ATTORNEYS FOR APPELLANT ATTORNEYS FOR APPELLEE
Heather L. Wilson Gregory F. Zoeller
Amy S. Wilson Attorney General of Indiana
Margaret L. Smith
Indianapolis, Indiana David L. Steiner
Deputy Attorney General
ATTORNEYS FOR AMICUS CURIAE
INDIANA CHAMBER OF COMMERCE, INC. Ronnie L. Miller
Jon B. Laramore Lauren D. Bogan
Fenton D. Strickland Indiana Department of Workforce Development
Indianapolis, Indiana Indianapolis, Indiana
FILED
ATTORNEYS FOR AMICUS CURIAE
INDIANA LEGAL FOUNDATION
Bryan H. Babb
Marisol Sanchez Sep 29 2011, 3:29 pm
Indianapolis, Indiana
CLERK
of the supreme court,
court of appeals and
tax court
In the
Indiana Supreme Court
No. 93S02-1102-EX-89
FRANKLIN ELECTRIC COMPANY, INC.,
Appellant (Plaintiff below),
v.
UNEMPLOYMENT INSURANCE APPEALS OF
THE INDIANA DEPARTMENT OF WORKFORCE
DEVELOPMENT,
Appellee (Defendant below).
Appeal from the Indiana Department of Workforce Development, No. 08-37203
The Honorable Robert K. Robisch, Liability Administrative Law Judge
On Petition to Transfer from the Indiana Court of Appeals, No. 93A02-0911-EX-01121
September 29, 2011
Shepard, Chief Justice.
Franklin Electric formed two new subsidiaries and started new unemployment experience
accounts with a low introductory contribution rate for each one. We hold that the new
subsidiaries are not new employers and that Franklin Electric’s experience rate should have
applied to contributions made by the subsidiaries.
Facts and Procedural History
Franklin Electric Co., Inc. is an Indiana corporation that manufactures pumps. In 2002,
Franklin Electric hired a new CEO who decided to expand the company’s product line and
reorganized the business to do so. To that end, Franklin Electric formed two new wholly owned
subsidiary corporations, Franklin Electric Manufacturing, Inc. and Franklin Electric Sales, Inc.
Franklin Electric Manufacturing took over all manufacturing operations and Franklin Electric
Sales began selling the goods made by Franklin Electric Manufacturing.
Franklin Electric transferred real estate, equipment, and other assets related to its
manufacturing operations to Franklin Electric Manufacturing in exchange for one hundred
percent ownership of the new corporation. Franklin Electric also transferred approximately 470
employees to Franklin Electric Manufacturing. Franklin Electric transferred all its sales-related
personal property, sales contracts, and other related items to Franklin Electric Sales in exchange
for one hundred percent ownership of the new corporation. Franklin Electric also transferred
about ten employees to Franklin Electric Sales. Franklin Electric retained some 170 employees.
Franklin Electric also retained some assets including all its intellectual property. It continued to
serve as corporate headquarters for the two new subsidiaries.
Franklin Electric engaged an accounting firm to advise it on tax issues related to the
formation of the subsidiaries. The accounting firm believed that the two new subsidiaries would
be eligible for a new unemployment insurance experience account with the new employer rate of
2.7%. Prior to the transfer, Franklin Electric had an experience rating approaching 5%.
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Franklin Electric filed a “Report to Determine Status” for both Franklin Electric Sales
and Franklin Electric Manufacturing. (Division’s Ex. 2, 3.) The Department of Workforce
Development responded by acknowledging that Franklin Electric had disposed of a “distinct and
segregable portion of its Indiana business,” and informing Franklin Electric that it had the option
to transfer part of its experience balance to the new entities or start with the new rate.
(Employer’s Ex. 2.)
In 2006, Franklin Electric sold a portion of the manufacturing operation previously
contributed to Franklin Electric Manufacturing to another company, Bluffton Motor Works LLC.
Franklin Electric Manufacturing was not a direct party to the sales contract between Franklin
Electric and Bluffton Motorworks and the assets were not transferred back to Franklin Electric
before the sale.
In 2006, the Department received new software that allowed it to monitor wage records
more closely. The Department noted a transfer of a large number of wage records from Franklin
Electric to Franklin Electric Sales and Franklin Electric Manufacturing. The Department next
noticed a transfer of wage records from Franklin Electric Manufacturing to Bluffton Motor
Works. These transfers prompted the Department to begin an investigation into Franklin Electric
Sales’ and Franklin Electric Manufacturing’s status.
On November 18, 2008, the Department notified Franklin Electric that it had conducted
an investigation and determined that Franklin Electric “did not dispose of a distinct and
segregable portion of its organization, trade, or business.” (Division’s Ex. A.) The Department
canceled Franklin Electric Manufacturing’s and Franklin Electric Sales’s experience accounts.
All experience balances and liabilities reverted to Franklin Electric, and the Department
recalculated Franklin Electric’s merit rate for 2005, 2006, 2007, and 2008. The Department
demanded back payments, interest, and a ten percent penalty.
Franklin Electric appealed the Department’s determination to a liability administrative
law judge (LALJ) who affirmed the Department’s determination that the three entities are a
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single employer, but waived the penalties imposed by the Department. The Court of Appeals
affirmed the LALJ. Franklin Elec. Co. v. Unemployment Ins. Appeals of the Dep’t of
Workforce Dev., 928 N.E.2d 880 (Ind. Ct. App. 2010). We granted transfer, vacating the
opinion of the Court of Appeals. 950 N.E.2d 1199 (Ind. 2011) (table). We affirm the
determination of the LALJ.
Standard of Review
Under Indiana Code § 22-4-32-9 (2007), “Any decision of the liability administrative law
judge shall be conclusive and binding as to all questions of fact.” The decision of the LALJ may
be appealed “solely for errors of law under the same terms and conditions as govern appeals in
ordinary civil court.” Id. The LALJ’s legal conclusions are not entitled to the same deference.
Ind. Dep’t of Envtl Mgmt. v. West, 838 N.E.2d 408 (Ind. 2005).
The Subsidiaries Are Not New Employers.
Franklin Electric raises three issues on appeal, which we restate as whether Franklin
Electric Manufacturing and Franklin Electric Sales acquired the “distinct and segregable portion”
of Franklin Electric’s business required to make them “employers.” We hold that Franklin
Electric Manufacturing and Franklin Electric Sales did not acquire a distinct and segregable
portion of Franklin Electric’s business and thus did not qualify as “employers” under the laws
governing Indiana’s unemployment compensation arrangements.
Unemployment insurance in Indiana is financed by a tax on Indiana employers.
Employer contributions are charged proportionally against an employer’s experience account.
Ind. Code § 22-4-11-1(a) (2007 & Supp. 2010). As a result, the more unemployment claims that
are filed against an employer, the more that employer must contribute to the unemployment fund.
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Indianapolis Concrete, Inc. v. Unemployment Ins. Appeals of the Ind. Dep’t of Workforce Dev.,
900 N.E.2d 48 (Ind. Ct. App. 2009).
Franklin Electric argues that its two new subsidiaries are successor employers entitled to
a 2.7% experience rate under Indiana Code § 22-4-10-6(c) (2007), which says, “If not an
employer prior to the acquisition, the successor employer shall pay the rate of two and seven-
tenths percent (2.7%) unless the successor employer assumes all or part of the resources and
liabilities of the predecessor employer’s experience account.” To qualify for an experience
account or be a “successor employer,” an entity must be an “employer” as defined in the Code.
See Ind. Code § 22-4-10-4 (2007). Thus, whether Franklin Electric Sales and Franklin Electric
Manufacturing became employers is a threshold question that must be addressed before we can
decide whether they are successor employers.
Franklin Electric maintains that its two new subsidiaries became employers when
Franklin Electric transferred assets and employees to them. Because Franklin Electric claims its
subsidiaries became employers through a partial acquisition, the relevant definition of
“employer” is found in Indiana Code § 22-4-7-2(b) (2007), which states:
Any employing unit (whether or not an employing unit at the time
of acquisition) which acquires a distinct and segregable portion of
the organization, trade, or business within this state of another
employing unit which at the time of such acquisition is an
employer subject to this article only if the employment experience
of the disposing employing unit combined with the employment of
its predecessor or predecessors would have qualified such
employing unit under section 1 of this chapter if the portion
acquired had constituted its entire organization, trade, or business
and the acquisition results in the operation or continuance of an
organization, trade, or business.
For Franklin Electric Sales and Franklin Electric Manufacturing to qualify for their own
experience accounts, the two subsidiaries must first show that they are employers, which requires
proving that they acquired a “distinct and segregable” portion of Franklin Electric’s business.
This case turns entirely on the application of this statutory standard.
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The Court of Appeals addressed the meaning of “distinct and segregable” 1 in Ashlin
Transportation Services, Inc. v. Indiana Unemployment Insurance Board, 637 N.E.2d 162 (Ind.
Ct. App. 1994). That court examined the plain, ordinary meaning of the words and concluded:
The terms “distinct” and “segregable[]” . . . are synonymous. The
word “distinct” is defined as “different, separate, plain, well-
defined, or clearly perceived.” Likewise, the root of “segregable,”
segregate, is defined as “separate, isolate, or set apart.” Thus,
“segregable” means something that is capable of being separated,
isolated, or set apart.
Id. at 167 (quoting Black’s Law Dictionary 425, 1218 (4th ed. rev. 1968); Webster’s New World
Dictionary 409, 1290 (2d ed. 1982)). We agree. Thus, the question is whether Franklin Electric
Sales and Franklin Electric Manufacturing acquired a business that was separate from Franklin
Electric.
In this case, we cannot say that Franklin Electric Sales and Franklin Electric
Manufacturing are separate from Franklin Electric. Franklin Electric Sales and Franklin Electric
Manufacturing combined conduct essentially the same business (using the same employees) that
Franklin Electric did before the change. We acknowledge that with the subsidiaries in place, the
company did make changes to its product line and completely revamped its marketing and sales
practices. These changes were simply the natural evolution of Franklin Electric’s business
model. After creating the subsidiaries, Franklin Electric’s business was still manufacturing and
selling pumps.
Although each of the three corporations maintained their own payroll, had their own
employer identification numbers, and issued their own W-2s, Franklin Electric still writes a
1
In Ashlin, the Court of Appeals was defining “distinct and segregable” under Indiana Code § 22-4-10-
6(b). The term “distinct and segregable” appears repeatedly in the Unemployment Compensation Act.
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single check to its payroll company to pay the wages to employees of all three companies.
Employee benefits including health insurance and retirement benefits for all three entities are
also paid by Franklin Electric, and Franklin Electric provides workers’ compensation coverage
for all three entities. With the funds to pay wages for all three entities coming from only one of
them, it is difficult to find that Franklin Electric Sales and Franklin Electric Manufacturing were
distinct entities separate from one another.
Finally, Franklin Electric sold assets to Bluffton Motor Works that it had previously
transferred to Franklin Electric Manufacturing. This sale was accomplished without first
transferring those assets back to Franklin Electric. This fact most strongly suggests that Franklin
Electric Manufacturing was not separate from Franklin Electric.
None of these facts alone would be dispositive, but taken together they adequately
support the LALJ’s conclusion that Franklin Electric Sales and Franklin Electric Manufacturing
are not distinct and segregable from Franklin Electric.
This result is necessary given the way the experience-rating system works. Each
employer contributes to the fund based on the number of claims submitted against the employer.
Thus, each employer essentially pays its own fair share. Franklin Electric had a rate of 4.9%.
(Appellee’s Br. at 4.) With the subsidiaries in place, that rate fell to 2.7% for the employees it
transferred to the subsidiaries. The rate was lowered despite the fact that the same employees
were doing essentially the same work and were being paid by the same parent company as before
the change. As a result, other contributors to the fund would be stuck making up the extra 2.2%.
Because the same employees are doing the same work for the same people, we hold that the
business acquired by Franklin Electric Sales and Franklin Electric Manufacturing was not
distinct and segregable from Franklin Electric.
Today’s holding is a narrow one. It deals only with the language “distinct and
segregable” as used in the unemployment statutes and only concerns determining the proper
merit rate for unemployment contribution. The instant ruling neither calls into question the
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validity of the wholly owned subsidiary arrangement, nor holds that the creation of a wholly
owned subsidiary can never result in the new entity becoming a separate employer. 2
The Unemployment Compensation Act allows a ten percent penalty added to delinquent
unemployment contributions if the lateness is caused by “negligence or intentional disregard of
authorized rules, regulations, or notices” of the Department. Ind. Code § 22-4-29-1(b) (2007).
The Department demanded the ten percent penalty from Franklin Electric. The LALJ waived the
penalty, finding that there was no fraud or negligence. We agree. There is no evidence in the
record suggesting any improper conduct on the part of Franklin Electric. Franklin Electric
reorganized the company for reasons completely separate from the unemployment tax. It was
not aware of any potential unemployment tax implications until it received an opinion from its
accounting firm. It filed its Reports to Determine Status in good faith based on that advice. The
penalty, therefore, is not appropriate. We also affirm the LALJ’s decision to set the beginning
date of the recalculation of Franklin Electric’s merit rate as November 26, 2004, in compliance
with the four-year reassessment limit in Indiana Code § 22-4-29-2 (2007 & Supp. 2010).
Conclusion
The decision of the Liability Administrative Law Judge is affirmed.
Dickson, Sullivan, Rucker, and David, JJ., concur.
2
We do note that the Unemployment Compensation Act was amended in 2006 (after the relevant events
in this case) to require that a successor employer take a predecessor’s experience account balance if the
two employers “have substantially common ownership, management, or control.” Ind. Code § 22-4-11.5-
7(a) (2007).
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