16-002997 Department Of Financial Services, Division Of Workers&Apos; Compensation vs. Jaguar Drywall Of Ponte Vedra Beach, Inc. Status: Closed Recommended Order on Tuesday, February 28, 2017.

Summary: The Division of Financial Services failed to prove by clear and convincing evidence that the direct payments from Jaguar Drywall to its president and sole shareholder should be included in the payroll penalty calculation.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL

SERVICES, DIVISION OF WORKERS'

COMPENSATION,

Petitioner,

vs. Case No . 16 - 2997

JAGUAR DRYWALL OF PONTE VEDRA

BEACH, INC.,

Respondent.

_______________________________/

RECOMMENDED ORDER

Pursuant to notice, a final hearing was conducted in this

case on November 30, 2016, via video teleconference at sites in

Jacksonville and Tallahassee, Florida, before Garnett W.

Chisenhall, a duly - designated Administrative Law Judge (ÐALJÑ)

of the Division of Administrative Hearings (ÐDOAHÑ).

APPEARANCES

For Petitioner: Young J. Kwon, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 3 2399

For Respondent: Charles A. Sears, CPA

2011 Gibson Road

Jacksonville, Florida 32207

STATEMENT OF THE ISSUE

The issue in this case is whether Petitioner correctly

calculated the penalty to be imposed on Respondent for failing

to have a sufficient amount of workersÓ compensation coverage

during the time period in question.

PRELIMINARY STATEMENT

On January 7, 2016, the Department of Financial Services,

Division of WorkersÓ Compensation (Ðthe DivisionÑ), served a

St op - Work Order and Order of Penalty Assessment on Jaguar

Drywall of Ponte Vedra Beach, Inc. (ÐJaguar DrywallÑ).

The Division served an Amend ed Order of Penalty Assessment

on February 25, 2016, requiring Jaguar Drywall to pay a

$112,471.92 penalty.

After evaluating records provided by Jaguar Drywall, t he

Division served a 2nd Amended Order of Penalty Assessment on

June 1, 2016, reducing the aforementioned penalty to $16,532.60 .

Charles A. Sears (acting on Jaguar DrywallÓs behalf)

requested an administrativ e hearing, and the Division referred

this matter to DOAH on June 1, 2016.

On June 6, 2016, ALJ W. David Watkins issued an Order

scheduling the final hearing to occur on August 16, 2016.

On July 12, 2016, the Division filed an ÐAgreed Motion to

Continue Final HearingÑ (Ðthe Motion to ContinueÑ) asking ALJ

Watkins to continue the final hearing so that the parties could

complete their discovery.

ALJ Watkins issued an Order on July 18, 2016, granting the

Motion to Continue and re - scheduling the final hear ing to occur

on September 20, 2016.

On July 18, 2016, ALJ Watkins issued an Order granting

Jaguar DrywallÓs request that Charles A. Sears be authorized to

appear as the q ualified r ep resentative of Jaguar Drywall.

On August 30, 2016, the Division filed a ÐMotion for Leave

to Amend Order of Penalty AssessmentÑ (Ðthe Motion for LeaveÑ)

assert ing that Jaguar Drywall had provided additional business

records to the Division and that the resulting review led the

Division to conclude that the assessed penalty s hould be reduced

to $8,021.12. ALJ Watkins issued an Order on August 30, 2016,

granting the Motion for Leave.

On August 30, 2016, Jaguar Drywall filed an ÐAgreed Motion

to Continue Final HearingÑ (Ðthe Second Motion to ContinueÑ).

In support thereof, Jag uar DrywallÓs q ualified r epresentative

asserted that he had been devoting a substantial amount of time

to addressing an unexpected family matter and was left with

insufficient time to prepare for the final hearing . ALJ Watkins

issued an Order on August 31 , 2016, granting the Second Motion

to Continue and re - schedul ed the final hearing for November 30,

2016.

On November 21, 2016, the instant case was transferred to

the undersigned.

The undersigned convened the final hearing on November 30,

2016. At the out set of the final hearing, the parties notified

the undersigned that they had agreed that the D ivision Ós

investigation was proper, that Jaguar Drywall failed to have a

sufficient amount of workersÓ compensation during the time

period in question, and that t he D ivision utilized the correct

method in calculating the penalty. The only disagreement

concerned whether the D ivision should have included certain

payments to Jaguar Drywall Ós president and sole shareholder in

the penalty calculation.

The Division pre sented the testimony of Nathaniel Hatten

and offered Exhibits 1 through 15 that were admitted into

evidence without objection. Jaguar Drywall presented the

testimony of Larry Kirkland and offered composite Exhibit 1 that

was accepted into evidence without objection.

A one - volume Transcript was filed with DOAH on December 13,

2016.

On January 10, 2017, Jaguar Drywall filed a ÐRequest for

Extension of Time to File Proposed Recommended OrderÑ (Ðthe

Extension MotionÑ) asking that the partiesÓ deadline for filing

the proposed recommended orders be extended to February 2, 2017.

The undersigned issued an Order on January 12, 2017,

granting the Extension Motion, and the parties timely filed

their p roposed r ecommended orders on February 2, 2017.

The undersign ed considered both of the p roposed r ecommended

o rder s in the preparati on of this Recommended Order.

FINDING S OF FACT

Based on the oral and documentary evidence adduced at the

final hearing and the entire record in this proceeding, the

following Findings of Fact are made:

1. The D ivision is the state agency responsible for

enforcing the requirement in chapter 440, Florida Statutes

(2016), 1/ that employers in Florida secure workersÓ compensation

coverage for their employees.

2. While an exemption can b e obtained for up to three

corporate officers, any employer in the construction industry

with at least one employee must have workersÓ compensation

coverage. § 440.02(15), Fla. Stat.

3. At all times relevant to the instant case, Jaguar

Drywall wa s reg istered with the Florida Department of State,

Division of Corporations. In addition, Jaguar Drywall operated

as a subchapter S corporation under the Internal Revenue Code .

4 . In order to be an S corporation, a corporation must

submit ÐForm 2553 Electio n by a Small Business CorporationÑ

to the Internal Revenue Service. Also, the corporation in

question must be a domestic cor poration, have no more than

100 shareholders, and have only one class of stock. 2/

5 . S corporations pass through corporate incom e, losses,

deductions, and credits to their shareholders for federal tax

purposes. Shareholders of an S corporation report the flow -

through of income and losses on their personal tax returns and

are assessed tax at their individual tax rates. As a result ,

S corporations avoid the double taxation that occurs when a

corporation is taxed on its gross income and its shareholders

are taxed on dividends.

6 . Jaguar DrywallÓs employees receive their compensation

through an employee leasing company.

7 . Howev er , and as explained in more detail below , Jaguar

Drywall made payments to particular people and entities during

2015 and 2016 that were not included on the employee leasing

contract.

8 . Nathaniel Hatten is a penalty auditor for the

D ivision Ós Bureau of Compliance. Mr. Hatten calculates the

penalties that the Division seeks to impose on employers

neglecting to have a sufficient amount of workers Ó compensation

coverage.

9 . In the course of calculating the penalty at issue in

the instant case, Mr. Hatt en utilized tax returns, bank

statements, and a general l edger from Jaguar Drywall.

10 . Mr. Hatten calculated three different penalties for

Jaguar Drywall because he had to recalculate the penalty each

time he received additional records from Jaguar Dry wall.

11 . The third and final penalty calculated by Mr. Hatten

total ed $ 8,021.12 . 3/

12 . The aforementioned penalty resulted from the fact that

Jaguar Drywall made direct payments t o John Rodriques, Martin

Garcia, PrimoÓs Jax Drywall Corporation, Par ra Construction

Services, Inc., and Larry Kirland . T hose payments did not flow

through Jaguar DrywallsÓ employee leasing company . As a result,

there was no workersÓ compensation coverage associated with

those payments.

13 . Classification codes pertain to various occupations or

types of work, and each one has an approved manual rate used by

insurance companies to assist in the calculation of workersÓ

compensation insurance premiums. 4/

14. Using the class codes associated with the work

performed, the approved manual rates , and the direct payments

described above , Mr. Hatton determined the individual insurance

premiums Jaguar Drywall would have paid if there had been

wor kersÓ compensation coverage for the aforementioned payments .

1 5 . Jaguar Drywall d oes not dispute that Mr. Hatten,

pursuant to section 440.107(7)(d)1 . , Florida Statutes, correctly

calculated the penalt ies associated with the direct payments

from Jaguar Drywall to John Rodriques, Martin Garcia, PrimoÓs

Jax Drywall Corporation, and Parra Construction Services, Inc.

1 6 . Instead, the dispute between the D ivision and Jaguar

Drywall simply concerns whether certain payments made to Larry

Kirkland in 2014 and 2015 should be included in the penalty

calculation. The payments in question total ed $47,134.50 in

2014 and $23,980 .00 in 2015 , and Mr. Hatton determined that the

corresponding penalties would be $1,875.96 for 2014 and

$892.06 for 2015.

1 7 . Mr. Kirkland is the president and sole stockholder of

Jaguar Drywall. Mr. Kirkland does not w ork at construction

sites and considers himself to be an off - site supervisor.

1 8 . Mr. Kirkland and other employees of Jaguar Drywall

receive wages via Matrix Leasing. Those wages are reported on

W - 2 tax form s , and Jaguar Drywall has obtained workersÓ

c ompensation coverage for those wages .

1 9 . Mr. Kirkland , as the sole shareholder of Jaguar

Drywall, also receives direct payments in the form of

ÐdistributionsÑ from Jaguar Drywal lÓs subchapter S earnings.

20 . The D ivision takes the position that the direct

payments to Mr. Kirkland fall within the scope of Florida

Administrative Code Rule 69L - 6.03 5(1)(e) which provides that

For purposes of determining payroll for

calculating a penalt y pursuant to

subparagraph 440.107(7)(d)1., F.S., the

Department must when applicable, include the

following as remuneration to employees,

based upon evidence received in its

investigation:

* * *

(e) Payments made to employees by or on

behalf of the employer on any basis other

than time worked, such as piecework, profit

sharing, dividends, income distributions, or

incentive plans;

2 1 . However, the Division presented no evidence

demonstrating that the direct payments were made to Mr. Kirkland

in his capacity as an employee of Jaguar Drywall. Instead, the

evidence demo nstrated that he received the direct payments due

to his status as the sole shareholder of Jaguar Drywall. As a

result, the Division failed to prove by clear and convincing

evidence that it correctly calculated the penalty to be imposed

on Jaguar Drywall.

CONCLUSIONS OF L AW

22. The Division of Administrative Hearings has

jurisdiction over the parties to and the subject matter of this

proceeding pursuant to s ection s 120.569 and 120.57(1), Florida

Statutes.

23. Chapter 440 is known as the ÐWorkersÓ Compen s ation

Law.Ñ § 440.01, Fla. Stat.

24. E very employer is required to secure the payment of

workers' compensation for the benefit of its employees, unless

the employee is exempted or excluded under c hapter 440. See Bend

v. Shamrock Servs. , 5 9 So. 3 d 153 , 1 5 7 (Fla. 1st DCA 2011 ).

Indeed, the Legislature has declared that Ðthe failure of an

employer to comply with the workersÓ compensation coverage

requirements under [chapter 440] poses an immediate danger to

public health, safety, and welfare.Ñ £ 440.107(1 ), Fla. Stat.

2 5. Accordingly, s ection 440.107(7)(a) states, in relevant

part:

Whenever the department determines that an

employer who is required to secure the

payment to his or her employees of the

compensation provided for by this chapter

has failed t o secure the payment of workers'

compensation required by this chapter . . . ,

such failure shall be deemed an immediate

serious danger to public health, safety, or

welfare sufficient to justify service by the

department of a stop - work order on the

employer , requiring the cessation of all

business operations. If the department

makes such a determination, the department

shall issue a stop - wo rk order within

72 hours.

26 . The Division is required to assess against any

employer that has failed to secure the p ayment of workers'

compensation "a penalty equal to" the greater of $1,000 or

"2 times the amount the employer would have paid in premium when

applying approved manual rates to the employer's payroll during

periods for which it failed to secure the payment of workers'

compensation . . . within the preceding 2 - year period ."

(emphasis add ed). § 440.107(7)(d)1 . , Fla. Stat . This is a

penal statute that, if ambiguous, must be construed against

Petitioner. See Lester v. Dep't of Prof'l & Occ . Reg . , 348 So.

2d 923, 925 (Fla. 1st DCA 1977).

27. B ecause the Division seeks to impose an administrative

penalty or fine against Jaguar Drywall , the Division has the

burden of proving the material allegations by clear and

convincing evidence. Dep't of Ba nking & Fin. v . Osborne Stern

& Co. , 670 So. 2d 932, 935 (Fla. 1996). Clear and convincing

evidence must make the facts "highly probable" and produce in

the mind of the trier of fact "a firm belief or conviction as

to the truth of the facts sought to be established," l eaving

"no substantial doubt." Slomowitz v. Walker , 429 So. 2d 797,

799 (Fla. 4th DCA 1983).

28. In order to meet its burden, the D iv i sion must

demonstrate that : (a) Jaguar Drywall was required to comply with

the Workers' Compensation Law ; (b) that Jagu ar Drywall failed to

comply with the requirements of the Workers' Compensation Law ;

and that (c) the penalty assessed by the D ivision is appropriate.

29. With regard to the instant case, there is no dispute

that Jaguar Drywall was required to comply with the WorkersÓ

Compensation Law and that Jaguar Drywall failed to do so . Jaguar

Drywall only disputes the D ivision Ós decision to include

subchapter S distributions from Jaguar Drywall to Mr. Kirkland in

the penalty calculation.

30. As noted above, rule 6 9L - 6.035(1)(e) provides that

For purposes of determining payroll for

calculating a penalty pursuant to

subparagraph 440.107(7)(d)1., F.S., the

Departme nt must when applicable, include the

following as remuneration to employees,

based upon evidence receive d in its

investigation:

* * *

(e) Payments made to employees by or on

behalf of the employer on any basis other

than time worked, such as piecework, profit

sharing, dividends, income distributions, or

incentive plans;

31. In his capacity as the p res ident of Jaguar Drywall,

Mr. Kirkland was an ÐemployeeÑ wi thin the meaning of

c hapter 440 and received wages through Matrix Leasing.

§ 440.02(15)(b)1. , Fla. Stat. (defining an ÐemployeeÑ in

pertinent part as including Ðany person who is an officer of a

co rporation and who performs services for remuneration for such

corporation within this state, whether or not su ch services are

continuous.Ñ).

32. I n his capacity as the sole shareholder of Jaguar

Drywall, Mr. Kirkland also received non - payroll distributi ons

directly from Jaguar Drywall.

33. Therefore, Mr. Kirkland received wages pursuant to his

status as an employee of Jaguar Drywall, but he also received

distributions pursuant to his status as Jaguar DrywallÓs sole

shareholder.

34. Because rule 69L - 6 .035(1)(e) limits payroll for

calculating the penalty pursuant to section 440.107(7)(d)1. to

p ayments Ðmade to employees , Ñ the Division should not have

included the direct payments from Jaguar Drywall to Mr. Kirkland

in its penalty calculation. See genera lly DepÓt of Fin. Servs.,

Div. of WorkersÓ Comp . v. RonÓs Custom Screen, Inc. , Case No. 09 -

0 959 (Fla. DOAH Nov. 24, 2009 ; Fla. DFS Feb. 22 , 2010 )(finding

that Ð[t]he testimony of the sole shareholder and the supporting

documentary evidence also shows that the disputed amounts were

not cash payments to the sole shareholder in his capacity as an

employee within the meaning of Florida Administrative Code Rule

69L - 6.035(1)(b).Ñ) ( emphasis added).

35. I n reaching this conclusion, the undersigned has not

over looked the fact that rule 69L - 6.035(1)(e) includes in the

payroll penalty calculation items Ð such as piecework, profit

sharing, dividends , income distributions , or incentive plans.Ñ

(emphasis added).

36. Because dividends are normally paid to shareholder s,

the Division could argue that the distributions from Jaguar

Drywall to Mr. Kirkland should be included in the payroll penalty

calculation.

37. However, the undersigned concludes that the inclusion

of ÐdividendsÑ in rule 69L - 6.035(1)(e) renders the rul e

ambiguous. Unless an employee is a sharehol der of his or her

company, a corporation does not normally pay dividends to an

employee.

38. Because rule 69L - 6.035(1)(e) is penal in nature, any

ambiguity must be construed against the Division and in Jaguar

DrywallÓs favor. See generally City of Miami Beach v. Galbut ,

626 So. 2d 192, 194 (Fla. 1993)(noting that Ð[w]hen a statute

imposes a penalty, any doubt as to its meaning must be resolved

in favor of a strict construction so that those covered by the

stat ute have clear notice of what conduct the statute

proscribes . Ñ).

39. The undersigned has also not overlooked the principle

that the Division is entitled to deference when interpreting one

of its own rules. However, that deference is not absolute.

Sout hpointe Pharmacy v. DepÓt of HRS , 596 So. 2d 106 , 110 (Fla.

1 st DCA 1992)(noting that Ð[a]lthough we would generally defer to

such an opinion, as we are required to give great weight to an

agencyÓs interpretation of its own rule, that deference is not

abso lute.Ñ).

40. T he DivisionÓs interpretation of rule 69L - 6.035(1)(e)

is owed no deference because the ruleÓs proper interpretation

implicates no expertise on the DivisionÓs part. See Doyle v.

DepÓt of Bus. Reg . , 794 So. 2d 686 , 690 (Fla. 1 st DCA 2001 )

(sta ting Ða court need not defer to an agencyÓs construction or

application of a statute if special agency expertise is not

required.Ñ ); s ee also BrandyÓs Products, Inc. v. D epÓt of

Bus. & ProfÓl Reg . , Div. of Alcoholic Beverages and Tobacco ,

Case No. 14 - 3496 (Fla. DOAH Feb. 24, 2015 ; Fla. DBPR June 11,

2015 )( explaining that Ð[u]nlike the judiciary, ALJs are

participants in the decision - making processes that lead to

administrative interpretations of statutes and rules - - the very

administrative interpretations to which courts defer. The ALJÓs

duty is to provide the parties an independent and impartial

analysis of the law with a view towards helping the agency make

the correct decision. In fulfilling this duty, the ALJ should

not defer to the agencyÓs interpretat ion of a statute or rule, as

a court would; rather, the ALJ should make independent legal

conclusions based upon his or her best interpretation of the

controlling law, with the agencyÓs legal interpretations being

considered as the positions of a party lit igant, entitled to no

more or less weight than those of the private party.Ñ) (internal

citation omitted) .

41. In sum, the Division has failed to prove by clear and

convincing evidence that the direct payments from Jaguar Drywall

to Mr. Kirkland , in his c apacity as a company shareholder, rather

than a company employee, should be included in the payroll

penalty calculation. 5/

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that the Department of Financi al

Services, Division of WorkersÓ Compensation , enter a final order

imposing a penalty of $5,253.10 on Jaguar Drywall of Ponte Vedra

Beach, Inc. ,

DONE AND ENTERED this 2 8 th day of February , 2017 , in

Tallahassee, Leon County, Florida.

S

G. W. CHISENHALL

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 28 th day of February, 2017 .

ENDNOTE S

1/ Unless stated otherwise, all statutory citations will be to

the 2016 version of the Florida Statutes.

2/ The undersigned obtained the information in paragraphs 4

and 5 from the Internal Revenue ServiceÓs website,

www.irs.gov/business/small - business - self - employed/s - corporation ,

and that information was a proper subject for official

recognition. See generally E.K.D. v. Facebook, Inc. , 885 F.

Supp. 2d 894, 904 n.2 (S .D. Ill. 2012)(noting that Ð[t]his Court

may judicially notice public records and government documents,

including those available from reliable sources on the Internet,

such as the official website of the United States District Court

for the Northern Distr ict of California.Ñ).

3/ Section 440.107(7)(d)1., provides in pertinent part that

Ð[i]n addition to any penalty, stop - work order, or injunction,

the department shall assess against any employer who has failed

to secure the payment of compensation as re quired by this

chapter a penalty equal to 2 times the amount the employer would

have paid in premium when applying approved manual rates to the

employerÓs payroll during periods for which it failed to secure

the payment of workersÓ compensation required by this chapter

within the preceding 2 - year period or $1,000, whichever is

greater. Ñ

4/ Classification codes come from the Scopes® Manual, which has

been adopted by the Department through Florida Administrative

Code R ule 69L - 6.021. Each code within the Sc opes® Manual

pertains to an occupation or type of work, and each code has an

approved manual rate used by insurance companies to assist in the

calculation of workersÓ compensation insurance premiums. Manual

rates associated with potentially dangerous acti vities will have

higher manual rates than activities with little or no potential

danger.

5/ The outcome of the instant could would very likely have been

different if the Division had demonstrated that the wages that

Mr. Kirkland received through Matrix Leasing were nonexistent

or a token amount. However, the Division made no allegation

that the wages paid to Mr. Kirkland as a company employee were

unreasonably low or that Jaguar Drywall was using the direct

payments to Mr. Kirkland as a means of avoidin g tax payments

or workersÓ compensation coverage. See generally Veterinary

Surgical Consultants, P.C. v. CommÓr , 117 T.C. 141, 145 - 46

(2001)(noting that Ð[a]n employer cannot avoid Federal

employment taxes by characterizing compensation paid to its sole

d irector and shareholder as distributions of the corporationÓs

net income, rather than wages. Regardless of how an employer

chooses to characterize payments made to its employees, the true

analysis is whether the payments represent remuneration for

service s rendered.Ñ).

COPIES FURNISHED:

Larry Kirkland

2180 Brighton Bay Trail

Jacksonville, Florida 32246

Young J. Kwon, Esquire

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399

(eServed)

Charles A. Sears, CPA

2011 Gibso n Road

Jacksonville, Florida 32207

(eServed)

Julie Jones, CP, FRP, Agency Clerk

Division of Legal Services

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399 - 0390

( eServed)

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All par ties have the right to submit written exceptions within

15 days from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.