IN THE COURT OF APPEALS OF IOWA
No. 3-1114 / 13-0609
Filed April 16, 2014
STARK CONSTRUCTION and
CHARLES STARK,
Petitioners-Appellees,
vs.
JOHN LAUTERWASSER,
Respondent-Appellant.
________________________________________________________________
Appeal from the Iowa District Court for Linn County, Ian K. Thornhill,
Judge.
A workers’ compensation claimant appeals a judicial review order
reversing the agency’s decision that he was an employee and not an
independent contractor. REVERSED AND REMANDED.
Thomas M. Wertz and Daniel J. Anderson of Wertz & Dake, Cedar
Rapids, for appellant.
Matthew G. Novak of Pickens, Barnes & Abernathy, Cedar Rapids, for
appellees.
Heard by Vogel, P.J., and Tabor and McDonald, JJ.
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TABOR, J.
We must decide if the workers’ compensation commissioner properly
concluded an injured carpenter was working as an employee of a construction
company and therefore was eligible for benefits. Because substantial evidence
supports the commissioner’s fact findings, and his application of the law to those
facts was not “irrational, illogical, or wholly unjustifiable,” we reverse the district
court and remand for determination of the remaining issues.
I. Background Facts and Proceedings
John Lauterwasser has been a carpenter for more than two decades. For
many years he was a full-time employee of Don Risdahl Builders and performed
work for his own company, J.B. Construction, on weekends. In 2009, the flow of
projects coming into Risdahl Builders slowed down. So in May of that year,
Lauterwasser started doing carpentry work for Stark Construction, a company
owned by Charles Stark.
Lauterwasser was working for Stark at the Bloomsbury Farms in Atkins on
September 18, 2009, when his saw kicked back and his left index and middle
fingers ran across the blade. Stark and co-worker Ben Schafer rushed
Lauterwasser to the hospital where he underwent surgery to repair tendon
damage.
Lauterwasser provided information to the hospital that he was employed
by Don Risdahl Builders and was self-insured. On a September 21, 2009 follow-
up visit to the doctor, Lauterwasser said he was not covered by workers’
compensation insurance and was the person responsible for the medical billing.
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Lauterwasser participated in physical therapy until December 9, 2009, when he
asked to be released because of the lack of insurance. Lauterwasser returned to
his work with Stark in late 2009.
When Lauterwasser filed his 2009 taxes he reported the $20,423 in pay
he received from Stark as income for his subcontractor business. Lauterwasser
also received $13,293 in wages from Risdahl Builders in 2009.
On May 7, 2010, Lauterwasser filed a claim for benefits under the workers’
compensation act, claiming he was Stark’s employee on the date of his injury.
On June 18, 2010, Stark filed an answer denying Lauterwasser was ever an
employee of his construction company and seeking dismissal of the claim.
A deputy workers’ compensation commissioner held a hearing on
Lauterwasser’s claim on May 11, 2011. The deputy heard from Lauterwasser,
Stark, Schafer, and Roger Nelson, who also did construction work with Stark.
The deputy issued his arbitration decision on July 12, 2011, concluding
Lauterwasser failed to prove he was an employee as that term is defined in Iowa
Code section 85.61(11) (2009). The deputy relied on the “common business
practice in the Benton and Linn County areas” where a carpenter would contract
with a client and then bring other carpenters on as “subcontractors” to complete
the job.
Lauterwasser appealed the deputy’s decision to the commissioner,
arguing “overwhelming evidence supports a finding that claimant is an employee
of Stark and not an independent contractor.” The commissioner agreed with
Lauterwasser, observing: “All of the men who testified at the hearing—including
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claimant and Stark—appear to have consistently engaged in or been the victim of
worker misclassification.” The commissioner issued the final agency order on
August 14, 2012, reversing the arbitration decision and awarding Lauterwasser
permanent partial disability benefits, healing period benefits, and medical
expenses. Stark sought judicial review.
On March 29, 2013, the district court reversed the final agency action.
The court elevated the “intent of the parties” over all other considerations
relevant to determining whether a claimant qualifies as an employee under
chapter 85. The court reasoned:
The Commissioner found the parties and witnesses intended
to work for one another as sub-contractors with the intent to
circumvent workers’ compensation laws. The Court cannot find any
evidence, whether by testimony or documentation, that supports
the Commissioner’s decision. Both the deputy and Commissioner
applied the same facts to the correct legal authorities. However,
the Commissioner’s determination that the parties’ intent should
not, be considered because they intended to evade workers’
compensation law is not supported by any evidence in the record.
This lack of evidence leads the court to conclude the
Commissioner’s conclusion was illogical . . . .
Lauterwasser now appeals from the judicial review order.
II. Standard of Review
Judicial review of agency action is governed by Iowa Code section
17A.19(10). We will apply administrative law standards to see if we reach the
same result as the district court. Burton v. Hilltop Care Center, 813 N.W.2d 250,
255–56 (Iowa 2012). The particular standard of review depends on the aspect of
the agency’s decision challenged in the petition for judicial review. Id. at 256.
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Stark’s petition for judicial review challenged the commissioner’s definition
of “employee.” When a substantive term within the special expertise of the
agency is being interpreted, the agency is vested with the power to interpret that
provision. Renda v. Iowa Civil Rights Comm’n, 784 N.W.2d 8, 14 (Iowa 2010).
The legislature did not delegate any interpretative authority to the commissioner
to interpret the definition of “employee” in chapter 85. Staff Mgmt. v. Jimenez,
839 N.W.2d 640, 648 (Iowa 2013). Therefore, neither the district court nor our
court on appeal is required to defer to the commissioner’s interpretation of the
term “employee.” We may substitute our own judgment if the commissioner
improperly defined that term. See Renda, 784 N.W.2d at 14-15.
Stark’s petition for judicial review also challenged the commissioner’s
findings of fact. Because the commissioner’s factual determinations are “clearly
vested by a provision of law in the discretion of the agency,” both the district
court and our court on appeal give deference to the commissioner's factual
determinations if they are based on substantial evidence, viewing the record as a
whole. See Larson Mfg. Co. v. Thorson, 763 N.W.2d 842, 850 (Iowa 2009).
“‘Substantial evidence’ means the quantity and quality of evidence that would be
deemed sufficient by a neutral, detached, and reasonable person, to establish
the fact at issue when the consequences resulting from the establishment of that
fact are understood to be serious and of great importance.” Iowa Code
§ 17A.19(10)(f)(1); Thorson, 763 N.W.2d at 850. The question is not whether the
evidence supports a different finding, but whether the evidence supports the
finding actually made. Meyer v. IBP, Inc., 710 N.W.2d 213, 218 (Iowa 2006).
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Finally, Stark’s petition for judicial review challenged the commissioner’s
application of the law to the facts. Courts will not reverse that application unless
it is “irrational, illogical, or wholly unjustifiable.” See Neal v. Annett Holdings, Inc.,
814 N.W.2d 512, 518 (Iowa 2012).
On appeal, Lauterwasser contends the district court erred in determining
the intent of the parties was a controlling factor in defining who is an employee.
He also argues the district court “did not properly apply ‘substantial evidence’
review and improperly substituted the court’s judgment for that of the agency.”
Finally, Lauterwasser asserts the district court erred in deciding the
commissioner’s application of the law to the facts was illogical. If our application
of the chapter 17A standards noted above yields the same conclusions as the
district court, we affirm; if we reach different conclusions, we reverse. See
Democko v. Iowa Dep’t of Natural Res., 840 N.W.2d 281, 286 (Iowa 2013).
III. Analysis
We start by discussing the definition of “employee” in chapter 85, as well
as the multi-factor tests adopted by our courts to differentiate between
employees and independent contractors. We then turn to the question whether
the record contained substantial evidence to support the agency’s fact finding.
Finally, we determine whether the agency’s application of the law on employee-
employer relationships to Lauterwasser’s circumstances was irrational, illogical or
wholly unjustifiable.
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A. The Governing Law
The workers’ compensation act provides coverage for “all personal injuries
sustained by an employee arising out of and in the course of the employment.”
Iowa Code § 85.3(1); Meyer, 710 N.W.2d at 220. The act defines an employee
as “a person who has entered into the employment of, or works under contract of
service, express or implied, or apprenticeship, for an employer . . . .” Iowa Code
§ 85.61(11). The act also lists certain people who do not meet this broad
definition, including independent contractors. See id. § 85.61(11)(c)(2). In
construing these legislative definitions, our courts have indulged a “measure of
liberality” and “doubt as to whether a claimant was an employee or independent
contractor is resolved in favor of the former status.” See Daggett v. Nebraska-
Eastern Exp., Inc., 107 N.W.2d 102, 105 (Iowa 1961); see also Usgaard v. Silver
Crest Golf Club, 127 N.W.2d 636, 639 (Iowa 1964) (noting act is “liberally
construed to extend its beneficent purpose to every employee who can fairly be
brought within it”). Furthermore, the workers’ compensation statute is “intended
to cast upon the industry in which the worker is employed a share of the burden
resulting from industrial accidents.” Caterpillar Tractor Co. v. Shook, 313 N.W.2d
503, 506 (Iowa 1981) (explaining theory that ultimate cost is born by the
consumer as the cost of the production).
Initially, Lauterwasser, as claimant, must establish that at the time of his
injury he was rendering services for Stark. See Everts v. Jorgensen, 289 N.W.
11, 13 (Iowa 1939). The burden then shifts to Stark to prove Lauterwasser was
an independent contractor and not an employee. Daggett, 107 N.W.2d at 106.
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Stark testified he had a verbal agreement with Lauterwasser that if he
needed work, Stark would hire him as a subcontractor at an agreed-on hourly
rate. The name chosen by the parties to describe their relationship is not
conclusive. Practitioners in workers’ compensation law recognize
misclassification can occur: “In an attempt to avoid the cost of providing
protection to their workers, employers have historically tried to establish an
independent contractor relationship for their workers.” 15 James R. Lawyer, Iowa
Practice Series, Workers’ Compensation § 3:1, at 19 [hereinafter Lawyer]; see
also 3 Larson’s Workers’ Compensation Law § 63.01, at 63-3 [hereinafter
Larson] (quoting General Accounting Office study estimating “15% of all
employers misclassify 3.4 million workers as independent contractors annually”).
A close look at the underlying relationship is necessary to properly determine
whether Lauterwasser was an employee or an independent contractor. See 15
Lawyer, § 3:1, at 19.
1. Multi-factor tests
When the issue is an individual’s status as an employee versus an
independent contractor, many factors are relevant. See Nelson v. Cities Serv.
Oil Co., 146 N.W.2d 261, 265 (Iowa 1966). In determining the existence of an
employer-employee relationship, the Nelson court pointed to the following five
factors:
(1) the right of selection, or to employ at will, (2) responsibility for payment
of wages by the employer, (3) the right to discharge or terminate the
relationship, (4) the right to control the work, and (5) the identity of the
employer as the authority in charge of the work or for whose benefit it is
performed.
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Id.
The Nelson court described an independent contractor as “one who
carries on an independent business and contracts to do a piece of work
according to his own methods, subject to the employer’s control only as to
results” and endorsed the following eight-factor test:
(1) the existence of a contract for the performance by a person of a
certain piece or kind of work at a fixed price; (2) independent nature
of his business or of his distinct calling; (3) his employment of
assistants, with the right to supervise their activities; (4) his
obligation to furnish necessary tools, supplies, and materials; (5)
his right to control the progress of the work, except as to final
results; (6) the time for which the workman is employed; (7) the
method of payment, whether by time or by job; (8) whether the work
is part of the regular business of the employer.
Id. at 264–65.
2. The parties’ intent
The Nelson court also called attention to “another possible element which,
when applicable, might be used with others as an aid in determining whether one
person is or is not the employee of another, to-wit: the intention of the parties as
to the relationship created or existing.” Id. at 265. The Nelson court warned that
looking at intent “standing alone” could be “somewhat misleading.” Id. The court
then quoted comment m, under section 220 of the Restatement (Second) of
Agency, which explained:
It is not determinative that the parties believe or disbelieve that the
relation of master and servant exists, except insofar as such belief
indicates an assumption of control by the one and submission to
control by the other. However, community custom in thinking that a
kind of service, such as household service, is rendered by servants,
is of importance.
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Id. Nelson stated the trier of fact may, where appropriate, use the subjective
standard of the parties’ intent “to the extent it serves to shed light upon the true
status of the parties concerned.” Id.
Our supreme court discussed the parties’ intention again in Henderson v.
Jennie Edmundson Hospital, 178 N.W.2d 429 (Iowa 1970). There, the court said
“in addition to the five . . . elements we recognize the overriding element of the
intention of the parties as to the relationship they are creating may also be
considered.” Henderson, 178 N.W.2d at 431. Henderson cited Nelson and
Usgaard as supporting that conclusion. Id.
“With [those] rules in mind,” the Henderson court focused on the
commissioner’s finding that the second factor—payment of some compensation
by the employer—had not been proved by Henderson, who was injured while
enrolled in a nurse’s aide training course for which she did not receive any
wages. Id. at 431–33. The court also noted: “[I]t did not appear under the entire
record it was the intention of the claimant or the hospital authorities to enter into
the relationship of employer-employee.” Id. at 433.
In an appeal involving unemployment benefits, the supreme court
discussed workers’ compensation cases appearing to hold “the intent of the
parties is conclusive in determining whether an employment relationship exists.”
Gaffney v. Dep’t of Emp’t Servs., 540 N.W.2d 430, 434 (Iowa 1995) (reviewing
Nelson and Usgaard). Justice Neuman opined: “Closer inspection reveals,
however, that those two cases do not support that holding.” Id. The Gaffney
court suggested the parties’ intent remained just one of several factors to be
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considered, and primarily only to settle the question whether the would-be
employee has submitted to the control of the would-be employer. Id.
Finally, we address the concept of evasive intent. In its ruling, the
commissioner suggested the case law provided the following: “Where both
parties by agreement state they intend to form an independent contractor
relationship, their stated intent is ignored if the agreement exists to avoid
workers’ compensation laws.” The district court similarly stated: “If both parties
intend to form a sub-contractor relationship for the purpose of avoiding workers
compensation laws, that intent is ignored and the standard rests on the five
factors.” We are unable to find this principle expressly stated in Iowa case law.
This concept does appear in a treatise examining when the contractual
designation of an independent contractor relationship may be disregarded: “If the
attempt to contract to specify a particular legal relationship is found to be
designated as an evasion of the Worker’s Compensation Act, it will of course be
disregarded.” 3 Larson, § 61.05, at 61-8. The treatise further states: “But, even
without the imputation of such an evasive intent, the contractual designation of
the relationship as employment or contractorship may be so plainly and
completely at odds with the undisputed facts that the contractual designation
must be disregarded.” Id.
3. Community custom
Community custom may be considered in determining if “a kind of service,
such as household service” is provided by employees. Nelson, 146 N.W.2d at
265. But community custom only matters if a question exists as to which party
12
controlled the work. See Burr v. Apex Concrete Co., 242 N.W.2d 272, 276 (Iowa
1976) (examining custom at construction site in a borrowed servant context).
The Restatement (Second) of Agency, cited in Nelson, looked to
community custom to find an employee relationship even when there was an
absence of control by the employer. See Restatement (Second) of Agency,
§ 220, cmt. m, illus. 11 (1958) (“A household servant working under an
agreement where his employer will not interfere with the servant’s conduct is an
employee where community custom regards people engaged in household
service as employees”). Neither Nelson nor the Restatement Second suggests
community custom should act as a counterweight when there exists a clear
finding the employer controlled the work.
4. Legal standards identified by the agency and district court
With the governing statutes and case law on employee-employer
relationships in mind, we now turn to the question whether the agency properly
interpreted that law. Lauterwasser’s argument on appeal presents another layer,
namely whether the district court missed the mark in its articulation of the legal
tests.
The district court concluded the agency used the correct legal standard; it
was the application of that standard to the facts that the district court dubbed as
illogical. In challenging the judicial review order, Lauterwasser argues the district
court skewed the legal test for determining who qualifies as an employee. He
asserts the court erred in viewing the parties’ intent as the controlling factor. We
agree with Lauterwasser’s assertion.
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The district court placed a burden upon Lauterwasser “to show the facts
meet the five-prong test and that the parties intended for his relationship with
Stark to be an employment relationship.” That description of the burden
misinterprets the governing law. The parties’ intent to establish an employee-
employer relationship is not a mandatory factor that must be established by the
claimant. The subjective standard of the parties’ intent may be considered by the
trier of fact “to the extent it serves to shed light upon the true status of the parties
concerned.” Nelson, 146 N.W.2d at 265.
But the most important consideration in determining if a person is an
employee or independent contractor is “the right to control the physical conduct
of the person giving service. Id. “If the right to control, the right to determine, the
mode and manner of accomplishing a particular result is vested in the person
giving service [that person] is an independent contractor, if it is vested in the
employer, such person is an employee.” Id. (quoting Schlotter v. Leudt, 123
N.W.2d 434, 436 (Iowa 1963)(internal quotations omitted)). Only if that control is
debatable, does the trier of fact need to consider the parties’ intention or
community customs. See id.
We conclude the commissioner recognized the proper factors to consider
when determining an employee for compensation purposes. We likewise
conclude the district court improperly elevated the intention of the parties as the
factor that “looms over all other considerations.” The district court’s
misstatement of the legal test impacted its conclusion concerning the application
of the law to the facts.
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B. Factual Findings
We next consider whether substantial evidence supports the agency’s
findings of fact relevant to the employment relationship.
The deputy and the commissioner agreed on most of the pertinent facts.
For instance, Stark paid Lauterwasser wages of thirty dollars an hour for his
carpentry work. Stark kept track of hours Lauterwasser worked and paid him at
the end of every week. Lauterwasser would sometimes bring his adult son to
assist on the job, and Stark would provide Lauterwasser wages to pay his son.
Stark told Lauterwasser what job to go to each day. Lauterwasser could not
change the way the work was to be performed. Stark set the time the work was
to be completed. Stark had the ability to fire Lauterwasser or reprimand him.
Stark controlled the contracts with the customers, as well as the beginning and
end of the work day and what the next project would be. All the responsibility for
quality of the work fell to Stark. Stark ordered supplies needed for the project.
Lauterwasser brought basic tools to work, but Stark would provide some of the
more specialized tools.
Lauterwasser also had his own carpentry business, J.B. Construction.
Before working for Stark, Lauterwasser was employed by Don Risdahl Builders.
In that job, Lauterwasser received a W-2 statement showing his earnings.
Lauterwasser testified he knew the difference between receiving a W-2
statement and a 1099 form. In 2008, Lauterwasser earned $30,562.00 from his
employment with Risdahl Builders and $3,100.00 in gross income as an
independent contractor. According to Lauterwasser’s 2009 tax records, he
15
received $13,293 in wages from Risdahl Builders. For 2009, Lauterwasser also
listed $20,423 in income from his subcontractor business, the same amount he
was paid by Stark. Lauterwasser also admitted in his testimony that on a 2009
tax schedule he deducted $5,734 for advertising from the income he received
from Stark, but that he did not actually do any advertising.
The commissioner also found that on the day of his injury, September 18,
2009, Lauterwasser “made numerous statements that contradict his assertion
that he is an employee of Stark.” Lauterwasser indicated on hospital forms that
he was an employee of Risdahl Builders and that his saw accident was not a
work injury. Stark testified he overheard Lauterwasser tell hospital staff he was
self-employed and uninsured.
The district court did not express any dissatisfaction with any of these
factual findings. The only determination by the commissioner challenged in the
judicial review was his finding “the parties and witnesses intended to work for one
another as subcontractors with the intent to circumvent the workers
compensation laws.” The district court stated: “[T]he Commissioner’s
determination that the parties’ intent should not be considered because they
intended to evade workers compensation law is not supported by any evidence in
the record.”
We do not share the district court’s concern on this point. Initially, the
record included testimony from Roger Nelson that it was common in the Linn
County area for construction companies to pay subcontractors more than
employees because they did not have to “pick up their insurance.” That
16
testimony could raise a fair inference that the work relationships were structured
to maximize the amount of take-home pay and not to reflect the true balance of
responsibilities.
But more critically, we are not required to reverse the commissioner’s
ultimate ruling that Lauterwasser was an employee simply because the record
lacks substantial evidence for one determination regarding the parties’ evasive
intent. “The substantial evidence rule requires us to review the record as a whole
to determine whether there is sufficient evidence to support the decision the
commission made.” See Woodbury Cnty. v. Iowa Civil Rights Comm’n, 335
N.W.2d 161, 164 (Iowa 1983). A single finding not supported by substantial
evidence may be set aside. Id.
When we review the record in its entirety, we find substantial evidence to
support the commissioner’s conclusion that Lauterwasser carried his burden to
show Stark exercised the kind of control over Lauterwasser’s work assignments
and conditions that reflect an employer-employee relationship. Because the right
to control the work was obviously vested in Stark, we need not resort to
assessing the parties’ subjective intent. See Nelson, 146 N.W.2d at 265. But
even if we were to give the same primacy to the parties’ intention as the district
court did in its ruling, we would not find their designation of the relationship as
one of general contractor and subcontractor to be controlling. That designation
was “so plainly and completely at odds with the undisputed facts” that we may
disregard it, even without imputing an evasive intent to the parties. See 3
Larson, § 61.05, at 61-8.
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C. Application Of The Law To The Facts
Finally, we review the commissioner’s ultimate conclusion to determine if
his application of law to facts is “irrational, illogical, or wholly unjustifiable.” See
Iowa Code § 17A.19(10)(m); Neal, 814 N.W.2d at 526.
As we have said, it was Lauterwasser’s burden to establish the existence
of an employer-employee relationship at the time he was injured. See D & C
Express, Inc. v. Sperry, 450 N.W.2d 842, 844 (Iowa 1990). The commissioner
cited the accepted factors for determining if an employment relationship existed.
See Nelson, 146 N.W.2d at 265 (listing considerations as (1) the right of
selection (2) responsibility for wages, (3) right to fire, (4) right to control the work,
and (5) identity of the employer as authority in charge of work or for whose
benefit it is performed). Applying those factors to the specific circumstances, the
commissioner concluded Lauterwasser was an at-will employee of Stark—with
Stark having the right of selection as to the employment status and relationship,
full responsibility for the payment of wages, the right to discharge Lauterwasser
at any time, sole control of the work, and Stark was the sole recipient of any profit
from the contracts. The commissioner also properly applied the independent
contractor factors. The commissioner ultimately decided: “[Lauterwasser] worked
in a manner that all other hourly, at-will employees work in the competitive labor
market.” The commissioner disregarded the intention of the parties to form a
general and subcontractor relationship, surmising it was done to evade the
workers’ compensation act and other laws.
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The district court’s overreliance on the parties’ subjective intent pushed it
to a different conclusion: “This lack of evidence [that the parties’ intent should not
be considered] leads the court to conclude that the Commissioner’s conclusion
was illogical.”
Under our deferential standard of review, we cannot uphold the district
court’s reversal. See Iowa Med. Soc’y v. Iowa Bd. of Nursing, 831 N.W.2d 826,
841 (Iowa 2013) (deferring to board’s application of law to fact where it was not
“irrational, illogical or wholly unjustifiable”). Recognizing the workers’
compensation commission’s expertise in this area, the legislature vested that
agency, not the courts, with the primary jurisdiction for applying the legal tests for
employer-employee relationships. See Larson Mfg. Co., 763 N.W.2d at 850. In
this case, the commissioner exercised that jurisdiction in a rational, logical, and
justifiable manner. Accordingly, we reverse the district court’s ruling and remand
for consideration of the remaining challenges to the commissioner’s award.
REVERSED AND REMANDED.