Title: Milano's, Inc. v. Dep't of Labor

State: kansas

Issuer: Kansas Supreme Court

Document:

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IN THE SUPREME COURT OF THE STATE OF KANSAS 
 
No. 102,114 
 
MILANO'S, INC., 
Appellant, 
 
v. 
 
KANSAS DEPARTMENT OF LABOR, CONTRIBUTIONS UNIT, 
Appellee. 
 
 
SYLLABUS BY THE COURT 
 
1. 
Interpretation of a statute raises a question of law reviewable de novo on appeal. 
 
2. 
 
Exotic dancers subject to a right of control by the owner of the club where they 
perform are employees under the "usual common law rules" incorporated into K.S.A. 44-
703(i)(1)(B) of the Kansas Employment Security Law.  
 
Review of the judgment of the Court of Appeals in 43 Kan. App. 2d 779, 231 P.3d 1072 (2010). 
Appeal from Shawnee District Court; CHARLES E. ANDREWS, JR., judge. Opinion filed February 1, 2013. 
Judgment of the Court of Appeals affirming the district court is affirmed. Judgment of the district court is 
affirmed.    
 
Michael W. Merriam, of Topeka, argued the cause and was on the brief for appellant.  
 
Brett A. Flachsbarth, of Kansas Department of Labor, argued the cause, and Darren E. Root and 
A.J. Kotich, of the same agency, were with him on the brief for appellee.   
 
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The opinion of the court was delivered by 
 
BEIER, J.:  Milano's, Inc., appeals the Kansas Department of Labor's determination 
that its exotic dancers are employees rather than independent contractors for purposes of 
unemployment insurance.   
 
This case, arising on petition for review, involves the relationship between 
provisions in the Kansas Employment Security Law (KESL), K.S.A. 44-701 et seq., as 
they existed before amendments that took effect in 2011 on the one hand and common-
law rules used to determine the existence of employee status on the other. In addition, 
Milano's argues that the Department's determination was not supported by substantial 
competent evidence and that the Court of Appeals erred by concluding that Milano's had 
abandoned arguments on appeal. 
 
FACTUAL AND PROCEDURAL HISTORY 
 
Milano's purchased Club Orleans in July 2002. After contacting the Department of 
Revenue, Milano's President John Samples began treating the club's dancers as 
independent contractors rather than employees in 2004. From that point forward, the 
dancers were no longer paid a nominal weekly wage, instead earning only tips paid by 
customers of Club Orleans.  
 
 
In 2005, in response to an unemployment claim filed by a Club Orleans dancer, 
the Unemployment Tax Contributions Unit of the Kansas Department of Labor 
investigated. The Unit auditor assigned to the investigation, Mike Mahan, determined that 
the dancers were employees under K.S.A. 44-703(i)(3)(D).  
 
Milano's challenged Mahan's determination, and a Department of Labor hearing 
officer heard testimony from Samples; Club Orleans manager Becky Kerley; dancers 
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Robin Royal and Julane Hiebert; Mahan; and three other Department employees, tax 
auditor Kelly Brader, supervisor E.W. "Skip" Sayler, and delinquent account supervisor 
Roc Biffinger. 
 
The hearing officer determined that the dancers' tips qualified as wages under 
K.S.A. 44-703(o). Further, because the dancers received wages, they were employees 
under K.S.A. 44-703(i)(3)(D), unless they fell within the exception outlined in K.S.A. 44-
703(i)(3)(D)(i) and (ii). 
 
The hearing officer cited four factual findings to support his conclusion that 
Milano's controlled the activities of the dancers:  First, the dancers were subject to house 
rules that prohibited illicit or illegal conduct and regulated interaction among the dancers 
and between the dancers and customers. Second, Kerley and Samples had testified that a 
dancer's violation of the rules meant Milano's could fine or terminate the dancer. Third, 
the rules set minimum tips for various types of dances. And, fourth, Milano's enforced the 
house rules on minimum tips. The hearing officer acknowledged contrary evidence from 
Milano's, including the dancers' ability to schedule their own shifts.   
 
 
The hearing officer noted that the parties had no dispute about the fact that dancers 
performed all of their services at Club Orleans. The officer concluded that, despite 
Milano's' "creative assertion that a gentlemen's club is merely a place with good 
atmosphere, good lighting and good food," the facts reflected that the atmosphere of Club 
Orleans was largely derived from the presence of its semi-nude dancers.  
 
 
Because the officer determined that the dancers received wages for services as 
defined by K.S.A. 44-703(i)(3)(D), and that K.S.A. 44-703(i)(3)(D)(i) and (ii) did not 
apply, he concluded that the dancers were employees under the KESL. He therefore 
ordered prospective relief, requiring Milano's to develop and use an internal procedure 
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for reporting its dancers' tips and to further report the tips to the Department of Labor for 
purposes of paying its unemployment insurance contributions.   
 
Milano's filed a petition for judicial review, claiming that the hearing officer made 
findings of fact not supported by substantial competent evidence and disregarded 
undisputed facts, and that he incorrectly interpreted K.S.A. 44-703(i)(3)(D).   
 
The district court judge agreed with the findings and conclusions of the hearing 
officer. The judge concluded that tips were wages under the plain language of K.S.A. 44-
703(o). In response to Milano's' argument that a contract of hire must exist before the 
dancers could be classified as employees, the judge concluded that such a contract existed 
because the dancers had to complete an application in which they agreed to abide by the 
house rules. The judge also ruled that Milano's maintained a right to control the dancers 
and that their services were provided in the ordinary course of Milano's business—noting 
that it provided a place to perform, that the dancers' customers were customers of Club 
Orleans from whom it received a cover charge, that Milano's instituted a minimum tip 
policy without input from the dancers, that the dancers were required to accept drinks 
from customers, and that Milano's provided some supplies to the dancers. The judge also 
observed that one of the main purposes of Club Orleans was to entertain customers with 
the dancers' performances. The club's advertisements included billboards and internet 
activity incorporating images of the dancers. The club also provided a stage, music, and a 
tanning booth for the dancers.   
 
Milano's appealed to the Court of Appeals, which affirmed the decision of the 
district judge. Milano's, Inc. v. Kansas Dept. of Labor, 43 Kan. App. 2d 779, 231 P.3d 
1072 (2010). The appellate panel interpreted the plain language of K.S.A. 44-703(o) to 
cover the dancers' tips as wages. 43 Kan. App. 2d at 784-85. Further, under the plain 
language of K.S.A. 44-703(i)(3)(D), the dancers qualified as employees who received 
wages, and Milano's had been unable to meet its burden to demonstrate that it did not 
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maintain a right of control over the dancers or that their services were performed outside 
its ordinary course of business. 43 Kan. App. 2d at 789.  
 
We granted Milano's petition for review.   
 
DISCUSSION 
 
Actions of the Department of Labor are reviewable under the Kansas Act for 
Judicial Review and Civil Enforcement of Agency Actions (KJRA). See K.S.A. 44-
709(i). Milano's, as the party arguing that the agency's action is invalid, bears the burden 
of proving the invalidity. See K.S.A. 77-621(a)(1); Kansas Dept. of Revenue v. Powell, 
290 Kan. 564, 567, 232 P.3d 856 (2010). 
 
K.S.A. 77-621(c) lists eight categories of cases in which this court may grant relief 
from an agency decision. Milano's appears to rely on two of them:  subsection (c)(4), 
which applies if the Department of Labor abused its discretion by erroneously 
interpreting or applying a statute, in this case, K.S.A. 44-703(i)(1)(B), K.S.A. 44-
703(i)(3)(D), and K.S.A. 44-703(o); and subsection (c)(7), which applies if the 
Department of Labor based its order on a determination of fact not supported by evidence 
in the record.  
 
 
Interpretation of a statute raises a question of law reviewable de novo on appeal. 
See Board of Sumner County Comm'rs v. Bremby, 286 Kan. 745, 754, 189 P.3d 494 
(2008); see also Powell, 290 Kan. at 567 (court no longer gives deference to agency 
interpretation of statute).  
 
"When courts are called upon to interpret statutes, the fundamental rule 
governing our interpretation is that 'the intent of the legislature governs if that intent can 
be ascertained. The legislature is presumed to have expressed its intent through the 
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language of the statutory scheme it enacted.' State ex rel. Stovall v. Meneley, 271 Kan. 
355, 378, 22 P.3d 124 (2001). For this reason, when the language of a statute is plain and 
unambiguous, courts 'need not resort to statutory construction.' In re K.M.H., 285 Kan. 
53, 79, 169 P.3d 1025 (2007). Instead, '[w]hen the language is plain and unambiguous, an 
appellate court is bound to implement the expressed intent.' State v. Manbeck, 277 Kan. 
224, Syl. ¶ 3, 83 P.3d 190 (2004). 
 
"Where a statute's language is subject to multiple interpretations, however, a 
reviewing court 'may look to the historical background of the enactment, the 
circumstances attending its passage, the purpose to be accomplished, and the effect the 
statute may have under the various constructions suggested. [Citation omitted.]' Robinett 
v. The Haskell Co., 270 Kan. 95, 100-01, 12 P.3d 411 (2000). Generally, courts should 
construe statutes to avoid unreasonable results and should presume that the legislature 
does not intend to enact useless or meaningless legislation. Hawley v. Kansas Dept. of 
Agriculture, 281 Kan. 603, 631, 132 P.3d 870 (2006). We ascertain the legislature's intent 
behind a particular statutory provision 'from a general consideration of the entire act. 
Effect must be given, if possible, to the entire act and every part thereof. To this end, it is 
the duty of the court, as far as practicable, to reconcile the different provisions so as to 
make them consistent, harmonious, and sensible. [Citation omitted.]' In re Marriage of 
Ross, 245 Kan. 591, 594, 783 P.2d 331 (1989); see also State ex rel. Morrison v. Oshman 
Sporting Goods Co. Kansas, 275 Kan. 763, Syl. ¶ 2, 69 P.3d 1087 (2003). Thus, in cases 
that require statutory construction, 'courts are not permitted to consider only a certain 
isolated part or parts of an act but are required to consider and construe together all parts 
thereof in pari materia.' Kansas Commission on Civil Rights v. Howard, 218 Kan. 248, 
Syl. ¶ 2, 544 P.2d 791 (1975)." Bremby, 286 Kan. at 754-55. 
 
As mentioned, the pertinent KESL subsections advanced by the parties for our 
consideration in this case are K.S.A. 44-703(i)(1)(B), K.S.A. 44-703(i)(3)(D), and K.S.A. 
44-703(o). We must decide what they mean and how they fit together.  
 
The first two contain definitions of "employment," as that term is used in the 
KESL. K.S.A. 44-703(i)(1)(B) provides: 
 
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"Employment" means:   
 
(1) Subject to the other provisions of this subsection, service, including service in 
interstate commerce, performed by . . .  
. . . .  
 
(B) any individual who, under the usual common law rules applicable in 
determining the employer-employee relationship, has the status of an employee." 
(Emphasis added.) 
 
K.S.A. 44-703(i)(3)(D) provides: 
 
"The term 'employment' shall also include:  
 
. . . .  
 
(D) Services performed by an individual for wages or under any contract of hire 
shall be deemed to be employment subject to this act unless and until it is shown 
to the satisfaction of the secretary that:  (i) Such individual has been and will 
continue to be free from control or direction over the performance of such 
services, both under the individual's contract of hire and in fact; and (ii) such 
service is either outside the usual course of 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." (Emphasis added.)  
 
K.S.A. 44-703(o) defines "wages" and provides: 
 
"Wages" means all compensation for services, including commissions, bonuses, 
back pay and the cash value of all remuneration, including benefits, paid in any medium 
other than cash. . . . Effective January 1, 1986, gratuities, including tips received from 
persons other than the employing unit, shall be considered wages when reported in 
writing to the employer by the employee. Employees must furnish a written statement to 
the employer, reporting all tips received if they total $20 or more for a calendar month 
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whether the tips are received directly from a person other than the employer or are paid 
over to the employee by the employer. This includes amounts designated as tips by a 
customer who uses a credit card to pay the bill." (Emphasis added.) 
 
The plain language of K.S.A. 44-703(i)(1)(B) states that employment is service 
provided by a person with the status of an employee as determined under common-law 
rules. See Wallis v. Secretary of Kans. Dept. of Human Resources, 236 Kan. 97, 102, 689 
P.2d 787 (1984). And past caselaw from this court, although mentioning K.S.A. 44-
703(i)(3)(D), has focused primarily on evaluating common-law factors indicating 
employment under K.S.A. 44-703(i)(1)(B), particularly stressing the importance of the 
purported employer's right of control over the employee and his or her work. See 
Hartford Underwriters Ins. Co. v. Kansas Dept. of Human Resources, 272 Kan. 265, 272, 
275-76, 32 P.3d 1146 (2001) (personal care attendants for disabled person employees 
rather than independent contractors; disabled person controlled means, manner of job 
performance, including hiring, training, supervision; disabled person retained right to 
terminate); Wallis, 236 Kan. at 102-03 (citing Jones v. City of Dodge City, 194 Kan. 777, 
779-80, 402 P.2d 108 [1965]) (dealers of vacuum cleaners employees of vacuum cleaner 
company; primary test of existence of employer-employee relationship whether employer 
has right of control, supervision over work of alleged employee; "It is not the actual 
interference or exercise or the control by the employer but the existence of the right or 
authority to interfere or control."); Crawford v. Dept. of Human Resources, 17 Kan. App. 
2d 707, 709-10, 845 P.2d 703 (1989), rev. denied 246 Kan. 766 (1990) (product 
demonstrators not employees; under Wallis, right to control, direct method, manner of 
work most significant; right to discharge, payment by hour rather than job, furnishing of 
equipment also factors).   
 
If K.S.A. 44-703(i)(1)(B) does not settle the question in favor of a conclusion that 
employment exists, the plain language of K.S.A. 44-703(i)(3)(D) provides that 
employment "also" exists when a person performs services for wages "or" under "any 
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contract of hire," unless a specified exception is demonstrated to exist to the satisfaction 
of the Secretary of Labor. Either the performance of services for wages or a contract of 
hire is sufficient; both need not be present in order for this auxiliary definition of 
employment to be satisfied, in essence giving rise to a presumption that may be rebutted 
by the specified exception. The exception has two requirements:  (1) The person must be 
free from any actual or contractual control by the purported employer over the person's 
performance of the subject services, and (2) the services must be outside the usual course 
of the purported employer's business or outside of the purported employer's places of 
business.   
 
If K.S.A. 44-703(i)(3)(D)'s auxiliary definition of employment comes into play, 
and there is no contract of hire, then the K.S.A. 44-703(o) definition of "wages" must be 
considered. That definition begins broadly:  Wages include "all compensation for 
services." But gratuities such as tips must be reported in order to give an employee any 
practical remedy:  "[T]ips received from persons other than the employing unit [] shall be 
considered wages when reported in writing to the employer by the employee." K.S.A. 44-
703(o).  
 
In short, if the hearing officer in this case had determined that the dancers at Club 
Orleans were employees of Milano's under the common-law rules expressly incorporated 
into K.S.A. 44-703(i)(1)(B), then there would have been no need to examine whether the 
auxiliary definition of employment in K.S.A. 44-703(i)(3)(D) applied. Likewise, the 
hearing officer would not have needed to decide whether the tips the dancer received 
from patrons of the club qualified as wages under K.S.A. 44-703(o).  
 
But this is not the route the hearing officer and, later, our two lower courts, took. 
Instead, they focused on the auxiliary definition of employment in K.S.A. 44-
703(i)(3)(D) and the existence or nonexistence of payment of wages for the dancers' 
services under K.S.A. 44-703(o).   
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We regard this repeated pattern of analysis as unwarranted under the plain 
language of the KESL provisions outlined above. The finer points of what are now 
historical versions of K.S.A. 703(i)(3)(D) and K.S.A. 44-703(o) need not have been 
examined or applied, because the determinative question in this case can be answered 
more simply and directly by K.S.A. 44-703(i)(1)(B). If the dancers at Club Orleans had 
the status of employees under the "usual common law rules applicable in determining the 
employer-employee relationship," as we have explained those rules in our caselaw, then 
they were employees under the KESL. As stated, the critical common-law factor is the 
employer's right of control over the employee and his or her work. 
 
Ample substantial competent evidence in the record before us, as echoed in the 
factual findings below, demonstrates that Milano's possessed such a right of control over 
the dancers at Club Orleans. Most telling, the house set various rules, and dancers' 
violations of those rules were punishable by fines and termination.  
 
Having reached this conclusion, we need not take up the propriety of the Court of 
Appeals panel's observation that Milano's had abandoned certain arguments by failure to 
brief them on appeal. Even if the panel erred in this respect, it makes no difference in the 
outcome. We have fully considered all of Milano's arguments on all issues.  
 
Although we have traveled to the result by a route different from that followed 
below, the judgments of the hearing officer and district court are affirmed. The decision 
of the Court of Appeals is affirmed.