No. 14917
IN THE SUPREME COURT OF THE STATE OF MONTANA
STANDARD CHEMICAL MANUFACTURING
COMPANY, a corporation,
Plaintiff and Respondent,
THE EMPLOYMENT SECURITY DIVISION OF
THE MONTANA STATE DEPARTMENT OF LABOR
AND INDUSTRY; THE BOARD OF LABOR APPEALS
OF THE MONTANA STATE DEPARTMENT OF LABOR
MJD INDUSTRY; MICHAEL J. WHALEN, JAMES W.
MURRY, and DOUGLAS R. HANSIN ,as members
of the Board of Labor Appeals,
Defendants and Appellants.
Appeal from: District Court of the First Judicial District,
Honorable Peter G. Meloy, Judge presiding.
Counsel of Record:
For Appellants:
Robert J.Campbel1, Helena, Montana
For Respondent:
Scribner, Huss and Mulroney, Helena, Montana
Submitted on briefs: November 7, 1979
Decided:
&2:&$
Filed:
!a[+ q
,r
, ;.7q
-. ,-.-
Mr. Justice John Conway Harrison delivered the Opinion of
the Court.
This is an appeal from a judgment holding that respondent
is exempt from paying unemployment compensation tax on
Persons it employs as salesmen. The judgment was rendered
in the District Court of the First Judicial District, in and
for the County of Lewis and Clark, the Honorable Peter G.
Meloy presiding.
Respondent is a Nebraska corporation engaged in the
manufacturing, distributing and wholesaling of livestock
nutritional products. Respondent markets its products in
twenty-three states through the use of certain salesman, who
are called "contract distributors" or "distributor dealers."
The salesmen are recruited by a division manager, who ex-
plains the nature of the products as well as respondent's
method of distribution, and then enters into contracts for
distribution. Once they are recruited, the salesmen purchase
a sales kit for $40.00, which is mailed by respondent to
either the salesman or his division manager. Accompanying
the kit are supply order forms, sales manuals, and other
promotional sales items. Most of the salesmen employed by
respondent are farmers, ranchers or persons involved in the
livestock industry. There are no required hours and the
salesmen may work parttime. Salesmen receive no formal
training except for occasional assistance in determining a
customer's nutritional needs or a problem relating to toxicity.
While the salesmen do not represent themselves as
agents of the company, order forms nevertheless reflect the
name of the company. The contract for sale, for example, is
made between respondent and the customer. Payments for the
products are made by check payable to either respondent or
the salesman or by case payable to the salesman. Respondent
furnishes a suggested retail price for its products, but
salesmen are not bound by the price. They may even barter
for the products.
Respondent extends credit to customers on the basis of
prior approved credit applications, which must be obtained
by the salesmen. When credit is approved and established,
it is the responsibility of respondent to collect from the
customer. Salesmen may also extend credit to customers.
They are liable to respondent, however, for the costs of
goods sold. When salesmen order products, the wholesale
purchase price is charged to the account of the salesman and
he is individually responsible for loss, damage and con-
tamination. The salesman may return the merchandise upon
express approval, however, and receive a credit. Commissions
are paid to the salesmen weekly, and the amount of the
commission is the difference between customer sales price
and the wholesale price.
Respondent maintains five company warehouses or merchan-
dise banks in Montana. Salesmen are also permitted to have
storage facilities, but must first receive permission from
the company and must build them at their own expense.
Approximately 20 to 30 percent of the salesmen have storage
facilities. Merchandise is generally delivered to the
company warehouses by respondent and may be picked up there
by customers. There is a conflict in the testimony as to
whether respondent delivers orders directly to customers.
Both respondent and its salesmen have the right to
terminate their contract at any time. At the conclusion of
the relationship, salesmen leave with only a customer list
and perhaps a greater knowledge of the nutritional needs of
livestock.
This appeal arises out of a determination made by the
Employment Security Division and the State Board of Labor
Appeals that respondent's salesmen were "employees" within
the terms of the provisions of Title 39, Chapter 51, Montana
Code Annotated. Respondent filed an action in District
Court to overturn those administrative decisions. On May 7,
1979, the District Court granted respondent judgment, hold-
ing that respondent was not subject to unemployment compen-
sation tax on those persons acting as its salesmen.
The following issue is raised for our consideration on
appeal:
Whether the District Court erred in determining that
respondent's salesmen were "independent contractors" and
were therefore exempt from unemployment compensation tax on
those persons pursuant to Title 39, Chapter 51, Montana Code
Annotated.
This Court has previously used two tests as guidelines
in determining whether services performed by an individual
for wages are deemed employment or are those of an indepen-
dent contractor. See St. Regis Paper Co. v. Unemployment
Comp. Comm'n (1971), 157 Mont. 548, 487 P.2d 524; Pat Griffin
Co. v. Employment Security Comm'n (1974), 163 Mont. 529, 519
P.2d 147. The first test is the so-called "ABC" test and is
established by statute:
"Service performed by an individual for
wages is considered to be employment sub-
ject to this chapter unless and until it
is shown to the satisfaction of the div-
ision that:
"(A) such individual has been and will
continue to be free from control or
direction over the performance of such
services, both under his contract and
in fact;
"(B) such service is either outside
the usual course of the business for
which such service is performed, or
that such service is performed outside
of all the places of business of the
enterprise for which such service is
performed; and
"(C) such individual is customarily
engaged in an independently established
trade, occupation, profession, or bus-
iness." Section 39-51-203(4), MCA.
Wages are defined in section 39-51-201, MCA, as ". . .
all remuneration payable for personal services, including
commissions and bonuses and the cash value of all remunera-
tion payable in any medium other than cash."
All three of the stated conditions must exist or the
services performed will be deemed to be employment. Griffin,
supra, at 533, 519 P.2d at 150. The statute shall be reason-
ably applied and will not be distorted to allow persons who
are truly independent in their operations to be held employ-
ees merely for tax purposes and resulting benefits derived
from an employer-employee relationship. Griffin, supra. To
keep the distortion at a minimum, this Court has used another
test derived from common law principles as an additional
guideline:
"While section 87-148(j) (5), R.C.M. 1947 [now sec-
tion 39-51-203 (4), MCA] , is used as a guide in
the determination of the relationship between an
employer and an individual performing services,
the well-established test in determining whether
an individual is an employee or an independent
contractor is also a guide to be used. As we
did in St. Regis, we here reiterate this test as
expressed in Shope v. City of Billings, 85 Mont.
302, 306, 278 P. 826, 827:
"'An independent contractor is one who renders
service in the course of an occupation, and
represents the will of his employer only as to
the result of his work, and not as to the means
whereby it is accomplished, and is usually not
paid by the job. (And see Neyman v. Pincus, 82
Mont. 467, 267 P. 805.)'
"The v i t a l t e s t i n d e t e r m i n i n g w h e t h e r a p e r s o n
employed t o do a c e r t a i n p i e c e o f work i s a
contractor o r a m e r e servant, is the control
o v e r t h e work which i s r e s e r v e d by t h e e m p l o y e r .
S t a t e d a s a g e n e r a l p r o p o s i t i o n , i f t h e con-
t r a c t o r i s under t h e c o n t r o l of t h e employer,
h e i s a s e r v a n t ; i f n o t u n d e r s u c h c o n t r o l , he
i s a n i n d e p e n d e n t c o n t r a c t o r . " G r i f f i n , 519
P.2d a t 150.
I n t h i s c a s e , two a d m i n i s t r a t i v e b o d i e s , t h e Employment
S e c u r i t y D i v i s i o n a n d t h e S t a t e Board o f Labor A p p e a l s , w e r e
c o n f r o n t e d w i t h a mixed q u e s t i o n o f law and f a c t , namely
w h e t h e r r e s p o n d e n t ' s s a l e s m e n m i g h t b e deemed t o s t a n d i n
t h e r e l a t i o n s h i p o f "employment. " That question n o t only
involved t h e determination of s e v e r a l underlying f a c t s t o
e s t a b l i s h t h e economic r e l a t i o n s h i p between r e s p o n d e n t and
i t s salesmen, b u t it a l s o involved t h e s p e c i f i c a p p l i c a t i o n
of a s t a t u t e c o n t a i n i n g a broad s t a t u t o r y t e r m . In questions
o f t h i s k i n d , where t h e a g e n c y i s e n t r u s t e d and c h a r g e d w i t h
a d m i n i s t e r i n g t h e s t a t u t e a n d making n e c e s s a r y , i n i t i a l
f a c t u a l determinations, it i s w e l l s e t t l e d t h a t a reviewing
court's function i s limited. Where f a c t u a l d e t e r m i n a t i o n s
a r e w a r r a n t e d by t h e r e c o r d and have a r e a s o n a b l e b a s i s i n
law, t h e y a r e t o be a c c e p t e d . I t i s n o t t h e c o u r t ' s func-
t i o n t o s u b s t i t u t e i t s own i n f e r e n c e s o f f a c t f o r t h o s e o f
a n a d m i n i s t r a t i v e t r i b u n a l o r a g e n c y , where f a c t s a r e sup-
p o r t e d by e v i d e n c e i n t h e r e c o r d . NLRB v . H e a r s t P u b l i c a t i o n s
( 1 9 4 3 ) , 322 U.S. 111, 1 3 3 , 64 S.Ct. 851, 860, 88 L.Ed. 1170,
S e c t i o n 2-4-704, MCA s t a t e s :
" ( 2 ) The c o u r t may n o t s u b s t i t u t e i t s judgment
f o r t h a t of t h e agency a s t o t h e weight of t h e
e v i d e n c e o n q u e s t i o n s o f f a c t . The c o u r t may
a f f i r m t h e d e c i s i o n o f t h e agency o r remand
t h e case f o r f u r t h e r p r o c e e d i n g s . The c o u r t
may r e v e r s e o r m o d i f y t h e d e c i s i o n i f s u b s t a n -
t i a l r i g h t s o f t h e a p p e l l a n t have been p r e j u -
d i c e d because t h e a d m i n i s t r a t i v e f i n d i n g s ,
inferences, conclusions, o r decisions are:
" ( a ) i n v i o l a t i o n of c o n s t i t u t i o n a l o r s t a t u -
tory provisions;
" ( b ) i n excess of t h e s t a t u t o r y a u t h o r i t y
o f t h e agency;
" ( c ) made upon u n l a w f u l p r o c e d u r e ;
" ( d l a f f e c t e d by o t h e r e r r o r of law;
" ( e ) c l e a r l y e r r o n e o u s i n view o f t h e r e l i a b l e ,
p r o b a t i v e , and s u b s t a n t i a l e v i d e n c e on
t h e whole r e c o r d ;
" ( f ) arbitrary o r capricious o r characterized
by a b u s e o f d i s c r e t i o n o r c l e a r l y u n w a r r a n t e d
e x e r c i s e of d i s c r e t i o n ; o r
" ( g ) b e c a u s e f i n d i n g s o f f a c t , upon i s s u e
e s s e n t i a l t o t h e d e c i s i o n , w e r e n o t made
although requested.
Here, t h e Employment S e c u r i t y D i v i s i o n and t h e S t a t e
Board d e t e r m i n e d t h a t , f o r unemployment c o m p e n s a t i o n t a x
p u r p o s e s , r e s p o n d e n t ' s s a l e s m e n were employees. The D i s -
t r i c t C o u r t o v e r t u r n e d t h o s e d e t e r m i n a t i o n s and h e l d t h a t
t h e y w e r e c l e a r l y e r r o n e o u s i n view o f t h e r e l i a b l e , p r o -
b a t i v e and s u s t a n t i a l e v i d e n c e o n t h e r e c o r d . The c o u r t
t h e n found t h a t r e s p o n d e n t ' s s a l e s m e n were " i n d e p e n d e n t
c o n t r a c t o r s . " Upon t h i s a p p e a l , w e a r e c o n f r o n t e d w i t h t h e
t a s k o f d e t e r m i n i n g w h e t h e r t h e D i s t r i c t C o u r t committed a n
abuse of d i s c r e t i o n .
A t t h e o u t s e t , w e recognize t h a t t h e element of r i g h t
o f c o n t r o l i s t h e most c r u c i a l f a c t o r which d i s t i n g u i s h e s
"employees" f r o m " i n d e p e n d e n t c o n t r a c t o r s . " This element i s
common t o b o t h t h e "ABC" and common l a w t e s t s . We also
recognize t h a t t h e r i g h t of c o n t r o l i s a very c l o s e question
u n d e r t h e p a r t i c u l a r f a c t s and c i r c u m s t a n c e s o f t h i s c a s e .
T h e r e are s e v e r a l f a c t o r s which s u g g e s t t h a t r e s p o n d e n t re-
t a i n e d t h e r i g h t t o c o n t r o l i t s salesmen: salesmen w e r e
r e c r u i t e d by a d i v i s i o n manager; t h e y p u r c h a s e d $ 4 0 . 0 0 s a l e s
k i t s ; t h e y w e r e a s s i g n e d t o p a r t i c u l a r t e r r i t o r i e s i n which
they could distribute products; respondent recommended sales
prices for its products; sales were made on respondent's
contracts and forms; and respondent extended credit to
customers. There are also several other factors which
suggest that respondent did not have the right of control:
salesmen received no formal training; they could work part-
time; they furnished their own transportation and paid their
own expenses; they could deviate from the recommended price
and barter for products; they could extend credit to customers;
they were not required to file reports; and they were respon-
sible for damage, loss or contamination.
Where the issue of control is so close and there is
sufficient credible evidence on the record which would allow
reaching opposite conclusions, we think that a finding which
overturns another as being "clearly erroneous" is an abuse
of discretion. Where the District Court's reviewing function
is limited, as in this case, the findings of administrative
agencies and tribunals must be sustained where there is
sufficient credible evidence in the record.
In view of the closeness of this case, however, we also
feel it is necessary to consider another element of the
"ABC" test, which is controlling in our jurisdiction. That
test, unlike the common law test, goes beyond the issue of
control.
In particular, we make reference to element "C" of the
"ABC" test, the question of whether an individual is custom-
arily engaged in an independently established trade, occupation,
profession or business. To uphold the findings of the
District Court, we must be able to say that respondent's
salesmen here are customarily engaged in an independently
established trade, occupation or business.
We have never had occasion to construe or interpret
what is meant by an "independently established business"
under part "C" of section 39-51-203(4), MCA. Several other
jurisdictions with statutes identical to ours, however, have
interpreted the phrase. In Vermont, for example, an "inde-
pendently established business" is an enterprise in which a
claimant is able to engage in an independent activity with-
out any hindrance from any individual whatsoever. Vermont
Securities, Inc. v Unemployment Compensation Comm'n (1954),
.
118 Vt. 196, 201, 104 A.2d 915, 917; Bluto v. Dep't of
Employment Sec. (1977), 135 Vt. 205, 373 A.2d 518, 521. In
Maine, an "independently established business" is an enterprise
in which an individual has a proprietary interest to the
extent that he could operate without hindrance from any
source. Hasco Manufacturing Co. v. Maine Employ. Sec.
Comm'n (1962), 158 Me. 413, 185 A.2d 442, 445; Fournier v.
Maine Employ. Sec. Comm'n (1965), 161 Me. 48, 206 A.2d 925,
926. Illinois also adopts the "proprietary interest" test.
Hart v. Johnson (1979), 68 Ill.App.3d 968, 386 N.E.2d 623.
In Hart, the Illinois court stated:
.
". . it is apparent that the act contemplates
that one who is engaged in an independent enter-
prise is an individual who has a proprietary
interest in such business to the extent that he
can operate same without hindrance from any in-
dividual whatsoever and whose business also is
free from control. Here, the so-called dealers
had no business to sell or give away. They were
dependent on the appellant for their employment
... Although appellant urges that the indivi-
duals were free to carry other lines, it is a
fact that there is no evidence that any indivi-
duals did so. [Citation omitted.]" Hart, 386
N.E.2d at 629.
An "independently established business" in New Jersey
is one that will survive the termination of a particular
service relationship. In Gilchrist v. Division of Employment
S e c u r i t y (19571, 48 N.J.Super. 1 4 7 , 137 A.2d 29, 35, t h e N e w
Jersey court stated:
"The f a c t t h a t a s a l e s m a n who works on commission
must r e l y on h i s e f f o r t s and a b i l i t y t o s e c u r e
o r d e r s t o make a l i v e l i h o o d d o e s n o t n e c e s s a r i l y
mean t h a t h e i s working f o r h i m s e l f a s a n e n t r e -
p r e n e u r o r businessman, w i t h i n t h e i n t e n d m e n t of
test C. The d o u b l e r e q u i r e m e n t t h a t a n i n d i v i -
d u a l must be ' c u s t o m a r i l y engaged' and ' i n d e p e n d e n t l y
established' c a l l s f o r an e n t e r p r i s e t h a t e x i s t s
and c a n c o n t i n u e t o e x i s t i n d e p e n d e n t l y o f and
a p a r t from t h e p a r t i c u l a r s e r v i c e r e l a t i o n s h i p .
The e n t e r p r i s e must be o n e which i s s t a b l e and
lasting--one t h a t w i l l survive t h e termination
of t h e relationship."
W e a l s o note with i n t e r e s t s e v e r a l o t h e r states within
t h i s j u r i s d i c t i o n t h a t have s t a t u t e s s i m i l a r t o o u r s .
I d a h o , Oregon and Utah have s t a t u t e s which c o n t a i n p a r t s "A"
and "C" o f t h e "ABC" t e s t . P a r t "C" o f t h o s e s t a t u t e s a d d s
t h a t t h e " i n d e p e n d e n t l y e s t a b l i s h e d b u s i n e s s " must b e "of
t h e same n a t u r e a s a c o n t r a c t f o r s e r v i c e . " Idaho h a s
e s t a b l i s h e d t h r e e f a c t o r s t o be considered i n determining
whether a n i n d i v i d u a l i s engaged i n a n i n d e p e n d e n t b u s i n e s s :
(1) Does t h e worker have a u t h o r i t y t o h i r e s u b o r d i n a t e s ?
( 2 ) Does t h e worker own m a j o r i t e m s o f equipment? ( 3 ) Would
e i t h e r p a r t y b e l i a b l e t o t h e o t h e r f o r a preemptory t e r m i n -
a t i o n of the business relationship? Hammond v. D e p ' t o f
Employment ( 1 9 7 1 ) , 94 I d a h o 66, 480 P.2d 912, 914; Swayne v .
D e p ' t o f Employment ( 1 9 6 9 ) , 93 I d a h o 1 0 1 , 456 P.2d 268, 272.
I n Utah i m p o r t a n c e i s p l a c e d upon t h e i n d e p e n d e n c e of
t h e business. An " i n d e p e n d e n t l y e s t a b l i s h e d b u s i n e s s " must
e x i s t i n d e p e n d e n t o f t h e s e r v i c e s under c o n s i d e r a t i o n i n t h e
s e n s e t h a t i t i s t h e whole o f which t h e p a r t i c u l a r ser771ce
is a part. Leach v. Board o f Review o f I n d u s t r i a l Com'n
( 1 9 5 3 ) , 1 2 3 Utah 423, 260 P.2d 744, 748.
I n Oregon, c a s e l a w h o l d s t h a t a n i n d e p e n d e n t l y e s t a b -
l i s h e d b u s i n e s s i s a n e n t e r p r i s e which i s c r e a t e d and e x i s t s
a p a r t from a r e l a t i o n s h i p w i t h a p a r t i c u l a r employee and which
survives the termination of that realtionship. The con-
tinued existence of the business does not depend upon a
relationship with a particular employer. Timberland
Sales, Inc. v. Employment Division (1975), 20 0r.App. 192,
530 P.2d 880, 883-884; Kirkpatrick v. Peet (1967), 247 Or.
204, 428 P.2d 405, 409-10; Baker v. Cameron (1965), 240 Or.
354, 401 P.2d 691, 696. The Oregon legislature has also
enunciated additional criteria to determine whether an
enterprise is an independently established business:
"(A) The individual customarily has two or
more effective contracts. (B) The individual
as a normal business practice utilizes sep-
arate telephone service, business cards and
engages in such commercial advertising as is
customary in operating similar businesses.
(C) The individual is recognized by the De-
partment of Revenue as an employer. (D) The
individual furnishes substantially all of the
equipment, tools and supplies necessary in
carrying out his contractual obligations to
his clients." 0r.Rev.Stat. § 657.040
In this case, both the Board and the District Court
entered specific findings with respect to part "C" of the
"ABC" test. The Board stated:
"The salesmen were not engaged in independently
established businesses as a result of their as-
sociation with the company, and would not have
saleable businesses if they terminated their
relationship with the company. They were not
engaged in independently established businesses,
but merely salesmen who worked on a commission
basis. "
The District Court stated:
". . . The salesmen are livestock 'nutritional
experts' capable of analyzing and adjusting the
nutrition of their customer's livestock. [Cita-
tions to transcript omitted.] This is a skill
they could sell after their relationship with
Standard Chemical is ended. It does not matter
that they would not have a business to sell. A
lawyer, for example, does not have a saleable
business, only a marketable skill. Thus, it is
clear that the third requirement of the 'ABC'
test is fulfilled."
Upon a r e v i e w o f t h e r e c o r d b e f o r e u s , w e f i n d t h a t t h e
D i s t r i c t C o u r t abused i t s d i s c r e t i o n i n holding t h a t r e s p o n d e n t ' s
s a l e s m e n w e r e i n d e p e n d e n t c o n t r a c t o r s and w e r e n o t s u b j e c t
t o unemployment c o m p e n s a t i o n b e n e f i t s . Respondent's salesmen
h e r e a r e employees. They have no i n d e p e n d e n t l y e s t a b l i s h e d
b u s i n e s s o f t h e i r own. Their "business" does n o t e x i s t
i n d e p e n d e n t l y and a p a r t from t h e i r r e l a t i o n s h i p w i t h r e s p o n -
dent. They a r e , r a t h e r , d e p e n d e n t upon r e s p o n d e n t f o r t h e i r
employment. Should t h e i r r e l a t i o n s h i p w i t h r e s p o n d e n t
t e r m i n a t e , t h e i r " b u s i n e s s " would a l s o t e r m i n a t e a s w e l l .
They have no a u t h o r i t y t o h i r e s u b o r d i n a t e s ; t h e y have t h e
r i g h t , a s d o e s r e s p o n d e n t , t o t e r m i n a t e t h e i r employment;
a n d , t h e y have no l i a b i l i t y f o r a p e r e m p t o r y t e r m i n a t i o n o f
their relationship. I t i s a l s o doubtful whether respondent's
s a l e s m e n may t r u l y b e c a l l e d " n u t r i t i o n a l e x p e r t s . " There
i s l i t t l e f o r m a l t r a i n i n g t h e s a l e s m a n r e c e i v e from which t o
g a i n such e x p e r t i s e . Respondent o n l y o c c a s i o n a l l y a s s i s t s
i t s s a l e s m e n i n d e t e r m i n i n g c u s t o m e r s ' n u t r i t i o n a l n e e d s and
i n problems r e l a t i n g t o t o x i c i t y . For t h e s e r e a s o n s , w e
h o l d t h a t t h e D i s t r i c t C o u r t a b u s e d i t s d i s c r e t i o n and t h a t
r e s p o n d e n t ' s s a l e s m e n a r e employees.
A c c o r d i n g l y , t h e judgment o f t h e D i s t r i c t C o u r t i s
reversed .
W e concur: