Case Title: Necanicum Investment Co. v. Employment Dept.

Citation: 

Docket Number: 

State: oregon

Court: Oregon Supreme Court

Date: 2008-07-24T00:00:00Z

Document:
FILED: July 24, 2008
IN THE SUPREME COURT OF THE STATE OF OREGON
NECANICUM INVESTMENT CO.,
Petitioner on Review,
v.
EMPLOYMENT DEPARTMENT,
Respondent on Review.
(Agency No. T70772;
CA A 131207; SC S055231)
En Banc
On review from the Court of Appeals.*
Argued and submitted March 7, 2008.
Joseph D. McDonald,
Smith, McDonald & Vaught, LLP, Portland, argued the cause and filed the
brief for petitioner on review.
Rolf C. Moan,
Assistant Attorney General, Salem, argued the cause for respondent on review. 
With him on the brief were Hardy Myers, Attorney General, and Mary H. Williams,
Solicitor General.
DE MUNIZ, C. J.
The decision of the
Court of Appeals is reversed.  The order of the Office of Administrative
Hearings is reversed, and the case is remanded to the Employment Department for
further proceedings.
*Appeal from Office of
Administrative Hearings for Employment Department. 214 Or App 385, 164 P3d 1197
(2007).
DEMUNIZ, C. J.
Petitioner Necanicum Investment
Company seeks review of a final order of  the Employment Department
(department), concluding that petitioner's payments to members of its board of
directors for directors' fees constitute wages that are subject to state
unemployment taxes.  The Court of Appeals affirmed the order, concluding that
corporate directors, by setting corporate policy and providing governance, were
in effect "employed" by petitioner and, thus, the payments constituted
wages subject to state unemployment taxes.  Necanicum Investment Co. v.
Employment Dept., 214 Or App 385, 164 P3d 1197 (2007).  Petitioner sought
review in this court, arguing that corporate directors are not "employees"
of a corporation, that fees paid to corporate directors therefore are not
wages, and that those fees thus are not subject to unemployment tax.  We
allowed review and now reverse the decision of the Court of Appeals and the department's
order, and remand the case to the Employment Department for further
proceedings.  
The facts are undisputed.  Petitioner
is a property management corporation headquartered in Portland.  It is governed
by a board of directors, which meets regularly, sets policy, and provides
governance and direction to the corporation.  In the third quarter of 2003,
petitioner paid $6,000 in directors' fees to each of its three board members. 
It did not report those payments as part of its payroll and it did not pay
unemployment tax on them.  In 2005, the department's tax section conducted an audit
of petitioner and determined that the $18,000 paid as directors' fees
constituted part of petitioner's 2003 taxable payroll.  The department issued a
notice of tax assessment for approximately $700.  
Petitioner sought review of the
unemployment tax assessment before an administrative law judge (ALJ) from the
Office of Administrative Hearings (OAH).  Petitioner contended that the fees
paid to its board of directors were not wages because directors control the
corporation and are not employees.  The ALJ determined that the directors' fees
met the statutory definitions of "wages" for "employment,"
set out below.  The ALJ also noted that petitioner could not point to a
specific exclusion in the statutes for directors' fees and therefore had failed
to carry its burden to prove that the assessment was incorrect. (1)  The ALJ issued an order
affirming the tax assessment. 
Petitioner appealed and, as noted,
the Court of Appeals affirmed.  That court agreed with the ALJ's application of
the statutory definitions of "wages" and "employment," Necanicum
Investment Co., 214 Or App at 387, and determined that the directors
engaged in "employment" for petitioner when they met to set policy
and provided governance and direction for the corporation.  According to the
court, because the legislature had not provided an explicit exception for such
employment, the directors' fees constituted wages subject to unemployment tax. 
Id. at 392.  The court therefore concluded that the ALJ did not err in affirming
the tax assessment.  Id. at 393.  
On review, petitioner asserts that
fees paid to directors of corporations are not "wages" under ORS
657.505, (2)
because "wages," as defined by ORS 657.105, (3) are remuneration for
"employment," and directors are not employees of the corporation. 
According to petitioner, directors are the alter ego of a corporation, are
elected by and serve at the pleasure of the shareholders, not the corporation,
and do not take direction from any officer or agent of the corporation. 
Directors, petitioner asserts, provide service to the corporation, not for
the corporation, and thus are not employees of the corporation engaged in
"employment."  
Both the ALJ and the Court of Appeals
apparently assumed that the directors were "employees" of the
corporation, and therefore focused their analysis only on whether the payments
to the directors were wages subject to unemployment taxation.   See, e.g.,
Necanicum Investment Co., 214 Or App at 390 (listing statutes excluding
certain services performed by "individuals who would not ordinarily be
regarded as 'employees of [an] employer''').  However, we agree with
petitioner's assertion that the first issue to be resolved in this case is
"who is the master of the directors, i.e., for whom are they in
service."  
We begin with the statutory
definitions of "employee," "employer," and "employment,"
that are part of the unemployment insurance and taxation scheme.  In that
regard, "employee" is defined in ORS 657.015(1), which provides, in
part: 
"As used in this chapter, unless the
context requires otherwise, 'employee' means any person, including aliens and
minors, employed for remuneration or under any contract of hire, written or
oral, express or implied, by an employer subject to this chapter in an
employment subject to this chapter."
"Employer," in turn, is defined in ORS 657.025(1),
which provides, in part: 
"As used in this chapter, unless the
context requires otherwise, 'employer' means any employing unit which employs
one or more individuals in an employment subject to this chapter[.]"
Finally, "employment" is defined in ORS 657.030,
which provides, in part:
"As used in this chapter, unless the
context requires otherwise, * * * 'employment' means service for an employer,
including service in interstate commerce, within or outside of the United
States, performed for remuneration or under any contract of hire, written or
oral, express or implied."  
We observe at the outset that the
legislature has included in each of the statutory definitions set out above the
phrase "unless the context requires otherwise."  That phrase means
that, in some cases, the circumstances of a case may require the application of
a modified definition of the pertinent statutory terms to carry out the
legislature's intent regarding the statutory scheme.  However, even when that phrase
is present in a statutory definition, we follow our standard interpretative
methodology -- beginning with the statutory text and context.  As part of that
textual analysis, we consider whether, in light of the factual context and the
entire statutory scheme, the use of a particular statutory definition would be
inappropriate because the result would conflict with one or more aspects of the
legislature's intent.  See Astleford v. SAIF, 319 Or 225, 233, 874 P2
1329 (1994) (legislature's inclusion of phrase "except where the context otherwise
requires" means that a given statutory definition does not apply when the
context -- including the structure and purpose of the statutory scheme as a
whole -- demonstrates that the use of that given definition would be
inappropriate, because the result of such use would conflict with one or more
aspects of the structure or purpose of the statutory scheme).  Accordingly, if
the directors fall within the definition of "employee," set forth in
ORS 657.015, in that they are employed for remuneration by the corporation,
the payments are subject to unemployment tax, "unless the context requires
otherwise."  
Because petitioner is an Oregon
corporation, we first examine the statutes regulating corporations and
directors to determine the legislature's definition of the nature of the
relationship between directors and a corporation.  Every registered corporation
in Oregon is required to have a board of directors.  ORS 60.301(1).  ORS
60.301(2) provides, in part, that "[a]ll corporate powers shall be
exercised by or under the authority of, and the business and affairs of the
corporation managed under the direction of, the board of directors[.]" 
Directors are elected by the corporation's shareholders, ORS 60.307, and
shareholders may remove a director with or without cause unless the articles of
incorporation provide otherwise.  ORS 60.324.  A judicial proceeding in a
circuit court is the only other method by which a  director may be removed.  ORS
60.327.  And, unless the articles of incorporation or bylaws of the corporation
provide otherwise, the board of directors may fix the compensation of directors. 
ORS 60.334.  Significantly, ORS 60.001(13) provides that an
"employee" of a corporation "includes an officer but not a
director, [but that a] director may accept duties that make the director also
an employee."  
The legislative recognition in the
corporation statutes that a director is not an employee is also present in the
unemployment insurance and taxation statutes.  For example, ORS 657.044
provides, in part:
"(1)  As used in this chapter, 'employment'
does not include service performed for:
"(a)  A corporation by corporate officers
who are directors of the corporation, who have a substantial ownership interest
in the corporation and who are members of the same family if the corporation
elects not to provide coverage for those individuals."  
That statute establishes an unemployment tax exemption for
service performed by certain corporate officers who are also directors.  As
written, the statute thus begins with the assumption that the remuneration of
directors qua directors is not subject to taxation, and adds to that
exemption a further exemption respecting any other (nondirectoral) service
performed by a director, if the corporation so elects. (4)
Informed by the legislature's
description of the relationship between directors and corporations, we conclude
that on the record before us there is no employer-employee relationship between
a corporation and its directors when the directors are performing the duties
imposed on them by statute.  Directors exercise "all corporate
powers" and direct the management of a corporation's business and affairs,
but directors do not take direction from any officer or agent of the
corporation.  Directors cannot be hired or fired by the corporation, but are
elected and may be removed by the shareholders of a corporation.  A corporation
may decide not to provide remuneration for its directors at all; when it does
provide such remuneration, that action by itself does not make a director an
"employee" for purposes of the unemployment tax.  To be sure, a
director may also be an employee of a corporation if the director is hired to
perform other services, however, a director acting only in that capacity is not
an employee.
We hold that the legislature did not
intend to include corporate directors, serving solely as directors, within the
statutory definition of an "employee" of a corporation for purposes
of the unemployment tax, because directors are not "employed by" the
corporation in the same sense as other persons who perform "service for an
employer * * * for remuneration."  ORS 657.030.  
Because petitioner's directors were
not acting as employees in addition to their roles as directors, the ALJ and
the Court of Appeals erred when they found that the fees that petitioner paid
to the directors were wages subject to the unemployment tax. (5)
The decision of the Court of Appeals
is reversed.  The order of the Office of Administrative Hearings is reversed,
and the case is remanded to the Employment Department for further proceedings.
1. ORS 657.683(4) provides, in part: 
"At any hearing held as provided in ORS 657.480,
657.679, 657.681 or 657.682, the determination or assessment of the director or
authorized representative shall be prima facie correct and the burden shall be
upon the protesting employing unit to prove that it is incorrect."
2. ORS 657.505(2) provides: 
"An employer shall be liable for taxes on
all wages paid for services performed on or after the first day of a calendar
quarter."
3. ORS
657.105(1) provides: 
"As used in this chapter, unless the
context requires otherwise, and subject to ORS 657.115 to 657.140, 'wages'
means all remuneration for employment, including the cash value, as determined
by the Director of the Employment Department under the regulations of the
director, of all remuneration paid in any medium other than cash."
4. We also note that ORS 657.030, which defines "employment"
as set out above, also provides, in part:
"(2)  Notwithstanding any other provisions
of this chapter, 'employment' shall include service:
"(a)  Which is subject to the tax imposed
by the Federal Unemployment Tax Act[.]"
In turn, the Federal Unemployment Tax Act (FUTA) defines
"employee," in part, as
"(1) any officer of a corporation; or
"(2) any individual who, under the usual
common law rules applicable in determining the employer-employee relationship,
has the status of an employee; or 
"(3) any individual (other than an
individual who is an employee under paragraph (1) or (2)) who performs services
for remuneration for any person[.]"
IRC § 3121(d) (2007).  A treasury regulation written in
accordance with that rule provides that 
"Generally, an officer of a corporation is
an employee of the corporation. * * * A director of a corporation in his capacity
as such is not an employee of the corporation."
Treas Reg § 31.3121(d)-1(b) (1980).  
5. Raymond
Dodge was a corporate officer as well as a director for petitioner in 2003. 
There is no evidence in the record that the director's fee paid to Dodge was
paid for services performed in his capacity as corporate officer rather than
director, and the department made no argument that the fee paid to Dodge should
be treated differently than the fees paid to the other directors.