02. Employer Liability, Tax Rate, Successorship

Team Member Subsidiary v UIA – 2.26

Team Member Subsidiary v UIA
Digest no. 2.26

Sections 22, 41

Cite as: Team Member Subsidiary v UIA, Unpublished Opinion of the Livingston County Circuit Court, Issued June 18, 2009 (Docket No. 08-23981-AV).

Appeal pending: No
Claimant: N/A
Employer: Team Member Subsidiary, LLC
Docket no.: L2007-00026-2971
Date of decision: June 18, 2009

View/download the full decision

HOLDING: An employee leasing company will not be liable for unemployment tax purposes under Section 41 when it is a “captive employer” for purposes of Rule 190.

FACTS: Appellant was formed to provide human resources to and manage and report the payroll payments of Kitchen Suppliers, Inc. (KSI) as a business tax strategy. Pursuant to this strategy, it sought to be considered an Employee Leasing Company (ELC) which would only service KSI. The UIA determined that it did not meet the criteria to be a liable ELC under either its administrative rules or Section 41, and it would therefore not be recognized as an employer for unemployment purposes. Both the ALJ and the Board agreed with the UIA and determined that Appellant was a “captive employer” for the purposes of Rule 190, and was therefore not liable for unemployment taxes purposes.  After being denied a rehearing by the Board, Appellant appealed to the Circuit Court.

DECISION: The Circuit Court affirmed the decision of the Board of Review; Appellant is considered a “captive employer” under Rule 190 and therefore not an employer under Section 41 for unemployment tax purposes.

RATIONALE: Both parties agree that there was a “transfer of business” pursuant to 421.22(c), and therefore Appellant is an employer pursuant to 421.41(2)(b), which defines an employer as “[a]ny individual, legal entity, or employing unit described as a transferee in section 22(c).” According to the Court of Appeals, the evil that 421.41 “sought to combat… [is] to prevent the sliding scale employer contribution rate from being defeated by paper reorganizations which, in fact, change nothing.”

Appellant has stipulated that it is a “captive provider,” defined by Rule 190(1)(a) as an ELC “which limits itself to providing services and employees to only 1 client entity and… which does not hold itself out as available to provide leasing services to other client entities that do not share an ownership relationship with the employee leasing company.”  Further, an “employer” under section 41 is “responsible to pay unemployment taxes on the employees leased to the other entity” only if several conditions are met.  Appellant failed to meet conditions 2(d) and (f), which provide that there could be no more than 20% ownership between the ELC and the client entity, and that the ELC could not be a “captive employer.”

Notably, the Court was reluctant to affirm the Board, noting that the Appellant was relying on prior guidance by the UIA, and was not seeking to lower its unemployment tax rating, but only keep the tax rate that the former employer had paid.  The Court strongly hints that it would have decided the case differently if it was not bound to respect the decision of the ALJ.

Digest author: Nick Phillips
Digest updated: 8/14