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Enesco Corp. v. Doherty, No. 1-99-0501

1st District, June 9, 2000

FIFTH DIVISION

JUSTICE HARTMAN delivered the opinion of the court:

Plaintiff Enesco Corporation (Enesco) sought administrative review of a decision reached by defendants, the Director of the Department of Employment Security (Director), and the Department (Department), which upheld the Department's determination and assessment against Enesco of $24,658.19 in unemployment insurance fund contributions for the period between January 1991 and April 1993, plus interest. Enesco claimed that the determination and assessment were erroneously based upon payments for services rendered by individuals who were independent contractors for purposes of section 212 of the Unemployment Insurance Act (Ill. Rev. Stat. 1991, ch. 48, par. 322, recodified as 820 ILCS 405/212 (West 1992)) (section 212). The Director found that these individuals had performed services in employment for Enesco within the meaning of section 212. The court affirmed the Director's decision as to all but three of the disputed individuals and remanded the matter to the Director for the purpose of issuing a supplemental administrative decision. The Director's supplemental decision reduced the amount owed by Enesco to $23,217.19, plus interest, which the court affirmed. Enesco appeals, and defendants cross-appeal from the court's initial decision.

The issues presented on appeal include whether the circuit court erred when it affirmed the Director's decision that (1) the free lance artists who performed services for Enesco were employees rather than independent contractors; (2) the independent manufacturers and sales representatives who performed services for Enesco were employees rather than independent contractors; and (3) that certain individuals or entities, other than those mentioned in (1) and (2), who performed services for Enesco, were employees rather than independent contractors. On cross-appeal, the issue raised includes whether the court erred in reversing the Director's decision that certain workers who performed services for Enesco were employees, rather than independent contractors.

On January 24, 1995, following an audit of Enesco, the Department issued a notice of determination and assessment to the company, stating that Enesco, an importer and wholesaler of giftware and collectible figurines, owed $24,658.19 in unemployment contributions, plus interest, for the period between January 1991 and April 1993. Enesco filed a timely protest with the Department, stating that many individuals considered by the Department to be Enesco employees under section 212, for purposes of calculating the amount of unemployment contributions due, were actually independent contractors.

On July 18, 1995, the Director's representative heard Enesco's protest. The parties introduced testimony and exhibits concerning the relational statuses of certain groups of individuals who were paid by Enesco for services rendered.

With regard to free lance artists (artists), four individuals testified at the hearing. Enesco's creative department often uses artists, generally between 10 and 25 at any given time, for sculpting, illustration, production and package engineering, because the company does not have full-time employees who perform these tasks. Enesco art directors and stylists have reference lists of artists to contact when one is needed for particular projects.

When an artist is needed, an art director or stylist often contacts by telephone an artist who has previously worked on a similar project for Enesco. Sometimes the artist will be asked to go to Enesco to discuss and examine the project before being retained. Artists who are interested in the proposed project negotiate their fees with the Enesco art director or stylist, and will agree to complete the projects within designated time frames. The fee varies, depending upon the nature of the projects and the artists' qualifications. Artists receive no benefits such as insurance, vacation, sick days, bonuses or pensions. Enesco does not deduct social security tax from the artists' compensation; nor does it carry workers' compensation insurance for them. Enesco does not reimburse the artists for any incurred expenses and does not furnish them with materials, supplies, tools, equipment, transportation, samples, business cards or expense accounts. They may perform work for other companies, including competitors, while performing services for Enesco and may engage in other occupations.

Enesco does not represent the artists as its employees; does not require them to report to specific locations at regular intervals or to provide records of their time; does not require them to perform services a specific number of hours per day or per week; does not require them to attend formal meetings; does not provide them with training; and does not guarantee their services. Artists may hire their own assistants.

Artists usually work out of their homes. No office space or clerical assistance is provided by Enesco. On rare occasions, they will be asked to help out at the Enesco offices during a crisis. The art director or stylist sometimes will meet with artists to check on the progress of the projects, and will advise them of necessary corrections. In rare instances, Enesco will not use the final product because the company is not satisfied with it, and the parties will negotiate a "kill fee."

The artists sign consultant agreements with Enesco, setting forth their compensation amounts and other terms and conditions. The contracts state that the artists will receive guidance from Enesco about the desired results from their services, but not as to the particular methods to be used. The contracts also state that the artists agree not to disclose any propriety information.

When the contract terminates, the artists must deliver to Enesco any documents, including notes, memoranda, drawings and blueprints containing proprietary information; assign any copyrighted works, ideas, or inventions developed during the project to Enesco; indemnify Enesco for any costs, including attorney fees, resulting from any claim relating to the ownership, originality, or property rights in the art work performed during the project; and are considered independent contractors.

Some artists testified their businesses would not close down if they were to lose Enesco business; no one interfered with their business operations; and they can have capital investments and make profits and incur losses in their businesses.

Another such group consisted of independent manufacturers' representatives, also called independent sales representatives (independent representatives), who sell Enesco products wholesale to retailers, such as greeting card shops and collectible gift dealers. Three individuals testified at the hearing, and their testimony established the following facts about the independent representatives and the conditions under which they operated.

Enesco retained about 450 independent representatives per year, 25 to 30 of whom are in Illinois. Under their agreements with Enesco, they may pursue other occupations, attend school, and represent other companies, but not giftware lines that compete with Enesco. They receive monthly commissions based on a percentage of all orders solicited by them that are accepted by Enesco. Although the commission rate is set forth in Enesco's sales manual, it can be amended from time to time. They receive no benefits such as insurance, bonuses, pensions, vacation, sick days or personal days. Enesco makes no deductions for social security, federal or state income tax from the commissions paid to the independent representatives. Enesco does not carry workers' compensation insurance on these independent representatives. Enesco deducts 10% from the commissions of all independent representatives who earn more than $30,000 during the course of the year, with a maximum deduction of $10,000, to pay for 11 corporate showrooms that it maintains throughout the country, including one in Elk Grove Village. The representatives are free to use these showrooms, but they are not required to do so. No office space is provided.

Enesco assigns territories to some independent representatives, but not to all. Some of them are assigned specific types of business accounts, such as military exchanges and religious bookstores. Enesco also provides leads to the representatives, and it gives them a list of established accounts in their territory. The representatives work under the supervision of sales directors who, in contrast, are Enesco employees. Enesco does not represent the representatives as being Enesco employees to others. The sales directors give the representatives annual sales goals, based upon the number of accounts, the previous sales' histories of those accounts, the varying sizes of the territories, and economic and other factors. If a representative does not meet the expected level of sales in his or her territory, the company will try to work with the representative in an effort to correct the problem. If the goal is not met without good reason, the company will terminate its relationship eventually.

The independent representatives must attend a one week training session provided by Enesco after they have represented the company in the field for one or two months. That session mostly consists of product line indoctrination and mechanical aspects of the work, such as writing orders and assisting customers with claims against the company. The representatives are not told how to sell or what selling methods to use. They are also required to attend two one-day sessions each year in Chicago that are designed to acquaint them with new Enesco products. The representatives pay for their own transportation and lodging while attending these meetings; they are not penalized for failure to attend.

Enesco does not instruct the independent representatives on when, where and how to work in their territories, nor does it dictate their work schedule. They control their own time and are not expected to provide time records. They are not required to work a specific number of hours per day or per week, nor need they report to specific locations at regular intervals or have their offices at any particular location. Enesco does not reimburse these representatives for expenses incurred, nor does it provide them with cars or other form of transportation. The representatives may operate at a profit or a loss. They own any materials they use, with the exception of catalogs and order forms. Enesco furnishes no other materials, supplies, tools, equipment, expense accounts, or clerical assistance. The representatives, however, are free to hire their own employees without Enesco approval, but are responsible for paying them.

When independent representatives take orders from customers, they fill in Enesco's order forms and send them to Enesco, which are subject to Enesco's approval and acceptance and to terms and conditions of sales established by Enesco, including extensions of credit. Enesco ships the products ordered to the customers and bills the customers. Enesco may change, replace, or remove the product that it sells without prior notice to the representatives or the customers. The representatives can determine the pricing structure to be afforded a customer.

The independent representatives sign annual contracts prepared, and terms dictated, by Enesco, which set forth many of the terms described above. Specifically, the contracts state that the representatives are independent contractors, a relationship which the company may terminate for failure to comply with the agreement or substantial failure to meet sales goals. Enesco's determinations as to whether sales goals were substantially met are binding.

Enesco also presented evidence about four other individuals whose statuses as employees or independent contractors were at issue. Various exhibits were admitted into evidence. Exhibit A shows Enesco's independent representatives and artists; and Exhibit B shows independent contractors other than independent representatives and artists, identified in an Enesco audit. The latter are engaged in independently established businesses, and work on specific projects on a one-time basis; they are not employed in the work of importing and distributing giftware in Illinois and Enesco does not direct or control the methods used by these individuals or entities.

One of the individuals included in Exhibit B was a former executive vice-president of Enesco, a 20-year employee who retired and entered into a two-year consultancy agreement with Enesco, which was in force during most of the assessment period. He was required to provide any consulting services reasonably requested by Enesco in exchange for payment of $25,000 per year. He was permitted to participate in any business that competed with Enesco.

Another person listed on Exhibit B had a verbal consultancy agreement with Enesco during a portion of the assessment period, a former executive vice-president of Enesco, who left the company after working there for 18 years. He performed consultancy services for Enesco under this agreement. He had no set schedule and worked on special projects or requests as made by Enesco. He is in business for himself, generally performing consulting work in the giftware industry.

Another person listed in Exhibit B was a pianist, retained to perform in the customer lunchroom at Enesco's trade shows, twice per year for wholesale customers, at its Elk Grove Village warehouse distribution facility. The shows lasted from four to six weeks. This person played the piano during the lunch hour several times each show, for which he was paid $5,535 in 1991, $11,297.50 in 1992, and $9,135 in 1993.

Also included in Exhibit B is an entity named Imagine That, which painted wall murals and decorative designs in a showroom setting, for Enesco's trade shows. Enesco negotiated a fee and a particular type of outdoor scene to be portrayed in a defined space by a specified deadline. Although Enesco gave the artist the concept, she executed the design.

Enesco does not carry workers' compensation insurance on any of the independent contractors listed on Exhibit B and does not deduct social security or income tax from their compensation.

On August 9, 1996, the Director's hearing representative issued a report and recommendation that the Department's determination and assessment be upheld in its entirety, because Enesco failed to show that the disputed individuals met any of the three criteria necessary to establish that they were independent contractors under section 212.

Enesco's objections to the report and recommendation were overruled by the Director who adopted her representative's report in her October 29, 1996 decision, upholding the determination and assessment.

On November 27, 1996, Enesco filed its complaint for administrative review of the Director's decision in the circuit court of Cook County which, on October 5, 1998, affirmed the Director's decision as to the statuses of the artists, the independent representatives, and all other persons, with three exceptions: one consultant, the piano player and the muralist, finding that the Director's contrary decision as to these individuals was against the manifest weight of the evidence. The court remanded the matter to the Director for further proceedings consistent with its decision. On November 16, 1998, the Director issued a supplemental decision, reducing the amount due from Enesco to $23,217.19, plus interest. The court affirmed the Director's supplemental decision on January 5, 1999. This appeal and cross-appeal follow.

I

Enesco contends that the circuit court erred in affirming the Director's decision that the artists, independent representatives and certain other individuals or entities who performed services for Enesco were employees, rather than independent contractors, precluding Enesco's exemptions from unemployment contributions under section 212.

The factual findings of the Department are prima facie true and correct, which may set aside only if found against the manifest weight of the evidence. Jones v. Department of Employment Security, 276 Ill. App. 3d 281, 284, 657 N.E.2d 1141 (1995); Cohen Furniture Co. v. Department of Employment Security, 307 Ill. App. 3d 978, 981, 718 N.E.2d 1058 (1999) (Cohen). Administrative agencies are not entitled to such deference, however, on questions of law, which are subject to de novo review. City of Belvidere v. Illinois State Labor Relations Board, 181 Ill. 2d 191, 205, 692 N.E.2d 295 (1998); Cohen, 307 Ill. App. 3d at 981.

In the present case, the relevant facts are undisputed; the case rather involves the legal significance of those facts to the question of the employment status of those individuals at issue. Metro East Cab Co., Inc. v. Doherty, 302 Ill. App. 3d 402, 406, 705 N.E.2d 947 (1999) (Metro East). Because this court reviews the legal conclusions regarding the employment issues, an independent analysis must be conducted to determine whether the Director considered all the facts and correctly applied them to the relevant law. City of Belvidere, 181 Ill. 2d at 205; Metro East, 302 Ill. App. 3d at 406. This court is not bound by the determination of either the circuit court or the Director as to the employment issue. Metro East, 302 Ill. App. 3d at 406. Instead, because the issue presents a mixed question of fact and law, the "clearly erroneous" standard of review will be applied. City of Belvidere, 181 Ill. 2d at 205; Metro East, 302 Ill. App. 3d at 406.

The Unemployment Insurance Act (Act) requires an employer to make unemployment contributions to a fund with respect to wages payable for employment. Ill. Rev. Stat. 1991, ch. 48, par. 550 (recodified as 820 ILCS 405/1400 (West 1992)); United Delivery Services, Ltd. v. Didrickson, 276 Ill. App. 3d 584, 587, 659 N.E.2d 82 (1995), leave to appeal denied, 166 Ill. 2d 555 (1996) (United Delivery); Cohen, 307 Ill. App. 3d at 981. The purpose of the fund is to provide "money to involuntarily unemployed workers and their families to ease the burdens caused by unemployment." Cohen, 307 Ill. App. 3d at 981. The Act defines employment as "any service *** performed by an individual for an employing unit." Ill. Rev. Stat. 1991, ch. 48, par. 316 (recodified as 820 ILCS 405/206 (West 1992)); Metro East, 302 Ill. App. 3d at 406; United Delivery, 276 Ill. App. 3d at 587. There are a number of statutory exemptions, one of which is independent contractors. Section 212; United Delivery, 276 Ill. App. 3d at 587.⁽¹⁾

An employer seeking an independent contractor exemption from unemployment contributions must prove the three elements contained in A, B & C before the exemption is allowed. United Delivery, 276 Ill. App. 3d at 588; Cohen, 307 Ill. App. 3d at 982. Common law principles pertaining to independent contractor status are not employed when interpreting the term "independent contractor" under section 212, which uses the term in a much broader sense. Cohen, 307 Ill. App. 3d at 982. The terms of section 212's three elements dictate whether the section applies and the parties' designation or description of their relationship is not controlling. Cohen, 307 Ill. App. 3d at 982; 56 Ill. Admin. Code