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Carpetland U.S.A., Inc. v. Illinois Department of Employment Security

June 20, 2002

CARPETLAND U.S.A., INC., APPELLEE,
v.
THE ILLINOIS DEPARTMENT OF EMPLOYMENT SECURITY ET AL., APPELLANTS.



The opinion of the court was delivered by: Justice Garman

UNPUBLISHED

Docket No. 91564-Agenda 23-January 2002.

Carpetland U.S.A., Inc. (Carpetland), sought administrative review in the circuit court of Cook County of a decision by Lynn Quigley Doherty, Director of Employment Security, which adopted the report and proposed decision of a representative of the Department of Employment Security (Department) before whom a hearing had been held. The Director determined that floor measurers and floor-covering installers whose services were utilized by Carpetland were employees rather than independent contractors and, therefore, were not exempt under section 212 of the Unemployment Insurance Act (Act) (820 ILCS 405/212 (West 2000)). The Director further found that Carpetland owed $38,977.17, plus interest and penalties, in unpaid unemployment insurance contributions for 1991. The circuit court confirmed the Director's decision. On appeal, a divided court reversed, finding the Director's decision clearly erroneous. We granted the Department's petition for leave to appeal (see 177 Ill. 2d R. 315). We agree with the appellate court that the agency decision as to the installers was clearly erroneous and, therefore, affirm in part. Because we do not find clear error in the agency decision as to the measurers, we reverse in part.

Under the Act, an employer's liability for making contributions and an employee's eligibility for benefits are dependent, in part, on the existence of an employment relationship between them. The statutory definition of employment, rather than common law principles of master and servant or independent contractor, governs this determination. AFM Messenger Service, Inc. v. Department of Employment Security, 198 Ill. 2d 380, 396-97 (2001). The Act defines "employment," in relevant part, as "any service *** performed by an individual for an employing unit." 820 ILCS 405/206 (West 2000). Carpetland, a corporation "which has or *** had in its employ one or more individuals performing services for it within this State" (820 ILCS 405/204 (West 2000)), is an employing unit. At issue is whether 12 measurers and 259 installers whose services were utilized by Carpetland during the relevant time period were employees, on whose behalf Carpetland was required to make unemployment insurance contributions, or independent contractors, for whom the Act carves out an exemption:

"Service performed by an individual for an employing unit, whether or not such individual employs others in connection with the performance of such services, shall be deemed to be employment unless and until it is proven in any proceeding where such issue is involved that-

A. Such individual has been and will continue to be free from control or direction over the performance of such services, 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 engaged in an independently established trade, occupation, profession, or business." 820 ILCS 405/212 (West 2000).

Because these conditions are stated in the conjunctive, all three must be satisfied for the independent contractor exception to apply. Jack Bradley, Inc. v. Department of Employment Security, 146 Ill. 2d 61, 75 (1991). The burden of proof is on the presumptive employer, who is claiming the benefit of the exemption. Thus, the terminology used by the parties to describe their relationship is not controlling. The determination must be made, instead, based on the facts relevant to the three conditions. Jack Bradley, 146 Ill. 2d at 75-76. In addition, because the Act was passed with the public welfare in mind, its terms should be liberally construed in favor of inclusion. Jack Bradley, 146 Ill. 2d at 75.

The Director and the circuit court concluded that none of the three conditions of section 212 were met. The appellate court reached the opposite conclusion. 319 Ill. App. 3d 1068.

BACKGROUND

Carpetland is a retailer of floor coverings, primarily carpeting. During 1991, Carpetland operated 17 stores in Illinois. Carpetland's retail price for its products does not include measuring the customer's floor to determine the dimensions needed or installation of the floor covering. However, the majority of Carpetland's sales, approximately 75%, are to customers who request that Carpetland arrange for installation of the floor covering by signing a sales agreement containing the following provision:

"INSTALLATION BY SUBCONTRACTOR

It is understood that Carpetland will not install said materials but that by the acceptance of this proposal you authorize Carpetland to contract with a subcontractor on [your] behalf to make the installation. You authorize Carpetland to issue to said subcontractor on [your] behalf an installation work order with these specifications. You agree to pay to Carpetland the amount specified herein which shall include the price of all materials and the installation charges which are payable to the subcontractor on your behalf."

At the agency hearing, Carpetland's vice president of operations, three installers, one measurer, and an employment consultant testified before the Department's representative.

Installers

Joseph H. Smith testified that he had been in the business of carpet installation for 27 to 28 years. He is now self-employed with a company known as J. Smith Floors, Inc. During 1991, he was the self-employed president of an Indiana corporation known as Tile Works, Inc., which sold and installed floor coverings. Smith estimated that about 75% of Tile Works' business consisted of performing installations for retail or commercial customers of Carpetland and other companies. About 25% consisted of in-house sales and installations. Of the portion of his business that involved installations for other companies, about 30% of the work was for Carpetland; the rest was for Builder's Square, Colortile, and other retailers who were competitors of Carpetland. At the time of the hearing, Smith continued to do work for Carpetland, under the same arrangement that existed in 1991.

When Carpetland has a job for Smith in Illinois, he is contacted directly by the salesperson and, after accepting the job, receives a work order via fax. The work order contains the name and contact information for the customer and a description of the work to be done, including a diagram for placement of the floor covering. Depending on the job, he might have to visit the site to evaluate it. He occasionally declines jobs if his schedule is full, the job is "too big or too small," or the job will not pay well.

Smith has a basic price for various types of jobs, which he adjusts up or down depending on the size and complexity of the job. He quotes a price to Carpetland and, if they reach an agreement, he takes the job. If not, the job will go to someone else. He includes in his quoted price any anticipated incidental expenses such as parking. If his costs are less than his original estimate, he retains the extra profit. If the job costs him more than his estimate, he suffers the loss.

The actual installation work is performed by Smith's employees. In general, he has 10 to 12 employees but increases that number to 25 or 30 during busy seasons. He uses subcontractors when he is short-handed. Carpetland is not involved in his staffing decisions, does not suggest or recommend that he increase or decrease staff, and does not refer potential employees to him. Any training needed is provided by Smith.

One of his employees picks up the carpeting or other material at Carpetland and transports it to the customer's site. Smith supervises the actual installation. Only rarely will someone from Carpetland be present during the installation.

Smith provides any materials or supplies needed for installation, such as adhesives for vinyl or tile, mortars and grouts for ceramic and marble, and seam tape, tack strips, and other materials for carpeting. When purchasing these supplies, Smith determines which suppliers he will use and deals directly with suppliers who sell only "to the trade." Smith also provides all of the necessary tools, in which he estimated he has invested $15,000 to $18,000. In addition, Smith owns three delivery trucks and maintains a 3,500 square foot warehouse and an office with a staff of four.

After completing a job for Carpetland, Smith submits an invoice on his company stationery, accompanied by a copy of the work order. Usually, he does this by mail. Carpetland pays him twice a month, with a check made out to his company. He estimated that his company does about one job per month for Carpetland.

Smith guarantees his work for one year from the date of installation. If the customer complains to Carpetland, the matter is referred to him for resolution. He does not receive complaints directly from Carpetland customers once his installers have left the customer's premises.

Smith testified that in 1991, he had an Illinois Department of Employment Security account number and a federal employer identification number. Tile Works filed a corporate tax return in 1991. Smith uses his own business cards, containing the name of his company and his own telephone number. He advertises his business in local newspapers and in the yellow pages.

James Lawson testified that he had been the sole proprietor of Lawson's Carpet Service in Decatur, Illinois, for 20 years. In 1991, approximately 75% of his business consisted of carpet installations for customers of the Carpetland store in Decatur and occasionally for the stores in Champaign and Bloomington. He continues to do business with Carpetland under the same arrangement that existed in 1991. Lawson calls the store to advise the manager that he is available for work. Sometimes, he is given work immediately. At other times, the store will call him back with assignments. He occasionally turns down work. Lawson takes vacation or holiday time as it suits him and informs Carpetland that he will not be available.

Lawson's Carpet Service generally employs Lawson, one full-time employee, and one part-time employee. He pays his employees by the hour and pays withholding taxes and FICA on their behalf. He also makes unemployment compensation contributions for them. He hires by word of mouth or by placing newspaper ads and trains his own employees. Carpetland has never referred a potential employee to him, nor has Carpetland recommended that he hire or terminate any employee. Lawson estimated that five years of training and experience are necessary to become a fully qualified installer. The products are constantly changing and he must keep up-to-date. He communicates directly with carpet manufacturers regarding recommended installation procedures, such as which type of adhesive to use with a particular product.

After accepting a job, Lawson calls the customer directly to discuss details such as whether existing carpeting must be removed. They also set up a time for the installation. He then obtains the roll of carpeting from the store and transports it in his company's van to the customer's home or business, where he cuts it to fit.

The installer must also be able to properly prepare the floor to which the carpeting is being applied. On some jobs, he must lay a new floor or patch the existing floor before he can install the floor covering. When he finds such a situation, he explains it to the customer, quotes a price, and gets the customer's permission to do the work. Because he gives a one-year warranty, he will not do the job if the customer declines to allow him to properly prepare the floor. He also works with the customer to determine where seams will be placed. Considerations include the traffic pattern in the room and the arrangement of furniture. If the customer authorizes additional services that were not included in the original estimate, Lawson will negotiate a price directly with the customer. The customer may pay him directly, or they will agree to pass the charge through Carpetland. This is likely to occur when a customer is using a credit card and wants the carpet purchase and installation to be treated as one credit transaction.

Lawson and his employees use tools owned by Lawson Carpet Service, including power tools such as stretchers, tackers, and trimmers. He purchases tools directly from suppliers. Carpetland does not lend him tools or help him acquire tools. He estimated his total investment in tools at $5,000. All supplies used in the installation process are also provided by Lawson, including tape, metal trim, staples, and knife blades.

Advertising for Lawson Carpet Service includes yellow pages ads, ads in school and church bulletins, and business cards. In addition to using the Lawson Carpet Service name, these ads include his logo. These materials do not mention Carpetland.

Lawson negotiates with Carpetland and his other clients for the cost of each job. He sets his price based on the size and complexity of the job. He charges more for carpeting a stairway, for example, than for a floor. He quotes his price to the salesperson, who might make a counteroffer. Lawson also does "contract jobs" for builders or commercial customers. He bids on a job and negotiates directly with the customer, who then purchases floor covering from Carpetland or another supplier. In these cases, he bills the customer directly for his installation services.

Only rarely does a representatives from Carpetland visit a work site. This might occur if Lawson discovered a flaw in the carpeting and Carpetland was going to have to replace it, or if the quantity of carpeting provided by Carpetland was insufficient.

Lawson guarantees his work for one year. He provides one of his business cards to the customer, who may call him directly if a problem arises with the installation. The customer might also contact Carpetland and the problem would be referred to him. Lawson would make the repair, incurring the cost of new carpet if necessary. Carpetland does not reimburse him. If he determines that the problem was not his responsibility, he will charge the customer or Carpetland for the repair, as appropriate.

Lawson submits a bill to Carpetland twice a month and receives a check for the billed amount several days later. He does not participate in any employee benefit programs.

Craig Panozzo testified that he incorporated his business, Craig's Custom Tile, in 1989. In 1991, approximately 25% of the work done by his company was for the Carpetland store in Matteson, Illinois. At the time of the hearing, he continued to do ceramic and marble tile installation for retailers and builders and does remodeling work on his own.

A Carpetland employee calls Panozzo when a job comes up, usually giving him 10 to 14 days' notice. He will turn the job down if he does not have the time to do it or if the job is too big for him to do alone. If he accepts the job, he picks up a work sheet from Carpetland and the tile from the distributor in Crestwood, Illinois. All of the work he does for Carpetland is on new construction, so he does not have to visit the site before agreeing to a price per square foot, as he would have to do for a remodeling job. Panozzo provides the necessary supplies such as pads, adhesives, cement, grout, and caulk. The cost of supplies is built into his price. He also provides his own tools, such as saws, in which he has invested approximately $5,000.

Periodically, Panozzo turns in a "recap sheet" to Carpetland, along with the worksheet for each job. He stops by Carpetland several days later to pick up a check made out to Craig's Custom Tile. When he takes a vacation, he notifies Carpetland that he will be gone. Panozzo also acknowledged that he did not have an account with the Department or a federal employer identification number.

Measurers

Kenneth W. Weiss testified that from January to June 1991, he worked as a measurer, doing jobs subcontracted to him by GW Carpet Service (GW), a sole proprietorship of his father, Gary Weiss. The business was operated out of the elder Weiss' home. Several secretaries were employed by GW, but the measurers were "subcontractors."

Weiss estimated that 10% of the jobs he did for GW were for Carpetland and the remainder were for other floor-covering businesses. Each morning, he would call GW to pick up job assignments for that day. He was given the customers' names, addresses, and telephone numbers, the account or store that had requested each measuring job, and perhaps the name of the salesperson. Weiss would contact the customers to arrange a time to make the measurements.

After making the measurements, Weiss returned to his "personal office" in his home to make a diagram of each job. Some accounts supplied their own forms; Carpetland did not. In addition to showing the measured area to scale, the diagram noted any additional information that might be needed to calculate the cost of the floor covering or installation, such as heavy furniture that would have to be moved, or old carpeting to be taken up. Weiss placed the forms in his mailbox, where they were picked up by a messenger service for GW. GW then had the reports delivered to the stores that had ordered the work. Weiss rarely went into a Carpetland store. Occasionally, he would do so if a customer had a special need such as a rush order that he might decide to hand-deliver as a service to the customer.

No one from Carpetland checked his work. If a mistake occurred, he remeasured. He would be paid for the additional work if the mistake turned out not to be his responsibility. If he had made the mistake, he would not be paid for the second trip.

Weiss and other measurers charged GW on a per-job basis, with additional charges for distance and particularly large jobs. He would submit daily and weekly tallies of jobs done. His check from GW was delivered each week by the same messenger who picked up his measurements. GW, in turn, billed Carpetland and the other stores. GW negotiated its fees with each of the stores and the rates were slightly different as a result.

Weiss was trained on the job by his father. Later, Weiss trained other measurers. Carpetland was not involved in any of this training. Weiss testified that he considered himself to be self-employed and that he filed a Schedule C federal tax return in 1991. GW was his only customer and he earned $7.50 per job, unless there was some adjustment for distance or size of the job. On average, Weiss would do 17 jobs per day, six days per week. He did not have his own business cards and did not do any advertising. GW had business cards and called on stores to solicit business.

When GW went out of business in June 1991, the younger Weiss and two other measurers each took over a portion of the business. Each of them paid Gary Weiss "a commission" on the accounts that they took over from GW. Several of the Carpetland stores became Weiss' accounts under this arrangement.

Carpetland

John L. Booth, Carpetland's vice president of operations, explained that a Carpetland salesperson calculates the cost of a floor covering based on dimensions provided by the customer. However, if the customer does not know the dimensions or wants to arrange for installation, an actual measurement is required. The salesperson has the option of doing the measuring himself or referring the job to a measuring service. If a measuring service is used, half the cost is deducted from the salesperson's commission. The salesperson explains to the customer that the measuring service is an independent business, over which Carpetland has no control, but that the salesperson will relay the customer's request as to a convenient time for the measuring to occur. After the results of the measuring are communicated to the salesperson, he recalculates the price and informs the customer of any adjustment.

Booth further testified that measurers are not Carpetland employees. They do not participate in any Carpetland employee benefit program such as insurance or paid vacation. Measurers may take vacation time or other time off without clearing it with Carpetland. Carpetland does not provide them with vehicles or reimburse them for mileage. Carpetland does not require that the measurers work only for Carpetland. Carpetland neither trains the employees of the measuring services nor instructs the measurers on the performance of their work. Measurers are not required to come to a Carpetland store for any purpose and representatives of Carpetland do not go to customer's locations to review or supervise the work of measurers. If a measuring service makes an error that results in extra cost, such as a need for additional carpeting, Carpetland holds the measurer responsible for the expense. Carpetland pays the measuring services on a per-measure basis at a rate that is negotiated individually. Different stores have different arrangements with the measuring services as to how often they are paid, usually weekly or biweekly. The measuring service submits invoices to Carpetland, on the service's own bill or letterhead. Carpetland pays the amount of the invoice, without deductions for payroll taxes.

Carpetland does not enter into written contracts with the various measuring services, but does require that each service provide certificates of automobile and liability insurance as a condition of doing business.

Carpetland specifically informs its customers that it does not provide installation services. If the customer wants to have the floor covering installed, Carpetland will subcontract the work to an installer. Booth identified a form that was used in all Carpetland stores as an "installation subcontract." The form contains the customer's name and address, the material to be installed, the areas to be covered, and the installation price. The price of installation is negotiated between the store and the installer and is based on a base price per square yard, plus any "add-ons" such as preparation of the floor. The base price varies from store to store and, within a single store, from installer to installer. Installers are free to decline jobs and do so on occasion. Once the installer accepts the job, this document is ...


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