Opinion
No. 1294 C.D. 2011
04-09-2012
Jennifer L. Zegel, Petitioner v. Unemployment Compensation Board of Review, Respondent
BEFORE: HONORABLE BERNARD L. McGINLEY, Judge HONORABLE MARY HANNAH LEAVITT, Judge HONORABLE P. KEVIN BROBSON, Judge
OPINION NOT REPORTED
MEMORANDUM OPINION BY JUDGE LEAVITT
Jennifer L. Zegel (Claimant), pro se, petitions for review of an adjudication of the Unemployment Compensation Board of Review (Board) holding her ineligible for benefits under Section 402(h) of the Unemployment Compensation Law (Law) by reason of her self-employment. In doing so, the Board affirmed the Referee. Claimant contends that the legal services she provided for indigents and family, which she did for no compensation both before and after leaving the law firm that employed her full time, was a sideline business activity and, as such, did not render her ineligible for unemployment benefits. Concluding that the Board erred, we reverse and remand.
Act of December 5, 1936, Second Ex. Sess., P.L. (1937) 2897, as amended, 43 P.S. §802(h). Section 402(h) of the Law provides that an individual is ineligible to receive benefits for any week
in which he is engaged in self-employment: Provided, however, That an employe who is able and available for full-time work shall be deemed not engaged in self-employment by reason of continued participation without substantial change during a period of unemployment in any activity including farming operations undertaken while customarily employed by an employer in full-time work whether or not such work is in "employment" as defined in this act and continued subsequent to separation from such work when such activity is not engaged in as a primary source of livelihood. Net earnings received by the employe with respect to such activity shall be deemed remuneration paid or payable with respect to such period as shall be determined by rules and regulations of the department.
Claimant was employed full time as an associate at the law firm of Choi & Associates, P.C. (Employer) from March 2009 to September 30, 2010, when she resigned. She did so after the principal of the firm was indicted for tax and immigration fraud. On October 9, 2010, she applied for unemployment benefits. The UC Service Center found that Claimant established a necessitous and compelling reason for resigning and awarded benefits. She began collecting benefits.
In January 2011, Claimant informed the UC Service Center that she had incorporated a law firm in October 2010 and had recently opened a bank account for the firm. On the basis of this information, the UC Service Center held that Claimant was not entitled to unemployment compensation benefits she had received after October 23, 2010, when she had set up her own law firm. Claimant appealed, and a Referee conducted a hearing.
At the hearing, Claimant was the sole witness. She explained that she had worked full time for Employer at an annual compensation of $75,000. On October 21, 2010, Claimant incorporated Jennifer L. Zegel, LLC, so that she could represent family members who live in New Jersey in a mortgage foreclosure matter. Claimant is a member of the Bar of Pennsylvania as well as the Bar of New Jersey. To practice law in New Jersey, Claimant had to have an IOLTA trust account, and an employer identification number (EIN). These requirements, in addition to a desire to limit her liability for the legal services that she provided free of charge, prompted her to set up the corporation. She applied for an EIN on January 4, 2011, and on the next day opened a business bank account, which is required to practice law in New Jersey.
Claimant testified that she had done legal work for her family since graduating from law school in 2008, and it was her intention to use the LLC strictly for this family work and for her work as a volunteer for the Philadelphia Volunteers for the Indigent Program, which also requires malpractice coverage. The work she did for her family and for indigent clients was done both before and after she resigned from Employer. She was not compensated for this work.
Claimant explained that she has no plans to use the LLC to generate a living but only to allow her to continue providing legal services to family and to the indigent. The LLC involves nominal expense and facilitates her family and pro bono work. In the meantime, she is seeking full time employment as an attorney.
In addition to her testimony, Claimant offered other evidence. She presented a letter from her aunt, Johanna Claire Mickel. The letter listed the legal services Claimant had provided to her and another family member, without charge, from 2008 through 2010. Claimant also provided a representation agreement with the Philadelphia Volunteers for the Indigent Program, which obligates her to represent its clients free of charge. Additionally, Claimant submitted several financial documents, showing that she obtained malpractice insurance on November 19, 2010; incorporated her law firm on October 21, 2010; applied for an EIN on January 4, 2011; and established a bank account for her law firm on January 5, 2011.
Under Section 402(h) of the Law, self-employed persons are not eligible for unemployment compensation. However, there is an exception for a claimant's sideline business that may supplement a claimant's full time job. The Referee concluded that Claimant did not meet the sideline business exception because she did not establish her LLC until after she left her law firm job. The Referee found that Claimant took a positive step towards self-employment when she incorporated and, as such, Claimant was ineligible for compensation. Claimant appealed, and the Board denied her appeal without further discussion or analysis. Claimant then petitioned for this Court's review.
On appeal, Claimant argues that the activities she performed, which were done both before and after her separation from Employer, constituted a sideline business activity. Alternatively, assuming the Board is correct that she has taken a positive step toward self-employment, this step was not taken until January 5, 2011, when she opened a bank account for the LLC. Accordingly, January 5, 2011, is the earliest possible day Claimant can be considered to have made the move towards self-employment.
Our review is limited to determining whether constitutional rights were violated, whether an error of law has been committed, or whether necessary findings of fact are supported by substantial evidence. Roberts v. Unemployment Compensation Board of Review, 977 A.2d 12, 16 n.2 (Pa. Cmwlth. 2009). --------
The Board counters that Claimant cannot assert the sideline activity exception because her law firm, i.e., the LLC, did not exist until after her separation from full-time employment. It was the act of incorporation in October 2010 that constituted the positive step toward self-employment.
We begin with the Law. The Law is a remedial statute and is to be "liberally and broadly construed" in order to provide those who have become unemployed through no fault of their own with an economic benefit. LaChance v. Unemployment Compensation Board of Review, 987 A.2d 167, 170 (Pa. Cmwlth. 2009), appeal denied, 607 Pa. 692, 3 A.3d 672 (2010). However, the Law excludes those who are self-employed from receiving benefits because it "'was not designed to insure a weekly income to those engaged in business ventures who may not realize a profit therefrom during various weekly periods.'" Id. (quoting Urban v. Unemployment Compensation Board of Review, 151 A.2d 655, 656 (Pa. Super. 1959)).
Although the Law excludes self-employment, it does recognize "that there are industrious individuals who, while employed by another, engage in self-employment which is not their primary source of income." LaChance, 987 A.2d at 171. To these individuals, the Law grants an exception to the general self-employment exclusion. This is known as the "sideline activity exception." Id. The sideline activity exception applies when the claimant establishes that all of the following conditions have been met:
(1) that the self-employment activity precedes valid separation from full-time work; (2) that it continues without substantial change after separation; (3) that the claimant remains available for full-time work after separation; and (4) that the self-employment activity is not the primary source of the claimant's livelihood.Id.
It is the employer who has the burden of proving that a claimant is self-employed. Id. at 170. However, where, as here, the UC Service Center "'acts on its own in suspending benefits because of self-employment, [then it] carries the burden.'" Id. at 170-171 (quoting Teets v. Unemployment Compensation Board of Review, 615 A.2d 987, 989 (Pa. Cmwlth. 1992)).
In the present case, the Board found that Claimant provided legal services to family members and to the indigent before and after the loss of her job with Employer. Before separating from that job, however, she provided her volunteer services by using Employer's business accounts and malpractice coverage. In October 2010, after leaving Employer, she incorporated. Claimant acknowledges that this incorporation may be considered a factor in evaluating whether she is now self-employed, but she contends that it cannot be the sole and dispositive factor. By incorporating, Claimant asserts that she was only maintaining the status quo. The self-employment "activity" remained the same, and her participation in that "activity" did not change.
The Board responds that Claimant's LLC was established so that Claimant could continue the legal work she did for compensation while employed by Employer. Claimant used Employer's business accounts and malpractice insurance for her paid legal work as well as her unpaid work. The Board argues that the act of incorporating is sufficient in itself to deny Claimant benefits. In support, the Board relies upon Parente v. Unemployment Compensation Board of Review, 366 A.2d 629 (Pa. Cmwlth. 1976) and LaChance, 987 A.2d 167.
In Parente, the claimant worked full time for a steel corporation when he was laid off. Before his layoff, the claimant had incorporated a business involving bicycle sales and repairs. This sideline bicycle business was found not to render the claimant ineligible for benefits. In so holding, we observed "that if the [claimant] had initially embarked on his business venture immediately [a]fter his severance from [employment], then he would be deemed 'self-employed' and thus ineligible for benefits." Id. at 631.
In LaChance, the claimant had owned and operated a consulting business, advising clients on leadership development. When he was appointed the vice-president of a hospital, he stopped his consulting work. After he lost his job at the hospital, he revived his consulting work, working approximately twenty hours a week. The claimant argued that this work was preparatory to an expansion of his sideline business. The Board rejected this assertion, finding that the claimant was calling, writing and networking with people in an effort to re-enter self-employment. We affirmed the Board, noting that the claimant had increased his activity in his consulting firm and was actively seeking new clients. We held that "claimants who engage in business and the solicitation of clients have been viewed as self-employed, regardless of whether the claimants received any income from those efforts." Id. at 173. Therefore, we concluded that the claimant was self-employed.
Parente and LaChance are distinguishable from the case sub judice. In Parente, the claimant incorporated his bicycle business before he was laid off. We observed, in dicta, that if the claimant had incorporated his bicycle business after being laid off, the outcome would have been different. However, we did not hold that this act alone was sufficient to establish self-employment. In LaChance, the claimant was disqualified because he was actively developing his consulting business by seeking new clients. The facts are different here.
The Referee found, as fact, that Claimant did not advertise her services. However, the Referee also found that she had "networked" with other attorneys. Claimant testified that she was networking with other attorneys only to find a full-time job. There is no evidence of record that Claimant ever networked for paying clients. Claimant argues that the simple act of incorporation cannot be solely determinative, and we agree.
Roche v. Unemployment Compensation Board of Review, 503 A.2d 1103 (Pa. Cmwlth. 1986), is instructive. In that case, we stated that "[w]hether or not a business is incorporated is not determinative of whether activity in such business can be considered self-employment." Id. at 1105. Instead, the Court must look at whether a claimant has "perform[ed] a positive act of establishing an independent business enterprise." Id. In Roche, the claimant had not only incorporated but also established a checking account and signed a lease. Those acts together did establish self-employment. Roche teaches that we must examine a number of factors and go beyond the act of incorporation.
Here, the Board accepted Claimant's evidence, and it established that the nature of Claimant's work, both before and after her separation from Employer, were the same. She worked, free of charge, for family members and for a charitable organization. Claimant had to establish bank accounts and malpractice insurance in order to continue these activities. Claimant testified, and apparently credibly, that she had no intention of establishing an independent firm as her source of employment. She admitted that she would not turn away paying clients, but she was not looking for them. Further, none had presented themselves.
The Board focused on the legal form by which Claimant did the activities. Claimant provided her free legal services as a sole proprietor before losing her job; afterwards she provided them as an LLC. How she did these services is of no moment. The nature of her sideline activities never changed. There was no evidence that Claimant intended to hang out her shingle and earn a living thereby. She was looking for an employer, not paying clients.
The Board did not address the other relevant factors such as whether the sideline activity continued after separation without substantial change; whether the claimant remained available for full-time work; and whether the sideline activity was a secondary source of livelihood. However, the Board's findings of fact found in favor of Claimant on all the other sideline activity factors.
For these reasons, we reverse and remand for a computation of benefits.
/s/_________
MARY HANNAH LEAVITT, Judge ORDER
AND NOW, this 9th day of April, 2012, the order of the Unemployment Compensation Board of Review dated June 17, 2011 in the above-captioned matter is hereby REVERSED and REMANDED and benefits reinstated in accordance with the attached opinion.
/s/_________
MARY HANNAH LEAVITT, Judge
43 P.S. §802(h).