Tuesday, November 28, 2017

LLCs Are Still Not Corporations, And At Least One Judge (In Dissent) Knows It

A recent Pennsylvania opinion makes all sorts of mistakes with regard to a single-member limited liability company (LLC), but in dissent, at least some of the key issues are correctly framed. In an unreported opinion, the court considered whether a company (WIT Strategy) that required an individual to form an LLC as a predicate to payment was an employee eligible for unemployment compensation. WIT Strategy v. Unemployment Compensation Board of Review, 2017 WL 5661148, at *1 (Pa. Cmwlth. 2017).  The majority explained the test for whether the worker was an employee as follows:

The burden to overcome the ‘strong presumption’ that a worker is an employee rests with the employer. To prevail, an employer must prove: (i) the worker performed his job free from the employer's control and direction, and (ii) the worker, operating as an independent tradesman, professional or businessman, did or could perform the work for others, not just the employer.

Id. at *3. (quoting Quality Care Options v. Unemployment Comp. Bd. of Review, 57 A.3d 655, 659-60 (Pa. Cmwlth. 2012) (citations omitted; emphasis added)).

As to the first prong, the Unemployment Compensation Board of Review (UCBR) determined, and the court confirmed, that WIT Strategy had retained control over the claimant consistent with the type of control one exerts over an employee.  I might disagree with the assessment, but the test is correct, and the analysis reasonable, if not clearly correct.  Assessment of the second prong, though, is flawed.  

The court quotes the UCBR's conclusions:

The [UCBR] does not find that [C]laimant was operating a trade or business, customarily or otherwise. The only reason [C]laimant formed the LLC was because WIT required it, claiming that it needed to pay [C]laimant through the LLC. WIT also claimed that doing so was a ‘common agency model’ for its kind of agency. The [UCBR] does not credit WIT's testimony. Rather, although [C]laimant did perform two projects for other entities, each for under $600 [.00], there is no evidence that [C]laimant solicited business through her LLC since its inception in 2013 through her termination in 2015. [C]laimant worked for WIT 40 hours per week and did not have employees of the LLC to solicit business for her. Further, although WIT claimed that all its team members were required to have additional clients through their LLCs to share with it, WIT did not prove that [C]laimant had such clients. As [C]laimant did not operate a trade or business, but rather the LLC was formed as a type of shell corporation, the fact that [C]laimant was the single-member owner is not dispositive. [C]laimant was not customarily engaged in a trade, occupation, profession or business.

Id. at *4 (emphasis and modification in original).
 
Enter President Judge Mary Hannah Leavitt.  In dissent, Judge Leavitt writes what should be the majority opinion.  First, she notes that "quality control" is not the same thing as control by an employer.  I think her analysis of the control prong is the better one, but again, reasonable minds can assess these facts differently. As the second prong, Judge Leavitt also quote the UCBR, then proceeds to assess it correctly. She explains: 
The legal form by which Claimant provided public relations and communications services to WIT-provided clients and to her own clients is irrelevant. A sole proprietor may establish a single-member LLC for many reasons, the obvious being a desire to limit individual liability. It is not known what the Board meant by a “shell corporation,” and there is no evidence on this point. A limited liability company is not even a corporation. The Pennsylvania Associations Code provides as follows:
One or more persons may act as organizers to form a limited liability company ....
15 Pa. C.S. § 8821. A single-member LLC, such as Jilletante Creative, is a perfectly lawful and valid alternative to a sole proprietorship.
Claimant continued to operate as an LLC even after her separation from WIT. The record includes Claimant's two-page detailed proposal to a potential client on “Jilletante Creative, LLC” letterhead, signed as “Jilletante Creative, LLC; By: Jillian Ivey, sole member.” R.R. 10a-11a. Jilletante Creative is not a sham or “shell” corporation, and characterizing it as such is a red herring in the analysis of whether Claimant worked for WIT clients as an employee of WIT or as an independent contractor.
Id. at *12 (Leavitt, Pres. J, dissenting). Yes!   "It is not known what the Board meant by a 'shell corporation,' and there is no evidence on this point. A limited liability company is not even a corporation." This is exactly right. Further, there is nothing wrong with an LLC serving one client. Whether its because it is a requirements contract (e.g., I will do as much work for you as you require) or simply that the LLC's owner is comfortable with the revenue coming from a single client, having only one client does not make you an employee.  
 
As a side note, as someone who has worked both for a law firm and a public relations agency, it is not at all uncommon for people in each profession to work as independent contractors.  A lawyer can be a solo and work for one client, or that lawyer can be hired an brought into the firm or in-house.  Same with PR professionals.  They may work as employees, but it is not uncommon to work as an independent contractor, in part to maintain the flexibility of work location, hours, and manner in which the work is completed.  
 
In the unemployment compensation context, what constitutes an employee can often be different than what one might deem an employee in the agency context. And that's okay. Sometimes we craft different definitions for different purposes or policy goals.  But disregarding an entity as a "shell" merely because there is only one member is wrong because the law says it is wrong.  If a state wants to outlaw single-member entities, they can (they'd be wrong to do so, but that's a different discussion).  But as long as the law allows it, the courts should respect it.  
 
Furthermore, when a person creates an LLC, they are actively engaging in the process of defining their relationship with others. I can come up with scenarios where maybe the existence of an LLC should be disregarded in the employment analysis, but more often than not the use of an LLC in the relationship should be compelling evidence of the type of relationship the parties have.  
 
Although this opinion still gets it wrong, there is hope. The dissent has set forth a proper path, and I can only hope others will follow. 
 
 

http://lawprofessors.typepad.com/business_law/2017/11/llcs-are-still-not-corporations-and-at-least-one-judge-in-dissent-knows-it.html

Case Law, Corporations, Employment Law, Joshua P. Fershee, LLCs | Permalink

Comments

Josh,

Taught my final B.A. class today. I told them that I used to blog with someone whose life mission is getting people to use the right terminology to refer to LLCs. I was able to point to two instances in our casebook where people got it wrong--a Delaware case that referred to members as "partners" and a comment by the casebook's authors that referred to members as "shareholders." I told them that, if they messed it up, you would notice and publicly call them to account.

Posted by: Steve Bradford | Nov 28, 2017 9:57:27 AM

Thanks for spreading the word, Steve. Hope you're well!

Posted by: Joshua Fershee | Nov 28, 2017 10:16:23 AM

I frequently run into improper terminology among my clients. I tell them its critical to word everything properly in their Board minutes and other documents... "member, partner, etc"

Posted by: Alexander Davie | Nov 28, 2017 11:52:08 AM

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