04-001595 D. J. D., Inc., D/B/A Superior Falls Floor Coverings vs. Department Of Financial Services, Division Of Workers' Compensation Status: Closed Recommended Order on Friday, August 27, 2004.

Summary: Petitioner incorrectly included nine workers in a penalty base who were independent contractors prior to January 1, 2004, but correctly included the workers in the base after December 31, 2004.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF FINANCIAL )

SERVICES, DIVISION OF WORKERS' )

COMPENSATION, )

)

Petitioner, )

)

vs. ) Case No. 04 - 1595

)

D. J. D., INC., d/b/a SUPERIOR )

FALLS FLOOR COVERINGS, )

)

Respondent. )

)

RECOMMENDED ORDER

Administrative Law Judge (ALJ) Daniel Manry conducted the

administrative hearing in this proceeding on behalf of the

Division of Administrative Hearings (DOAH), on July 7, 2004, in

Fort Mye rs, Florida.

APPEARANCES

For Petitioner: David C. Hawkins, Esquire

Division of Legal Services

Department of Financial Services

200 East Gaines Street

Tallahassee, Fl orida 32399 - 4229

For Respondent: Susan McLaughlin, Esquire

Law Offices of Michael F. Tew

Building 800, Suite 2

6150 Diamond Center Court

Fort Myers, Florida 33912

STATEMENT OF THE ISSUES

The issues are whether nine workers were employees of

Respondent, during part of the audit period; whether Respondent

failed to secure the payment of workers' compensation coverage

in violation of Section 440.107, Florida Statutes (2003); and

whether Petitioner should impose a penalty against Re spondent in

the amount of $123,960.23.

PRELIMINARY STATEMENT

This proceeding has an extensive procedural history.

Because the procedural history may be relevant to Respondent's

request for attorney's fees and costs, the ALJ addresses the

procedural histo ry more specifically in the Findings of Fact.

In summary, Petitioner issued three orders assessing

different amounts of penalties against Respondent, the last of

which assessed a penalty in the amount of $123,960.23.

Respondent requested an administrative hearing, and Petitioner

referred the matter to DOAH to conduct the hearing.

At the hearing, Petitioner and Respondent each presented

the testimony of two witnesses, and submitted 13 exhibits for

admission into evidence. The identity of the witnesses and

exhibits and the rulings regarding each are reported in the

one - volume Transcript of the hearing filed with DOAH on

August 4, 2004.

Petitioner timely filed its proposed recommended order

(PRO) on August 13, 2004. Respondent timely filed its PRO on

July 15, 2004.

Respondent preserved its right in this proceeding to

challenge in another forum the constitutionality of relevant

statutes. Although the ALJ has permitted Respondent to preserve

its constitutional challenges on the record, DOAH has no

jurisdic tion to resolve the issues of constitutionality asserted

by Respondent.

Respondent also requests attorney's fees and costs pursuant

to Sections 57.111 and 120.569, Florida Statutes (2003). For

reasons stated in the Conclusions of Law, DOAH lacks

jurisd iction to award attorney's fees and costs under the former

statute, and the ALJ has no factual predicate for an award of

attorney's fees and costs under the latter statute.

FINDINGS OF FACT

1. Petitioner is the state agency responsible for

enforcing the statutory requirement that employers secure the

payment of workers' compensation for the benefit of their

employees. § 440.107, Fla. Stat. (2002). Respondent is a

closely held corporation domiciled in Florida and engaged in the

sale and installation of f loor coverings.

2. Mr. Dennis Davison and Mrs. Lynne Davison, a married

couple, own all of the outstanding stock of Respondent (the

owners). Respondent has five in - office employees, including the

owners, and had a net worth of approximately $100,000 be fore

paying the proposed penalty.

3. On April 2, 2004, Petitioner's compliance officer

conducted a random site inspection of a single - family residence

at 213 Northwest 3rd Place, Cape Coral, Florida. Mr. John

Walega and Mr. Mike Stephens were laying carp et in the residence

(Walega and Stephens, respectively).

4. Walega was a sole proprietor who employed Stephens.

The compliance officer determined that Walega was an employee of

Respondent because Walega had an expired exemption and no proof

of workers' compensation insurance coverage.

5. The compliance officer issued separate stop work orders

against Walega and Respondent. The stop work order against

Walega is not at issue in this proceeding.

6. The compliance officer issued the stop work order

aga inst Respondent even though: she knew that Respondent had

compensation coverage for Respondent's five employees through a

leasing company; and she had no knowledge that Respondent had

subcontractors other than Walega working for Respondent.

7. The compl iance officer requested Respondent's business

records for the three years from April 2, 2001, through April 2,

2004 (the audit period). Respondent fully complied with the

request in a timely manner.

8. The stop work order issued against Respondent on

A pril 2, 2004, also assessed a penalty stated as the greater of

$1,000 or 1.5 times the premium Respondent would have paid in

premium charges during the period Respondent allegedly failed to

secure the payment of workers' compensation insurance. Sometime

b etween April 2 and 16, 2004, Petitioner amended the penalty

assessment to $137,820.72.

9. On April 16, 2004, the owners mortgaged their personal

residence to pay the amended penalty assessment. Petitioner

released the stop work order, but the owners lo st business in an

unspecified dollar amount while the stop work order was in

effect and continue to incur monthly interest expense in the

amount of $500 to service the mortgage on their home.

10. On June 28, 2004, Petitioner issued a Seconded Amended

Orde r of Penalty Assessment No. 04 - 157 - D7 - 2 that reduced the

assessed penalty to $123,960.23 (the Seconded Amended Order).

Respondent is entitled to a refund in the amount of $13,860.49,

but Petitioner had not paid the refund as of the date of

hearing.

11. The Second Amended Order is the proposed agency action

at issue in this proceeding. The compliance officer is the only

employee for Petitioner who investigated and developed the

substantive information that forms the basis of Petitioner's

proposed agency action. Other employees calculated the actual

amounts of the proposed penalties.

12. Respondent does not challenge the mathematical

accuracy of the penalty calculations by Petitioner, but

challenges the legal and factual basis of Petitioner's

determin ation that nine workers were Respondent's employees.

The nine workers are identified in the record as Walega; Messrs.

James Allan, Bertin Flores, Cliff Hill, David Lancaster, Earl

Lancaster, Jeff Dozier, Anthony Gioe; and Ms. Patricia

Lancaster.

13. The statutory definition of an employee for that part

of the audit period before January 1, 2004 (the relevant

period), was different than the statutory definition that became

effective on January 1, 2004. Factual findings concerning the

nine workers at issue are driven by one statutory definition

during the relevant period and another statutory definition

thereafter.

14. Any of the nine workers that satisfied the statutory

definition in former Subsection 440.02(15)(d)1, Florida Statutes

(2003), of an indepe ndent contractor should not have been

included in that part of the proposed penalty attributable to

the relevant period. Effective January 1, 2004, however,

Subsection 440.02(15)(d)1, Florida Statutes (2003), no longer

excludes independent contractors in the construction industry

from the definition of an employee. Thus, a determination of

whether a worker was an independent contractor is not relevant

to that portion of the proposed penalty covering any part of the

audit period after December 31, 2003.

15. Effective January 1, 2004, Subsection 440.02(15)(c)2,

Florida Statutes (2003), no longer excludes a subcontractor,

including those that would have satisfied the former definition

of an independent contractor, from the definition of an employee

unless the subcontractor either executes a valid exemption

election or otherwise secures payment of compensation coverage

as a subcontractor. There is insufficient evidence to support a

finding that any of the nine workers at issue in this proceeding

either elec ted a valid exemption or otherwise secured payment

for compensation coverage after December 31, 2003.

16. The nine workers at issue in this proceeding are not

excluded from the definition of an employee after December 31,

2004, even if they were indepen dent contractors throughout the

audit period. Except for constitutional arguments raised by

Respondent over which DOAH has no jurisdiction, Respondent owes

that part of the penalty attributable to any period after

December 31, 2003.

17. It is undisputed that the nine workers included in

that part of the penalty assessment attributable to the relevant

period were subcontractors throughout the audit period.

Respondent's ledger clearly treated the workers as

subcontractors and reported their earnings on For m 1099 for

purposes of the federal income tax. Petitioner treated the

workers as subcontractors in the penalty calculation. Customers

of Respondent paid Respondent for installation of floor

coverings they purchased from Respondent, and Respondent paid

ea ch of the nine workers to install the floor coverings.

18. The Workers' Compensation Law in effect during the

relevant period did not expressly exclude from the definition of

an employee those subcontractors who executed a valid exemption

election or ot herwise secured payment of compensation coverage

as a subcontractor. Findings concerning the existence of an

exemption election or payment of compensation coverage are

neither relevant nor material to the statutory definition of an

employee during the rel evant period.

19. During the relevant period, the nine workers at issue

were excluded from the definition of an employee only if they

satisfied the definition of an independent contractor in former

Subsection 440.02(15)(d)1, Florida Statutes (2003). Ea ch of the

nine workers were required to satisfy all of the following

requirements:

a. The independent contractor maintains a

separate business with his or her own work

facility, truck, equipment, materials, or

similar accommodations;

b. The independent contractor holds or has

applied for a federal employer

identification number, unless the

independent contractor is a sole proprietor

who is not required to obtain a federal

employer identification number under state

or federal requirements;

c. The inde pendent contractor performs or

agrees to perform specific services or work

for specific amounts of money and controls

the means of performing the services or

work;

d. The independent contractor incurs the

principal expenses related to the service or

wor k that he or she performs or agrees to

perform;

e. The independent contractor is

responsible for the satisfactory completion

of work or services that he or she performs

or agrees to perform and is or could be held

liable for a failure to complete the wo rk or

services;

f. The independent contractor receives

compensation for work or services performed

for a commission or on a per - job or

competitive - bid basis and not on any other

basis;

g. The independent contractor may realize a

profit or suffer a lo ss in connection with

performing work or services;

h. The independent contractor has

continuing or recurring business liabilities

or obligations; and

i. The success or failure of the

independent contractor's business depends on

the relationship of b usiness receipts to

expenditures.

20. The preponderance of evidence shows that each of the

nine workers at issue was an independent contractor during the

relevant period. Respondent conducted the ordinary course of

its trade or business with each of th e nine workers in

substantially the identical manner.

21. None of the workers shared office space with

Respondent. Each worker used his or her own truck, equipment,

and tools to transport the floor coverings sold by Respondent

and to install them in a cu stomer's premises.

22. Petitioner admits that Walega was a sole proprietor.

Each of the other workers either held a federal employer

identification number or was a sole proprietor who was not

required to obtain a federal employer identification number.

23. Each worker agreed to perform specific services or

work for specific amounts of money and controlled the means of

performing the services or work. Each worker incurred his or

her own expenses to install floor coverings.

24. Each worker transporte d floor coverings and necessary

materials to the work site in the worker's own truck and used

his or her own tools to perform the work. Each worker exercised

independent professional judgment to perform the work.

Respondent did not perform any pre - instal lation site inspection

and did not perform any site preparation. Respondent did not

train workers, instruct workers on how to perform their work,

did not supervise their work while it was being performed, and

did not perform any post - installation site ins pection unless

Respondent received a customer complaint.

25. Each worker was responsible for the satisfactory

completion of work or services that he or she performed. Each

worker was liable to Respondent and the customer for any failure

to complete th e work or services or for inferior workmanship.

Each worker warranted his or her work to the customer's

satisfaction and absorbed the costs of rework and any damage to

the customer's premises.

26. Respondent paid each worker for work or services

perform ed on a per - job or competitive - bid basis rather than any

other basis. Respondent negotiated the price paid to a worker

on a square - foot basis. The price did not change regardless of

the amount of time the job required or the number of helpers the

worker paid to assist the worker on the job.

27. Each worker realized a profit or suffered a loss in

installing floor coverings sold by Respondent. Each worker

performed work for other vendors and had continuing or recurring

business liabilities or obligation s apart from installing floor

coverings for Respondent. Each worker depended on the

relationship of business receipts of expenditures for the

success or failure of the worker's business.

28. Each worker maintained his or her own occupational and

profes sional licenses. Each worker maintained his or her own

liability insurance.

29. Respondent required each worker to sign a written form

stating that the worker was an independent contractor. The form

acknowledged the workers' warranty obligations and his or her

obligations for their own taxes and insurance. Each form

disclosed the workers' social security number or federal

employer identification number. Respondent did not withhold

federal income taxes from the payments to workers.

30. Petitioner did n ot explicate the basis for reducing

the proposed assessment in the Second Amended Order. However,

the evidence reveals that the penalty reduction resulted from

the exclusion of corporate subcontractors from the penalty base.

The business relationship bet ween Respondent and its corporate

subcontractors during the relevant period was substantially the

same as that between Respondent and the nine workers at issue.

31. Early in this administrative proceeding on April 8,

2004, the compliance officer advised the owners that she was

unable to release the stop work order against Respondent unless

she could verify in Petitioner's data base, in relevant part,

that the nine workers at issue each had a valid exemption or had

insurance. However, Petitioner's databas e would not have

disclosed compensation coverage maintained by a subcontractor

through a leasing company.

32. The compliance officer's advice to the owners did not

reflect the law in effect during the relevant period. T he

Workers' Compensation Law in e ffect during the relevant period

did not expressly exclude from the definition of an employee

those workers who executed a valid exemption election or

otherwise secured payment of compensation coverage as a

subcontractor. The law excluded subcontractors f rom the

definition of an employee only if the subcontractors satisfied

the statutory definition of an independent contractor. The

compliance officer made no effort to determine whether any of

the workers she included in the penalty base satisfied the

defi nition of an independent contractor.

33. The compliance officer never advised the owners that

establishing a subcontractor as an independent contractor would

avoid part of the assessment against Respondent during the

relevant period. The compliance of ficer never advised the

owners that Respondent was free to choose to be represented by

counsel during the audit process. The compliance officer told

the owners that the only thing Respondent could do to avoid the

assessment was to provide a certificate of insurance or an

exemption for each of the subcontractors included in the penalty

base.

34. The compliance officer admitted that she was unaware

that a subcontractor who was an independent contractor during

the relevant period was legally excluded from th e penalty base.

Counsel for Respondent advised the compliance officer of the

correct legal standard on April 12, 2004, but the compliance

officer refused to release the stop work order unless Respondent

paid the assessed penalty.

35. The compliance offic er knew that Walega had held a

valid exemption at various times in the past as a sole

proprietor. She knew Walega had renewed the exemption on

October 29, 2003, for five years. However, Petitioner's

database showed the exemption had expired on January 1, 2004, by

operation of new law.

36. Walega provided Respondent with a copy of the

exemption he renewed on October 29, 2003. The exemption stated

on its face that it was effective for five years. The owners

had no actual knowledge that the exemption ex pired on January 1,

2004, as a result of a change in the Workers' Compensation Law.

37. Petitioner admits that it issued the exemption to

Walega knowing that the exemption would expire on January 1,

2004. Petitioner issued the exemption so that Walega co uld use

it until January 1, 2004.

CONCLUSIONS OF LAW

38. DOAH has jurisdiction over the parties and subject

matter of this proceeding pursuant to Subsections 120.57(1)

and 120.569, Florida Statutes (2003). The parties received

adequate notice of the ad ministrative hearing.

39. Petitioner has the burden of proof in this case.

Petitioner must show by a preponderance of the evidence that

Respondent violated the Workers' Compensation Law during the

audit period and that the penalty assessments are correct .

Department of Labor and Employment Security, Division of

Workers' Compensation v. Bobby Cox, Sr., d/b/a C H Well

Drilling , DOAH Case No. 99 - 3854 (Recommended Order

para. 34)(adopted in part by Final Order June 7, 2000);

Department of Labor and Employmen t Security, Division of

Workers' Compensation v. Eastern Personnel Services, Inc. , DOAH

Case No. 99 - 2048 (Recommended Order para. 24)(adopted by Final

Order Nov. 30, 1999), appeal dismissed , Case No. 1D99 - 4839 (Fla.

1st DCA April 10, 2000); § 120.57(1)(j), Fla. Stat. (2002).

40. Petitioner satisfied its burden of proof for that part

of the penalty assessment attributable to the audit period that

began on January 1, 2004. Petitioner did not satisfy its burden

of proof for the penalty assessment attributabl e to the relevant

period.

41. During the relevant period, Respondent did not employ

the nine workers at issue. Each worker was an independent

contractor, and Respondent was not a statutory employer within

the meaning of Subsection 440.02(15), Florida S tatutes (2003).

42. Respondent is legally entitled to attorney's fees and

costs, pursuant to Subsection 120.569(2)(e), Florida Statutes

(2003), for that part of the proposed agency action attributable

to the relevant period. There was no justiciable is sue of law

or fact on which Petitioner could have prevailed to require

Respondent to provide Petitioner with proof that the nine

subcontractors had exemptions or insurance coverage during the

relevant period. The only legal basis for exclusion was that

th e nine workers were independent contractors. The proposed

agency action for the relevant period was not based on

applicable law.

43. There is insufficient evidence to support an award of

attorney's fees and costs pursuant to Subsection 120.569(2)(e),

Flo rida Statutes (2003). Respondent submitted no evidence of

the amount of attorney's fees and costs that it incurred to

defend that part of the proposed agency action attributable to

the relevant period or the reasonableness of the pretermitted

amount.

44. DOAH lacks jurisdiction over Respondent's claim for

attorney's fees and costs pursuant to Section 57.111, Florida

Statutes (2003). Respondent must initiate a separate

administrative proceeding by filing a timely petition with DOAH

in order to recover att orney's fees and costs pursuant to

Section 57.111, Florida Statutes (2003). State, Department of

Health and Rehabilitative Services v. South Beach Pharmacy,

Inc. , 635 So. 2d 117 (Fla. 1st DCA 1994). Respondent is not a

prevailing party until after the en try of a final order by the

referring agency and the time for appeal. Id.

RECOMMENDATION

Based on the Findings of Fact and Conclusions of Law, it is

RECOMMENDED that Petitioner enter a final order dismissing

the disputed charges against Respondent for the relevant period,

refunding any overpayment by Respondent, and sustaining the

remaining allegations and penalties against Respondent.

DONE AND ENTERED this 27th day of August, 2004, in

Tallahassee, Leon County, Florida.

DANIEL MANRY

Administrative Law Judge

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Cler k of the

Division of Administrative Hearings

this 27th day of August, 2004.

COPIES FURNISHED :

David C. Hawkins, Esquire

Division of Legal Services

Department of Financial Services

200 East Gaines Street

Tallahassee, Florida 32399 - 4229

Susan McLaughlin , Esquire

Law Offices of Michael F. Tew

Building 800, Suite 2

6150 Diamond Center Court

Fort Myers, Florida 33912

Honorable Tom Gallagher

Chief Financial Officer

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 030 0

Pete Dunbar, General Counsel

Department of Financial Services

The Capitol, Plaza Level 11

Tallahassee, Florida 32399 - 0300

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 days from the date of th is Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.