kyco to eventually stop working with ITY1.

         ¶3 In December 2011, the owner of ITY1 created a new company called ITY of Texas, LLC (ITY2), and at some point thereafter, apparently in 2012, Kyco entered into a written "subcontract agreement" with this new entity. That agreement stated that ITY2 would provide workers to Kyco, provide supervision for those workers, maintain worker's compensation insurance, pay payroll taxes, and hold a valid subcontractor's license. ITY2 never obtained such a license, however, and the working relationship that actually developed between Kyco and ITY2 deviated substantially from the terms of their agreement.

         ¶4 In 2015, a representative of the Department of Workforce Services (Department) audited Kyco and determined that ITY2 had not actually provided and supervised laborers for Kyco, but instead had merely served as a "bookkeeping company" that arranged for payment of workers that Kyco hired and supervised. Under the Utah Administrative Code, an employer must report an employee on its payroll tax reports if the employer: (1) has the right to hire and fire the employee, (2) has the responsibility to control and direct the employee, and (3) is the employer for whom the employee performs a service. Utah Admin. Code R994-202-104(1). "Payrolling" is "the practice of [a company] paying wages to the employees of another employer or reporting those wages on its payroll tax reports." Id. Payrolling is not permitted under Utah law. Id. R994-202-104(2). The auditor determined that certain laborers who had been paid by ITY2 during various pay periods in 2014 and 2015 were actually employed by Kyco, and that Kyco should have been making unemployment insurance contributions for these laborers. Accordingly, the auditor recommended that Kyco be ordered to pay those contributions, plus interest and penalties. Kyco requested that a "hearings officer" review the auditor's determination.

         ¶5 After review, the hearings officer acknowledged that "[Kyco] signed a subcontractor agreement with [ITY2]" stating that ITY2 would "provide individuals to install drywall . . . at [Kyco's] worksites," but noted that the auditor had "found a different working relationship between [Kyco] and [ITY2] than . . . implied in the agreement." The officer stated that the auditor had based that conclusion on discussions with the owner of ITY2 (Owner), who had "revealed" that ITY2 "was acting as a payroll service" and that Kyco, not ITY2, employed the workers paid by ITY2. The hearings officer affirmed the auditor's determination, and Kyco sought further administrative review.

         ¶6 Thereafter, Kyco received a notice from the Department that its appeal had been set for a telephonic hearing before an administrative law judge (ALJ). This notice warned Kyco that one of the issues to be heard during the hearing would be the issue of "payrolling," and that the hearing would be Kyco's opportunity to "present ALL testimony and evidence on the issues." The notice stated that "[t]he appeal decision will be based solely on the evidence and testimony presented at the hearing," and that if a further appeal of the ALJ's decision was filed, Kyco would "generally not be allowed to present new or additional testimony and evidence." The notice also advised Kyco that, while hearsay testimony would be admissible at the telephonic hearing, direct witness testimony would be more helpful than hearsay testimony in proving factual assertions.

          ¶7 The hearing took place in April 2016. At the hearing, Kyco presented testimony from its owner, Kyle Morris, who testified about several topics, such as the details of Kyco's working relationship with ITY1 prior to the formation of ITY2. However, Kyle Morris stated that he did not deal directly with ITY2, and that he had very few recent contacts with Owner and did not know how ITY2's business was structured. Kyco did not present testimony from any other witnesses.

         ¶8 In response, the Department presented testimony from Owner, who testified that, while the contract signed by the parties stated that ITY2 would provide supervised workers to Kyco for construction projects, their actual agreement and subsequent working relationship was significantly different in practice. Indeed, Owner stated that, around the time that the parties entered into the signed agreement, Kyco's Rob Morris- Kyle Morris's brother-informed Owner that ITY2 would instead handle payrolling for Kyco. Owner testified that, for the entirety of their professional relationship, the only work ITY2 performed for Kyco was issuing checks to employees that Kyco hired and supervised based on lists of employee names and payment amounts that Kyco provided. Owner further testified that ITY2 was never involved in any labor on Kyco's behalf, and that he had never worked with drywall and would not know how to perform such work.

         ¶9 In response, Kyco solicited additional testimony from Kyle Morris, who reiterated that he had very few conversations with Owner, and confirmed that it was Rob Morris-rather than himself-who "made the arrangements" regarding Kyco's relationship with ITY2. While Kyle Morris acknowledged that he did not have direct knowledge of Rob Morris's interactions with Owner or of the actual working relationship that developed between Kyco and ITY2, he indicated that he felt strongly that, if asked, Rob Morris would deny that Kyco and ITY2 were in a payrolling relationship. Kyle Morris further stated that Rob Morris "would have asked me first" before agreeing to enter into a payrolling relationship with ITY2, and that he had no reason to believe Rob had entered into such a relationship.

         ¶10 The ALJ credited Owner's testimony over Kyle Morris's testimony. In a formal written decision, the ALJ found that Owner was "the only individual who provided firsthand testimony about the arrangements made" between Kyco and ITY2. Accordingly, despite the written agreement's language classifying ITY2 as a subcontractor, the ALJ found that the workers ITY2 paid were hired by Kyco, controlled and directed by Kyco, and performed services for Kyco. The ALJ further noted that, "[e]ven if . . . [Owner] signed an agreement to be a construction subcontractor, he could not legally do so" because he did not have a license. Accordingly, the ALJ concluded that, regardless of the terms ...

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