| IN RE: WESTERN GOLD SHAKE | ) | DOCKET NO. 89 3349 |
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| FIRM NO. 550,218-00 | ) | DECISION AND ORDER |
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- APPEARANCES
- Firm, Western Gold Shake, Inc., By
- Daniel J. Tighe
- Department of Labor and Industries, By
- The Attorney General, per
- Yvonne K. Dickson, paralegal, and
- Nancy Hovis and Penny Allen, Assistants
This is an appeal filed by the firm on August 2, 1989, from an Order and Notice Reconsidering Notice and Order of Assessment of the Department of Labor and Industries dated July 27, 1989, which affirmed Notice and Order of Assessment No. 73186 dated July 14, 1989, which demanded payment of $229,518.98 in unpaid industrial insurance taxes for the period April 1, 1987 through December 31, 1988. The order is reversed and remanded.
DECISION
Pursuant to RCW 51.52.104 and RCW 51.52.106, this matter is before the Board for review and decision on a timely Petition for Review filed by the firm to a Proposed Decision and Order issued on May 21, 1990 in which the order of the Department dated July 27, 1989, was affirmed.
The Board has reviewed the evidentiary rulings in the appeal record and finds that no prejudicial error was committed and said rulings are hereby affirmed.
The issue in this appeal is whether the corporate officer/director/shareholder exclusion of RCW 51.12.020(9) or RCW 51.12.020(8) prohibits the Department from assessing industrial insurance taxes for certain employees of Western Gold Shake. [2]
We note the Industrial Appeals Judge, as well as the parties, assumed that the issues in this appeal are controlled by RCW 51.12.020(8) in its present form. However, that section as amended by Laws of 1987, ch. 316, § 2, p. 1122 (SHB 677), took effect on July 26, 1987. The assessment in this case covers the period April 1, 1987, through December 31, 1988. The portion of the assessment from April 1, 1987 through July 25, 1987 is therefore controlled by the 1979 version of RCW 51.12.020(9).
Former RCW 51.12.020 provided in pertinent part:
The following are the only employments which shall not be included within the mandatory coverage of this title:
. . . .
(9) Any executive officer elected and empowered in accordance with the articles of incorporation or bylaws of a corporation who at all times during the period involved is also a director and shareholder of the corporation. Any officer who was considered by the Department to be covered on and after June 30, 1977, shall continue to be covered until such time as the officer voluntarily elects to withdraw from coverage in the manner provided by RCW 51.12.110. However, any corporation may elect to cover such officers who are in fact employees of the corporation in the manner provided by RCW 51.12.110.
Laws of 1979, ch. 128, ] 1, p. 488.
The current RCW 51.12.020 provides in pertinent part:
The following are the only employments which shall not be included within the mandatory coverage of this title:
. . . .
(8) Any officer of a corporation elected and empowered in accordance with the articles of incorporation or bylaws of a corporation who at all times during the period is also a director and shareholder of the corporation. However, any corporation may elect to cover such officers who are in fact employees of the corporation in the manner provided by RCW 51.12.110.
RCW 51.12.020(8). [3]
The 1987 version of RCW51.12.020(8) differs from the 1979 version in only two respects. A sentence was deleted which stated "Any officer who was considered by the Department to be covered on and after June 30, 1977, shall continue to be covered until such time as the officer voluntarily elects to withdraw from coverage in the manner provided by RCW 51.12.110." This deletion is not relevant to the appeal before us. In addition, the word "executive" was deleted.
The term "executive" was not defined in the former RCW 51.12.020 and was deleted as a technical change in SHB 677 requested by the Department of Labor and Industries in 1987. House Bill Report, Commerce and Labor Committee (February 9, 1987). See also Senate Bill Report, Commerce and Labor Committee (March 30, 1987). Larson defines "executive" to include such work as "policy making, hiring and firing, and negotiation of important contracts". 1C A. Larson, Workmen's Compensation Law, § 54.21(d) at 9-232 (1988). The effect of the technical deletion of "executive" at the Department's request is not entirely clear. Since the Department itself characterized its deletion as technical, it does not appear that there is any real substantive distinction between the two versions of the statute. If anything, the deletion of "executive" supports our interpretation of the corporate officer/director/shareholder exclusion articulated in In re New West Manufacturing, Inc., BIIA Dec., 88 3634 (1989). We therefore conclude that the analysis used in New West is equally applicable here.
In New West, we discussed in detail the scope of the exclusionary provision of the 1979 version of RCW 51.12.020(9) and the history and [4] development of the industrial insurance laws relating to coverage for corporate officers. Our holdings from that case, as they apply to this case, can be summarized as follows:
- The Legislature intended to exclude from mandatory coverage any and all corporate officers who are elected and empowered by the articles of incorporation or bylaws and who are also directors and shareholders of the corporation. New West, at 11.
- If a person is a corporate officer/director/shareholder in name only and therefore not "empowered" or if he has not voluntarily agreed to become a corporate officer, he is not excluded from mandatory coverage. New West, at 16.
- RCW 51.04.060, which prohibits agreements to waive the benefits of Title 51, cannot preclude employers from utilizing the exclusion provided by RCW 51.12.020(9) (1979) and RCW 51.12.020(8) (1987). New West, at 21.
- The Department has no authority to question the internal management of a corporation in opposition to the desires of the shareholders of the corporation. New West, at 25-26.
- The Department has no authority to disregard the corporate existence simply to assess industrial insurance taxes. New West, at 26.
Rather than restate all the reasoning supporting these holdings, we incorporate the reasoning of New West by reference.
We turn, then, to the facts of this particular case. Western Gold Shake, Inc. is a shake manufacturing company. An accountant, Ronald Wikander, referred Steve Dziubak to a lawyers' typing service for preparation of the corporate papers. These included articles of incorporation which were originally filed with the Secretary of State on June 17, 1987, and the bylaws. At the time of incorporation, there were fifteen directors and shareholders of the corporation. As expressed in [5] the articles, the corporation's purpose was to "engage in all activities related to Cedar Shake Manufacturing and to engage in any business, trade or activity which may lawfully be conducted by a corporation under the Washington Business Corporation Act." Exhibit 2.
The articles of incorporation authorized the firm to issue 50,000 shares of common stock with a par value of $1.00 per share. The bylaws provided for the company's management by a three-member board of directors. Although the bylaws were not formally changed, the corporation identified each shareholder as a director. In addition, the bylaws established four offices within the corporate structure -- president, vice president, secretary and treasurer. Under the terms of a 1987 agreement in lieu of an organizational meeting of directors, the Board of Directors adopted the bylaws and named Lawrence Bowers as president, Steve Dziubak as secretary and treasurer, and identified thirteen other individuals [Jeffrey L. Bowers, John D. Deskins, Mark Dragoo, Bob Dziubak, Kevin Gallanger, Chris Kelly, Bill Plute, Craig Skinner, Steve Smith, Steve Sumner, Gene Swor, Bobby Turpin Jr., and Bobby Turpin Sr.] as vice presidents. A 1988 corporate renewal identified twenty-one directors.
The firm had an average of six to fifteen individuals involved at any one time. The firm owns no property. Steve Dziubak explained that a person became a member of the corporation if he was needed and was approved by the other corporate shareholders/officers/directors. Prospective participants were given the option of private insurance [6] coverage or industrial insurance; all chose to be covered with private insurance instead of industrial insurance.
Each shareholder held one vote and paid $1.00 per share. When members left the corporation, the firm bought the share for $10.00. Mr. Dziubak noted he and Lawrence Bowers may have initially held 2,000 shares each, since they had invested that much money in the corporation. When the corporation repaid the investment, Mr. Dziubak stated he and Mr. Bowers reduced their share ownership to one share each. The firm held meetings, which were attended by a majority of participants, at the millsite. Its corporate records were kept by the firm's accountant although Mr. Dziubak maintained the meeting minutes. According to Mr. Wikander, the corporation was not in business long enough to pay dividends.
We disagree with our Industrial Appeals Judge's determination that the election not to be covered by industrial insurance was not voluntarily given by the participants in the company and that only Mr. Dziubak and Mr. Bowers were properly empowered officers, shareholders, and directors of the corporation. As we stated in New West:
It is important to note that the officers and directors of this corporation are the shareholders. Thus, any criticism of the action of the officers and directors is not well-founded since the acts of the officers and directors constitute the actions of the corporation through its shareholders. Where the directors are the shareholders, they are the corporation. Steeple v. Max Krumer Company, 121 Wash. 47, 208 Pac. 444 (1922); 2 W. Fletcher, Private Corporations § 395 (Perm.Ed.1982).
New West, at 24.
The Department lacks the authority to contest the election of the officers and directors, as the validity of the election can be [7] effectively questioned only by the corporation or its shareholders. Baggot v. Turner, 21 Wash. 339, 58 Pac. 212 (1899); 2 W. Fletcher, Private Corporations, § 365 (Perm.Ed.1982). Furthermore, a corporation may alter, amend, or repeal bylaws, and may waive bylaws expressly or impliedly. Bay City Lumber Co. v. Anderson, 8 Wn.2d 191, 111 P.2d 771 (1941). We therefore conclude the Department has no grant of authority to question the internal management of this corporation. While the Department's objections, if lodged by directors, officers, or shareholders of this corporation, might be valid concerns, we do not believe, nor has any authority been cited, that the Department has the power to raise these issues in opposition to the desires of the shareholders of the corporation.
While there may be situations where we will find the requirements of the corporate officer/director/shareholder exclusion are not met, this is not one of them. Articles of incorporation were filed. Shareholders paid for their stock, held meetings, and selected directors and officers. Mr. Dziubak's testimony leads to no other conclusion than that the workers who were also officers/directors/shareholders voluntarily consented to their status. They are entitled to the exclusion from mandatory coverage which the Legislature created in 1979 and reinforced in 1987.
The Department recently promulgated WAC 296-17-349, which became effective April 1, 1988. Since the assessment in this matter covered the period April 1, 1987 through December 31, 1988, the portion of the assessment from April 1, 1988 through December 31, 1988, should be [8] considered in light of WAC 296-17-349. The pertinent portion of the rule provides:
The underlying intent of the corporate officer exemption is to exclude from coverage only those officers meeting the two prong test of share holder (sic) and director who are in a position similar to a proprietor to direct and control the business. In applying this exemption, the department will consider corporate officers exempt from coverage when they are elected and sit on the corporation's board of directors and are in a position similar to a proprietorship to direct and control the business.
WAC 296-17-349.
We agree that the corporate officer exemption applies only to officers who are "empowered" officers, and also shareholders and directors, but we must recognize the "cardinal rule of administrative law that an agency by its rulemaking authority may not amend or nullify a statute under the guise of interpretation." State v. Dodd, 56 Wn.App. 257, 260, 783 P.2d 106 (1989) review denied 114 Wn.2d 1019 (citations omitted).
The inquiry is whether the Department's rule conflicts with RCW 51.12.020(8). The statutory language exempts from mandatory coverage "any officer of a corporation elected and empowered in accordance with the articles of incorporation or bylaws of the corporation". The Department has determined that "empowered" means being "in a position similar to a proprietorship to direct and control the business".
Washington law, with respect to the powers of individual directors of corporations, has long recognized that "the power to do particular acts and the general authority to manage the corporate affairs is vested in the trustees or directors, and their acts are binding only when done as a board and at a legal meeting." Trethewey v. Green River Gorge, Inc., [9] 17 Wn.2d 697, 727, 136 P.2d 999 (1943). As we observed in New West, the Legislature declined to define "empowered" in the statutory provision. As noted at page 9:
The decision not to include a definition was reached after the House Labor Committee considered a proposed substitute to HB 92 which would have defined a corporate officer as "a shareholder who is an active and direct participant in the management and policy- making functions of the corporation." Like the original version of HB 92, this proposed substitute would have provided a withdrawal mechanism rather than a straight exemption from mandatory coverage. Bill Analysis, K. Wiitala, House of Representatives Labor Committee (January 30, 1979). The Legislature chose not to adopt this proposed definition.
To determine whether WAC 296-17-349 conflicts with RCW 51.12.020(8), the legislative intent must be considered. Since the Legislature had the opportunity to adopt language remarkably similar to that of the WAC and determined not to, we find that the WAC provision is beyond the authority of the Department. Administrative agencies do not have the power to make rules which, rather than applying legislative enactments, attempt to amend or change them. See State Employees v. Personnel Board, 54 Wn.App. 305, 308, 773 P.2d 421 (1989).
Because the articles of incorporation for Western Gold Shake, Inc. were not filed until June 17, 1987, and the assessment period commenced April 1, 1987, we must consider whether the employees during that interim period were covered by industrial insurance. The record is not clear regarding whether Western Gold Shake operated before incorporation. Mr. Dziubak stated the mill commenced operation in 1987 and was in the shake business during April 1, 1987 through December 31, 1988. He also observed the mill did not operate before incorporation and was not a continuation of an "old" business. It appears, however, that the firm [10] was active before the articles of incorporation were actually filed with the Secretary of State. See, e.g., Initial Filing Report, dated May 8, 1987. Exhibit No. 8. In light of this record, we find the Department's assessment of premiums for employees during the period April 1, 1987 through June 16, 1987 was appropriate. The corporate officer exclusion does not apply to work performed by employees prior to the date the corporation became a legal entity.
After consideration of the Proposed Decision and Order and the Petition for Review filed thereto, and a careful review of the entire record before us, we are persuaded the Department's Notice and Order of Assessment which assessed industrial insurance taxes and penalties for the period April 1, 1987 through December 31, 1988, is incorrect and should be reversed in part. This matter is remanded to the Department with instructions to issue an order finding that no industrial insurance taxes are due for the officers, who were also directors and shareholders of the corporation, for the period June 17, 1987 through December 31, 1988, but assessing industrial insurance taxes due for those employees for the period April 1, 1987 through June 16, 1987.
FINDINGS OF FACT
1. On July 14, 1989, the Department of Labor and Industries issued Notice and Order of Assessment No. 73186 which assessed $229,519.98 in unpaid industrial insurance taxes and a penalty for the period April 1, 1987 through December 31, 1988, against Western Gold Shake, Inc. The firm filed a protest and request for reconsideration on July 20, 1989. On July 27, 1989, the Department affirmed Notice and Order of Assessment No. 73186.
On August 2, 1989, the firm filed a notice of appeal with the Board of Industrial Insurance Appeals. On [11] August 15, 1989, the Board issued an order granting the appeal, assigning it Docket No. 89 3349.
2. On June 17, 1987, Steve Dziubak incorporated Western Gold Shake, Inc. He became the secretary-treasurer, registered agent, and a director of the firm. He initially received 2000 shares of stock in the firm for $2,000.00. He arranged for most of the contracts for the firm.
3. At the time of the incorporation, fifteen other individuals became directors and shareholders. They also were named vice-presidents and received one share of stock for $1.00. A person became a member of the corporation if he was needed and was approved by the other corporate shareholders/officers/directors. When workers wished to leave the firm, they resigned as vice-presidents and directors, and the firm bought their shares for $10.00.
4. All prospective participants were given the option of private insurance coverage or industrial insurance; all chose to be covered with private insurance instead of industrial insurance.
5. Corporate director, shareholder, and officer meetings were held at the mill site irregularly and without written notice.
6. All the individuals who participated in the company as shareholders were properly empowered officers, shareholders, and directors of Western Gold Shake, Inc., and voluntarily elected to not be covered by industrial insurance.
7. Western Gold Shake, Inc. operated and had employees between April 1, 1987 and June 17, 1987, the date the articles of incorporation were actually filed with the Secretary of State.
CONCLUSIONS OF LAW
- The Board of Industrial Insurance Appeals has jurisdiction over the parties and the subject matter to this appeal.
- All of the individuals who participated in the company as shareholders were properly empowered officers, shareholders, and directors of Western Gold Shake, Inc., during the period of June 17, 1987 through [12] December 31, 1988 within the meaning of RCW 51.12.020(8) (1987) and RCW 51.12.020(9) (1979), which exclude properly empowered officers, shareholders, and directors from mandatory industrial insurance coverage.
- None of the individuals who participated in the company as officers, directors and shareholders of Western Gold Shake, Inc. during the period of June 17, 1987 through December 31, 1988 were subject to the mandatory industrial insurance coverage of Title 51 RCW. Any individuals who were employees of this business entity between April 1, 1987 and June 16, 1987, were subject to mandatory industrial insurance coverage.
- Notice and Order of Assessment No. 73186, which was affirmed July 27, 1989, and which assessed $229,518.89 in unpaid industrial insurance taxes for the period of April 1, 1987 through December 31, 1988 is incorrect and is reversed in part, and this matter is hereby remanded to the Department with instructions to issue an order finding no industrial insurance taxes are due for the officers of this corporation who were also directors and shareholders for the period June 17, 1987 through December 31, 1988, but assessing taxes due for any employees working during the period April 1, 1987, through June 16, 1987.
It is so ORDERED.
Dated this 15th day of November, 1990.
BOARD OF INDUSTRIAL INSURANCE APPEALS
/s/
SARA T. HARMON Chairperson
/s/
PHILLIP T. BORK Member
DISSENT
I hereby dissent from the majority opinion. I fully concur with the result reached by the Industrial Appeals Judge in his Proposed Decision [13] and Order issued on May 21, 1990, and hereby incorporate that decision as my dissent.
Dated this 15th day of November, 1990.
/s/
FRANK E. FENNERTY, JR.Member