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ACN Opportunity, LLC v. Employment Department

Supreme Court of Oregon

May 3, 2018

ACN OPPORTUNITY, LLC, Petitioner on Review,
EMPLOYMENT DEPARTMENT, Respondent on Review.

          Argued and Submitted May 12, 2017

          On review from the Court of Appeals T71434; CA A152977. [*]

          William F. Gary, Harrang Long Gary Rudnick P.C., Portland, argued the cause and fled the briefs for petitioner on review. Also on the briefs was J. Aaron Landau.

          Keith L. Kutler, Assistant Attorney General, Salem, argued the cause and fled the brief for the respondent on review. Also on the brief were Ellen F. Rosenblum, Attorney General, and Benjamin Gutman, Solicitor General.

          Brad S. Daniels, Stoel Rives LLP, Portland, fled the brief for amicus curiae Direct Selling Association.

          Janet M. Schroer, Hart Wagner LLP, Portland, fled the brief for amici curiae Individual Direct Sellers Dorinda Stoller, Crystal Ross, Angela Muse, Alyssa Sutera, Linda Archambault, Angela Lister, Sarah Warner, Brenna Reyes, Sara Haas, Theresa Hutcherson, and Nicole Johanson.

          Before Balmer, Chief Justice, and Kistler, Walters, Nakamoto, Flynn, Duncan, and Nelson Justices. [**]

         [362 Or. 825] Case Summary: A business contested the assessment of unemployment insurance tax on earnings that the business paid to its workers, arguing that the workers were independent contractors under ORS 670.600 or that they fell within the exemption from employment in ORS 657.087(2) for in-home sales. Held: (1) The word "maintains" in ORS 670.600(3)(a) (requiring that an independent contractor "maintains a business location") imposes an independent requirement; (2) the business did not prove that its workers satisfied that requirement; (3) the workers lacked the requisite authority to hire and fire others to provide or to help provide the services, as required by ORS 670.600(3)(e); (4) the workers therefore were not independent contractors; (5) the workers did not fall within the in-home sales exemption from employment in ORS 657.087(2); and (6) the workers, therefore, were employees of the business and the business was required to pay unemployment insurance tax on their earnings.

         The decision of the Court of Appeals and the final order of the Administrative Law Judge are affirmed.

         [362 Or. 826] NAKAMOTO, J.

         Petitioner ACN Opportunity, LLC (ACN) sells satellite television, telephone, Internet, and home security services, as well as some goods related to those services, through a network of direct-to-consumer sellers that it calls "independent business owners" (IBOs). The Employment Department determined that ACN was an employer and thus was required to pay unemployment insurance tax on earnings that ACN paid to the IBOs for their sales work. An administrative law judge (ALJ) affirmed that determination, concluding that the IBOs did not fall within the exemption from employment under ORS 657.087(2) and were not independent contractors under ORS 670.600. ACN sought judicial review of the department's final order, and the Court of Appeals affirmed. ACN Opportunity, LLC v. Employment Dept, 278 Or.App. 697, 337 P.3d 638 (2016).

         This court accepted review primarily to address the statutory interpretation questions that this case presents. We first conclude that the IBOs do not qualify as independent contractors, because ACN failed to establish that the IBOs were customarily engaged in an independently established business. In reaching that conclusion, (1) we construe "maintains a business location" in ORS 670.600(3)(a), a factor considered in determining whether a worker has an independently established business, as the Court of Appeals did, and (2) we agree with the Court of Appeals that the IBOs lack the required authority to hire others to provide services, as provided in ORS 670.600(3)(e). Finally, we reject ACN's reading of the in-home sales exemption from employment in ORS 657.087(2) and conclude that the IBOs do not fall within that exemption. As a result, we affirm the decision of the Court of Appeals and the final order of the ALJ.

         I. BACKGROUND

         A. Legal context

         For purposes of unemployment insurance tax liability, Oregon law begins with the presumption that a person [362 Or. 827] who performs services for remuneration is an employee, and the employer must pay unemployment insurance taxes on that person's wages. See ORS 657.505(2). As relevant in this case, there are two categories of workers who are not considered employees: (1) independent contractors, as defined in ORS 670.600, and (2) certain commissioned salespeople, as defined in ORS 657.087. If an employer can prove that a purported employee is in fact an independent contractor or one of the salespeople excluded by ORS 657.087, then the employer need not pay unemployment insurance taxes on that person's remuneration.

         An "independent contractor" is defined in ORS 670.600(2) as "a person who provides services for remuneration and who, in the provision of the services, " meets four enumerated requirements:

"(a) Is free from direction and control over the means and manner of providing the services, subject only to the right of the person for whom the services are provided to specify the desired results;
"(b) *** [I]s customarily engaged in an independently established business; "(c) Is licensed under ORS chapter 671 or 701 if the person provides services for which a license is required under ORS chapter 671 or 701; and
"(d) Is responsible for obtaining other licenses or certificates necessary to provide the services."

         All four criteria must be satisfied for the test to be met, and the alleged employer bears the burden of proof. Broadway Cab LLC v. Employment Dept, 358 Or. 431, 443, 364 P.3d 338 (2015). In this case, the dispute over whether the IBOs are independent contractors boils down to the requirement in subsection (2)(b): whether ACN proved that its IBOs were "customarily engaged in an independently established business."

         Subsection (3) of ORS 670.600 provides five factors that the department is to consider in determining whether the putative employer has shown that the worker meets the [362 Or. 828] "independently established business" requirement.[1] If ACN established that its IBOs met at least three out of the five factors in ORS 670.600(3), then the IBOs are "customarily engaged in an independently established business" for purposes of subsection (2)(b). Two of those factors are now at issue; namely, whether each IBO "maintains a business location" or "has the authority to hire other persons to provide or to assist in providing the services and has the authority to fire those persons." ORS 670.600(3)(a), (e).

         The other statute relevant on review is the in-home sales exemption in ORS 657.087(2). That exemption provides that" [e] mployment" does not include "service performed * * * [b]y individuals to the extent that the compensation consists of commissions, overrides or a share of the profit realized on orders solicited or sales resulting from the in-person solicitation of orders for and making sales of consumer goods in the home." The issue arising from that statute is whether someone can satisfy its requirements by primarily soliciting orders and making sales in the home, or if the statute limits its application only to those orders solicited and sales made in the home.

         B. Historical Facts

         ACN has not challenged the ALJ's factual findings. Therefore, we draw the following facts from the ALJ's final [362 Or. 829] order and, as needed, consider other uncontested facts in the record to determine whether the ALJ committed any errors of law. See ORS 183.482(7) ("the court shall not substitute its judgment for that of the agency as to any issue of fact").

         ACN, a subsidiary of ACN, Inc., is registered and has its principal office in North Carolina. ACN is an authorized retailer of various telecommunications services, including satellite television, high-speed and wireless internet, local and long-distance telephone, and home security services, along with related goods, that originate from various third-party national vendors. ACN enters into agreements with the vendors, and then ACN sells the products through its network of sellers, the IBOs.

         The relationship between ACN and an IBO is governed by a written contract. Each of the IBOs agreed that the IBO would pay ACN an initial fee of $499 for a one-year license to market and sell ACN's products. The IBO then could pay an annual renewal fee of $149 per year. The IBO contract stated that ACN and the IBO agreed that the IBO would market and sell ACN's products as an independent contractor, not as ACN's employee.

         The IBOs were compensated through bonuses from a new customer's subscription to ACN's services and through commissions from a customer's continued use of those services. In addition to making money from their own sales, the IBOs could "sponsor" or recruit other IBOs, who the parties refer to as "downline IBOs, " and receive additional compensation from the downline IBOs' customers' subscriptions and continued use of ACN's products and services.

         However, the downline IBOs were required to have their own separate IBO contracts with ACN. The IBO contracts prohibited IBOs from recruiting an existing downline IBO during the term of the existing downline IBO's contract and for one year after the downline IBO's contract ended. ACN also reserved the right to change a downline IBO's sponsorship if "unethical" practices were used, which included soliciting a prospect who was "considering joining ACN and being sponsored by another" IBO. Furthermore, the IBO contract prohibited downline IBOs from switching sponsors.

         [362 Or. 830] In return for payment of the initial fee, the IBOs received a "Team Trainer Kit, " as well as access to ACN's customer tracking services, ACN's website for submitting all customer orders, and ACN's back office and call center services. For a monthly fee, the IBOs could create personalized distributor websites on ACN's official company website. Other tools and services, such as computers, telephones, training assistance, and marketing materials, were not provided by ACN as part of the initial license or monthly fee, but some could be purchased from ACN.

         The IBO contracts gave the IBOs freedom to determine the location of their operation and how many or few hours they worked. ACN did not provide office space for the IBOs and, in fact, did not operate an office in Oregon. The IBOs solicited orders and sold ACN's products at various locations in Oregon, including in coffee shops, hotel conference rooms, and the homes and offices of their customers.

         However, ACN limited the methods that the IBOs could use to solicit sales. The IBO contract prohibited "cold marketing" techniques, which ACN defined as "promotional activity that is geared toward random individuals who have no personal, business, social or acquaintance relationship(s) with the promoter." Examples included "mass advertising, purchased leads, trade show participation, door-to-door selling, telemarketing, pamphlet distribution, etc." In their contracts, IBOs also promised not to, "directly or indirectly, sell or solicit customers for products or services offered by ACN through any person or entity other than that specifically designated or approved in writing by ACN."

         ACN had IBO contracts with multiple individuals in Oregon during the period at issue. It is undisputed that those IBOs performed services for remuneration and that ACN paid the IBOs for their services.

         C. Procedural history

         After multiple IBOs made claims for unemployment insurance benefits in Oregon, the department investigated the claims and issued an initial determination that each IBO performed services for ACN as an employee and, consequently, that ACN was an employer subject to Oregon [362 Or. 831] Employment Department law. The ...

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