Opinion
DOCKET NO. A-6135-10T4
06-12-2012
MARY F. TRONGONE, Appellant, v. BOARD OF REVIEW, DEPARTMENT OF LABOR and CARE BY YOUR SIDE, LLC, Respondents.
Mary Trongone, appellant pro se. Jeffrey S. Chiesa, Attorney General, attorney for respondent Board of Review (Lewis A. Scheindlin, Assistant Attorney General, of counsel; Ellen A. Reichart, Deputy Attorney General, on the brief). Respondent Care By Your Side, LLC has not filed a brief.
NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
Before Judges Sapp-Peterson and Ostrer.
On appeal from the Board of Review, Department of Labor, Docket No. 288,316.
Mary Trongone, appellant pro se.
Jeffrey S. Chiesa, Attorney General, attorney for respondent Board of Review (Lewis A. Scheindlin, Assistant Attorney General, of counsel; Ellen A. Reichart, Deputy Attorney General, on the brief).
Respondent Care By Your Side, LLC has not filed a brief. PER CURIAM
This appeal presents the issue whether a working member of a limited liability company (LLC) that opted to be treated as a partnership for tax purposes is ineligible to receive unemployment compensation after the LLC ceases doing business and the member's work for the LLC ends. Mary Trongone, one of two members of Care By Your Side, LLC (Care), which ceased doing business in June 2009, challenges the Board of Review's determination that she was ineligible for unemployment compensation. As the Board's decision is consistent with the Limited Liability Company Act (LLC Act), N.J.S.A. 42:2B-1 to -70, 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, we affirm.
I.
The record reflects the following facts. On January 31, 2007, Trongone and her fiance at the time, Scott Tustin, formed a New Jersey LLC that was ultimately named Care By Your Side, LLC. Care provided home health care services.
Care began business operations in 2007. Trongone worked in the business full-time, directing the delivery of home health care services. Trongone testified that Care had as many as forty-two employees. Tustin, who was principally employed elsewhere, was involved in managing the financial side of the business. Along with other employees, Trongone was on Care's payroll from the second quarter of 2008 through second quarter of 2009. Unemployment taxes were withheld from her paycheck and, apparently, Care paid the employer portion of unemployment taxes.
The LLC elected to be taxed as a partnership, N.J.S.A. 42:2B-69, and filed federal and State income tax forms as a partnership. Care filed an IRS form 1065 for 2009, for reporting partnership income, which reflected gross receipts of $240,073; salaries and wages to persons other than partners of $159,807; and payments to partners of $14,117. Trongone filed an IRS form K-1 for 2009, reporting a "Partner's Share of Income, Deductions, Credits, etc"; the form described her as a "General partner or LLC member-manager," with a fifty percent share in the firm's profits, losses and capital. Her personal form 1040 reported wages of $16,764, as well as the partnership income of $14,117. She also filed a Schedule SE for reporting self-employment tax, which reflected $16,193 net profit from Care, and net earnings from self-employment of $14,954 after accounting for $2288 in self-employment tax.
She initially filed an IRS 1040 for 2008 that reported $750 in wages, as reflected in a form W-2, and $19,294 in partnership income, which was also reflected in a Schedule SE for reporting self-employment tax. She subsequently prepared an amended 2008 return that reported wages of $18,044 and partnership income of $2000, as also reflected in a Schedule SE. Her accountant testified that the wages had been overlooked because it had been incorrectly entered in the firm's computer records.
Because of differences with her fellow LLC member and business conditions, the business ceased operations in June 2009, and filed a certificate of cancellation with the New Jersey Division of Revenue the next month. Trongone filed for unemployment benefits on June 28, 2009 and was deemed eligible. However, Trongone obtained employment about a month-and-a-half later, but then was unemployed again, and apparently remained unemployed at least until the second half of 2010. She received approximately $13,000 in unemployment benefits for the weeks ending July 11, 2009 through June 12, 2010, presumably excluding the weeks of her interim employment.
Trongone's efforts to obtain unemployment benefits involved multiple administrative appeals by both Trongone and the agency. Although the record is incomplete, it appears that Trongone was initially approved for benefits in June or July 2009. However, Trongone's accountant in April 2010 filed an amended New Jersey form WR-30 (reporting wages paid), and an amended form NJ-927 (reporting gross income tax withheld and contributions to unemployment compensation, among other programs); these amended forms disclosed higher wages to Trongone than previously reported for the second quarter of 2008.
The Deputy determined on June 16, 2010 that Trongone's claim for benefits was valid, and she was entitled to a weekly benefit of $379, and up to $6,443 in total benefits, beginning June 28, 2009. The Deputy also determined that Trongone was ineligible for benefits — for extended unemployment — from March 21, 2010 through May 22, 2010, because she did not report as required. The Deputy also decided on June 21, 2010 that Trongone was liable to refund $2040, which was a portion of the benefits she received for the weeks ending July 4, 2009 through June 12, 2010.
The record does not include the Deputy's initial 2009, or June 2010 Notice of Determination of the Deputy.
In the first appeal to the Appeal Tribunal, Trongone challenged the Deputy's three determinations. She argued she was entitled to a greater benefit rate; her failure to report was based on good cause and therefore should not have disqualified her for benefits for the March to May 2010 period; and she was not liable for a refund.
After a telephone hearing conducted July 28, 2010, the Appeals Examiner agreed. In a decision mailed July 29, 2010, the Appeal Tribunal found that Trongone's weekly benefit rate was $395. Her maximum benefit amount was $10,270. She also had good cause for not reporting based on information she received from the unemployment office. Therefore, the Appeal Tribunal found Trongone was not ineligible for benefits from March 21, 2010 to May 22, 2010. The request for a refund was remanded to the Deputy.
The Deputy then appealed to the Board of Review, which on August 16, 2010 remanded the matter to the Appeal Tribunal for reconsideration. However, before the Appeal Tribunal heard the matter a second time, the Deputy re-determined Trongone's eligibility for benefits. In a decision mailed August 23, 2010, the Deputy held Trongone was ineligible for benefits from June 28, 2009 on the ground she lacked sufficient base weeks or sufficient base year wages to establish a valid claim. The Deputy apparently decided to disregard Trongone's wages while she served as a member of the LLC. Deputy held Trongone was liable for a refund of $13,018 for benefits received for the weeks ending July 11, 2009 through August 29, 2009, and for the weeks ending January 9, 2010 through June 12, 2010. Trongone appealed that decision to the Appeal Tribunal.
The record does not include the Board's August 2010 remand order.
The record does not include the Deputy's August 2010 re-determination. Our description is based on the recitation of the procedural history found in a later decision of the Appeal Tribunal. However, the Appeal Tribunal's decision refers, apparently in error, to ineligibility for benefits from June 28, 2010, instead of June 28, 2009.
In connection with its second review of Trongone's claims, the Appeal Tribunal conducted hearings on September 13 and 28, 2010. Then, in a decision mailed September 29, 2010, the Appeal Tribunal reversed its previous decision and determined that Trongone, as a member of an LLC that was treated as a partnership for tax purposes, was not eligible for unemployment benefits at all arising out of cessation of her work with Care. The Appeals Examiner noted Trongone derived income solely from Care during the regular base year from January 1, 2008 to December 31, 2008; Care was treated as a partnership for tax purposes; and Trongone shared fifty percent of the profit, loss and capital. The Appeals Examiner relied on N.J.A.C. 12:16-11.2, which treats an LLC as a partnership for purposes of unemployment compensation, unless the LLC is classified otherwise for federal tax purposes.
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. 259 (App. Div. 1962). (See also BR-57865-C).
Based on the above precedent case, the claimant, who was one of the partners is not considered "in employment" in accordance with N.J.A.C. 12:16-11.2. Therefore, the claimant's income as a partner derived from the above LLC [is] not considered "covered employment" and may not be used to establish a claim. Consequently, the claim dated 6/28/2009 is invalid in accordance with N.J.S.A. 43:21-4(e).
In October 2010, Trongone appealed the second Appeal Tribunal decision to the Board of Review. On May 10, 2011, the Board affirmed based on the record, and referred Trongone's request for a refund waiver to the Director for consideration.
Trongone then filed a late notice of appeal in August 2012, which we permitted. Her sole point on appeal is that "an LLC is a separate legal and distinct entity," and the wages paid to her are "qualified wages for purposes of employment."
II.
The issue presented is a matter of law: is a working member of an LLC that opts for tax treatment as a partnership eligible for unemployment benefits upon cancellation of the LLC and termination of work. "An appellate tribunal is . . . in no way bound by the agency's . . . determination of a strictly legal issue." Mayflower Sec. Co. v. Bureau of Sec, 64 N.J. 85, 93 (1973); see also Mortg. Bankers Ass'n v. N.J. Real Estate Comm'n, 102 N.J. 176, 191 (1986). Our standard of review allows us to intervene when an agency action rests upon a misinterpretation of a statute or regulation. Mazza v. Bd. of Trs., 143 N.J. 22, 25 (1995) (stating an appellate court "can intervene" when, among other grounds, "the agency's action violates express or implied legislative policies," that is, where the agency did not "follow the law").
On the other hand, our courts "have consistently accorded 'substantial deference to the interpretation of the agency charged with enforcing an act.'" N . J . Tpk . Auth . v . Am . Fed. of State , Cnty . & Mun . Emp ., Council 73, 150 N . J . 331, 351 (1997) (quoting Merin v . Maglaki, 126 N . J . 430, 436-37 (1992)). We may also defer to an agency's interpretations of its own regulations. See Utley v . Bd . of Review, 194 N . J . 534, 551 (2008). We do so in part because the agency that drafted and promulgated the rule should know its meaning. Essex Cty . Bd . of Taxation v . Twp of Caldwell, 21 N . J . Tax . 188, 197 (App. Div.), certif . denied, 176 N . J . 426 (2003).
We discern no error in the agency's decision, which is based on its effort to harmonize the UCL with the LLC Act. We begin by reviewing basic elements of the two statutes. New Jersey enacted the Limited Liability Company Act in 1994. L. 1993, c. 210, § 1 to § 70 (eff. Jan. 26, 1994). Its purpose was to enable members and managers of LLCs "to take advantage of both the limited liability afforded to shareholders and directors of corporations and the pass through tax advantages available to partnerships." Senate Commerce Committee Statement to S. 890 (June 14, 1993), republished at N.J.S.A. 42:2B-1.
A member or manager of an LLC generally is not liable personally for any "debts, obligations or liabilities of a limited liability company . . . by reason of being a member [or] manager[.]" N.J.S.A. 42:2B-23. On the other hand, a limited liability company consisting of two or more members may, for tax purposes, be treated as a partnership, and the members may be treated as partners, thereby enjoying the pass-through tax status of a partnership. N.J.S.A. 42:2B-69(a).
For all purposes of taxation under the laws of this State, a limited liability company formed under this act or qualified to do business in this State as a foreign limited liability company with two or more members shall be classified as a partnership unless classified otherwise for federal income tax purposes, in which case the limited liability company shall be classified in the same manner as it is classified for federal income tax purposes. For all purposes of taxation under the laws of this State, a member or an assignee of a member of a limited liability company formed under this act or qualified to do business in this State as a foreign limited liability company shall be treated as a partner in a partnership unless the limited liability company is classified otherwise for federal income tax purposes, in which case the member or assignee of a member shall have the same status as the member or assignee of
a member has for federal income tax purposes.
[Ibid.]
The authorization of the LLC form presented the task of determining how an LLC, and its members, would be treated under the UCL. Basic principles of the UCL are pertinent. 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).Based on the UCL's remedial purpose, "its provisions have been construed liberally, permitting a statutory employer-employee relationship to be found even though that relationship may not satisfy common-law principles." Id . at 581.
[Carpet Remant Warehouse, Inc. v. N.J. Dep't of Labor, 125 N.J. 567, 582 (1991).]
The UCL provides guidance generally in determining whether a person is an independent contractor, or otherwise exempt from the law. The statute defines employment generally to mean "service . . . performed for remuneration or under any contract of hire, written or oral, express or implied"). N . J . S . A . 43:21-19(i)(1)(A). In addition to excluding from "employment" certain specifically identified categories of remunerated services, N . J . S . A . 43:21-19(i)(7), a person may be excluded from "employment" if he or she meets three statutory criteria, known as the "ABC test":
An employing unit is one of several identified entities, including corporations and partnerships, that "had in its employ one or more individuals performing services for it within this State." N . J . S . A . 43:21-19(g). An employer, in turn, includes an employing unit which paid remuneration of over $1000 in the current or previous year. N . J . S . A . 43:21-19(h)(1).
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Services performed by an individual for remuneration shall be deemed to be employment subject to this chapter ([N.J.S.A. 43:21-1 to -30]) unless and until it is shown to the satisfaction of the division that:See, e.g., Philadelphia Newspapers, Inc. v. Bd. of Review, 397 N.J. Super. 309, 319-24 (App. Div. 2007) (discussing and applying ABC Test), certif. denied, 195 N.J. 420 (2008).
(A) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
(B) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
(C) Such individual is customarily engaged in an independently established trade, occupation, profession or business.
[N . J . S . A . 43:21-19(i)(6).]
However, a self-employed person, or a working partner, is exempt from the UCL without necessarily reaching the ABC Test for determining an independent contractor. They are exempt 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. Silverberg, 29 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).
Against this backdrop, after enactment of the LLC Act, the Department adopted a 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 states:
(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 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.
The LLC's selection of the form of tax treatment therefore is dispositive. Employees of ongoing corporations are eligible for unemployment benefits, unless they are an officer or owner of more than five percent of the equity or debt. N.J.S.A. 43:21-19(m)(1)(A). The distinction between officers and significant owners on one hand, and other corporate employees on the other hand, is intended to prevent manipulation of one's own unemployment and eligibility for benefits. Nota v. Bd. of Review, 231 N.J. Super. 341, 343-44 (App. Div. 1989). However, even an officer or significant owner may be eligible for benefits upon dissolution of the corporation. N.J.A.C. 12:17-12.1(a)(3). Presumably, at that point, the risk of self-dealing or manipulation is not as great.
On the other hand, 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. We recognize that, as a policy matter, there may be little difference, in terms of risks of self-dealing, between shareholders of a closely held corporation and a member of an LLC. On the other hand, the Legislature has determined what attributes to assign to the LLC as a unique business entity. It has endowed it with a corporation's separateness for purposes of shielding its members from liability. And it has allowed the LLC to be treated like a partnership for tax purposes, to avoid double-taxation.
Partnership-like tax treatment is generally viewed as an advantage of the LLC form. Marie T. DeFalso, et al., 1-2 NJ Corporations and Other Business Entities § 2.06 (2011) (NJ Corporations). However, as this case demonstrates, the partnership-like tax treatment has consequences under the UCL for members who are actively engaged in providing services to the entity. It is for the Legislature to determine, if it deems it appropriate, whether an LLC, should generally, or at its option, be treated like a corporation for purposes of unemployment compensation. Cf. N.J.S.A. 34:15-36 (providing for workers' compensation coverage of "members of a limited liability company . . . who actively perform services on behalf of the . . . limited liability company" if the LLC elects to be covered). We also note unemployment taxes paid in error on behalf of a working LLC member may, under certain circumstances, be refunded. N.J.S.A. 43:21-14(f) (request for refund for taxes paid in error may be made within two years of payment). See also Fischer v. Bd. of Review, 123 N.J. Super. 263, 267-68 (App. Div. 1973) (although two years passed since contributions made, N.J.S.A. 43:21-14(f) mandated Director to offset erroneously paid contributions against request for refund of benefits).
Although we have found no case in New Jersey directly addressing the issue of the UCL's treatment of LLCs, the agency's construction of the UCL and the LLC Act is consistent with other persuasive authority. One treatise notes, "LLCs can have non-member employees, but when the members of the LLC are the ones providing services, a technical federal partnership tax rule prevents them from also being its literal employees." NJ Corporations, supra, § 2.06 (2011). Salary-like payments to LLC members are deemed "guaranteed payments" that are "not subject to employer-side payroll taxes and in other respects are treated as self-employment income." Ibid. The member is responsible for paying his or her own self-employment taxes. Ibid.
Consequently, the member is exempt from unemployment compensation.
[I]f an existing employee of an LLC is given an equity interest as a member in the LLC (including a profits interest) or receives an interest when he exercises an option, then for tax purposes and certain other federal and state law purposes such as eligibility in some states for unemployment compensation . . ., that employee will automatically be converted into a self-employed independent contractor. That may not be what the parties intend or desire, and they may not be prepared for the results.
[Ibid.]
At least one court, as noted in NJ Corporations, supra, has affirmed the denial of unemployment compensation to a member of an LLC upon the firm's cessation of business. Borkowski v. Commonwealth, 139 S.W.3d 531, 533-34 (Ky. Ct. App. 2004). The claimant Borkoski was one of forty-six members of a Kentucky LLC, owning roughly twenty percent of the company. He also actively managed the firm. After the company ceased doing business, he applied for unemployment compensation and was denied. The Kentucky appellate court affirmed. The court approved the agency's decision that Borkowski was not an officer of a corporation eligible for covered employment under Kentucky law, since LLC members are treated as partners for tax purposes, and corporations and LLC were distinct entities. The court also agreed that Borkowski was ineligible for treatment under common law principles of employer-employee relationship.
In sum, we discern no error in the Board's determination that Trongone, 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 THE APPELLATE DIVISION