B.C.D. 04-23

APR 2 1 2004

Employer Status Determination

Rail Safety & Training Resources Inc.

This is the decision of the Railroad Retirement Board regarding the

status of Rail Safety & Training Resources Inc. as an employer under

the Railroad Retirement Act (RRA) and Railroad Unemployment

Insurance Act (RUIA). The following information was provided by 

Mr. James L. Hill, President of Rail Safety.

Rail Safety was incorporated March 24, 1998, and engages in the

provision of training required for operating employees of railroads.

Such training includes skills involving car mechanical operating rules,

air brake and train handling rules, "locomotive and freight car

mechanical," and hazardous material handling. Rail Safety has four

employees. Rail Safety provides training to 23 companies, a majority

of which are covered employers under the Acts. Over 78 percent of

its revenue is derived from services provided to Canadian National

Railways and Illinois Central Railway Company, both covered

employers under the Acts (B.A. numbers 1103 and 1516,

respectively).

Classes provided by Rail Safety last from one day to five weeks.

Although all training is performed on customer property, there is no

evidence that any Rail Safety employees are directed or supervised

by employees of a railroad. Other services provided by Rail Safety

include assisting in developing rule books, serving as expert witnesses

in litigation, and development and maintenance of a database

program created to satisfy Federal record keeping requirements.

Rail Safety is a privately held corporation owned by three former 

railroad employees: James Hill, Timothy Cusack, and Tony Crabb.

Rail Safety is not affiliated with a railroad.

Section 1 (a)(1) of the Railroad Retirement Act (45 U.S.C. § 231 (a)(1)),

insofar as relevant here, defines a covered employer as:
(i) any carrier by railroad subject to the jurisdiction of

the Surface Transportation Board under Part A of

subtitle IV of title 49, United States Code;

(ii) any company which is directly or indirectly

owned or controlled by, or under common control

with, one or more employers as defined in

paragraph (i) of this subdivision, and which operates

any equipment or facility or performs any service

(except trucking service, casual service, and the

casual operation of equipment or facilities) in

connection with the transportation of passengers or

property by railroad * * *.

Sections 1 (a) and 1 (b) of the Railroad Unemployment Insurance Act

(45 U.S.C. §§ 351 (a) and (b)) contain substantially similar definitions,

as does section 3231 of the Railroad Retirement Tax Act (26 U.S.C.

§ 3231).

Rail Safety clearly is not a carrier by rail. Further, a majority of the

Board finds that the available evidence indicates that Rail Safety is

not under common ownership with any rail carrier nor is it controlled

by officers or directors who control a railroad. Therefore, a majority 

of the Board finds that Rail Safety is not a covered employer under

the Acts.

This conclusion leaves open, however, the question whether the

persons who perform work for Rail Safefy under its arrangements with

rail carriers should be considered to be employees of those railroads

rather than of Rail Safefy. Section 1 (b) of the Railroad Retirement

Act and section 1 (d) of the Railroad Unemployment Insurance Act 

both define a covered employee as an individual in the service of

an employer for compensation. Section 1 (d)(1) of the RRA further 

defines an individual as “in the service of an employer" when:
(i) (A) he is subject to the continuing authority of the

employer to supervise and direct the manner of rendition 

of his service, or (B) he is rendering professional or

technical services and is integrated into the staff of fhe

employer, or (C) he is rendering, on the property used in

the employer's operations, personal services the rendition 

of which is integrated into the employer's operations; and

(ii) he renders such service for compensation * * *.

Section 1 (e) of the RUIA contains a definition of service substantially

identical to the above, as do sections 3231 (b) and 3231 (d) of the

RRTA (26 U.S.C. §§ 3231 (b) and (d)).

The focus of fhe test under paragraph (A) is whether the individual 

performing the service is subject to the control of the servicerecipient not only with respect to the outcome of his work but also

with respect to the way he performs such work.

The majority of the Board, Labor Member dissenting, finds there is no

evidence showing that Rail Safety’s work is performed under the

direction or control of the employees of any of its customers;

accordingly, the control test in paragraph (A) is not met. Moreover,

under an Eighth Circuit decision consistently followed by the Board, 

the tests set forth under paragraphs (B) and (C) do not apply to 

employees of independent contractors performing services for a

railroad where such contractors are engaged in an independent

trade or business. See Kelm v. Chicago, St. Paul, Minneapolis and

Omaha Railway Company, 206 F. 2d 831 (8th Cir. 1953).

Thus, under Kelm, in the opinion of the majority of the Board, the

question remaining to be answered is whether Rail Safety is an

independent contractor. Courts have faced similar considerations

when determining the independence of a contractor for purposes of

liability of a company to withhold income taxes under the Internal
Revenue Code (26 U.S.C. § 3401 (c)). In these cases, the courts have

noted such factors as whether the contractor has a significant

investment in facilities and whether the contractor has any

opportunity for profit or loss; e.a., Aparacor, Inc, v. United States. 556

F. 2d 1004 (Ct. Cl. 1977), at 1012; and whether the contractor

engages in a recognized trade; e.a., Laniaan Storage & Van Co. v.

United States, 389 F. 2d 337 (6th Cir. 1968) at 341. It is apparent that

Rail Safety is in the business of providing services to many customers.

The evidence of record indicates that Rail Safety is engaged in the

recognized trade or business of training employees to meet Federal

requirements. Accordingly, it is the opinion of fhe Board that Rail

Safety is an independent business.

Because Rail Safety engages in an independent business, Kelm

would prevent applying paragraphs (B) and (C) of the definition of 

covered employee to this case. Accordingly, it is the determination

of a majority of the Board that service performed by employees of 

Rail Safety is not covered employee service under the Acts.

Michael S. Schwartz

V. M. Speakman, Jr. (Dissenting

opinion attached)
DISSENTING OPINION

OF V. M. SPEARMAN, JR.

I would find that Rail Safety & Training Resources, Inc. is an employer

covered by the Railroad Retirement and Railroad Unemployment

Insurance Acts as a company under common control with a railroad

employer which performs a service in connection with the transportation of

property by rail, effective January 1, 2001, the effective date of its current

contract with Canadian National Railways.

As the Majority notes, Rail Safety is not affiliated through equity ownership

with any rail carrier. Rail Safety’s principal business is training railroad

locomotive engineers, brakemen and conductors. Rail Safety also develops

rule books, maintains a database program for Federal record keeping

requirements, and provides expert witnesses in litigation. Almost 92

percent of Rail Safety’s revenue derives from rail carriers and over 78

percent of its revenue is derived from just one contract with Canadian

National Railways and Illinois Central Railway Company1. Rail Safety 

earns the remaining 8.1 percent revenues from non-carrier operations such 

as Nebraska Public Power, Marine Corps Chilian Human Resources, and

In-Terminal Sendees.

Rail Safety itself has four employees. One employee, Director of 

Administration, handles the business’ paperwork, wiiile the remaining

three employees are training instructors. Classes for clients last from one

day to five weeks. Students are taught requirements of mechanical

operating, air brake and train handling rules ofthe Federal Railway

Administration, and hazardous material handling. All training is

performed on customer property.

11llinois Central Railway became a wholly owned subsidiary of Canadian

National Railways in 1998. Merqent Transportation Manual. 2003 Ed., at

102. Both are covered employers under the Acts (B.A. numbers 1103 and

1516, respectively).
Rail Safety has provided copies of the current contract effective January

2001 with Canadian National and subsidiaries, as well as its prior contract

with Illinois Central, effective April 1999. Paragraph 4 of the 2001 contract

provides that Rail Safety is to invoice Canadian National for its services

according to the fee schedule (not provided). Appendix A to the 2001 

contract at section 6 also allows out of pocket expenses of Rail Safety

employees, and guarantees Canadian National will use a minimum of 

$325,000 of services under the contract in 2001 and $350,000 in 2002.

Section 2 ofthe Appendix specifies that Rail Safety7 shall provide Canadian

National with:

“qualified professionals to train persons designated by CN for the purpose

of providing those training services specified in Appendix A-i, * * * and to

provide certain additional database or rulebook maintenance services, upon

request * * * . CN shall be responsible for providing adequate classroom

facilities throughout the term hereof.”

Paragraph 9 requires that Rail Safety “shall have in its employ a sufficient

number of capable employees” to provide the contract sendees promptly

and at all times specified for performance. Paragraph 10 requires Rail

Safety to comply with employment related laws concerning social security

and unemployment insurance, immigrant status, and OSHA rules,

including required filings and record retention. Paragraph 12 not only gives

CN a proprietary right in any materials produced for CN during the

agreement, but further requires Rail Safety to assign to CN the copyright for 

any materials prepared for CN winch wrould not otherwise be CN property

under the United States Copyright Act. Paragraph^ ofthe contract gives

CN the right to terminate the agreement “for any reason whatsoever” with

60 days notice, wiiile paragraph 14 allows Rail Safety to cancel only for

non-compliance with contract terms.

Although coverage under the Acts administered by the Board is not elective, 

w7e note that in a letter dated August 11, 2003, containing information

relating to its business, Rail Safety7 stated that “We feel that w7e should be
covered [under the Acts] because 100% of our business is railroad related

and more than 90% of our business is for railroads covered under the

Railroad Retirement Act.”

Section 1(a)(1) of the RRA (45 U.S.C. § 231(a)(1)), insofar as relevant here,

defines a covered employer as:

(i) any carrier by railroad subject to the jurisdiction of the

Surface Transportation Board under Part A of subtitle IV of title 

49, United States Code;

(ii) any company which is directly or indirectly owned or 

controlled by, or under common control with, one or more

employers as defined in paragraph (i) ofthis subdivision, and

which operates any equipment or facility or performs any

service (except trucking service, casual service, and the casual

operation of equipment or facilities) in connection with the

transportation of passengers or property by railroad * * *.

Sections i(a) and i(b) of the RUIA (45 U.S.C. §§ 351(a) and (b)) contain

substantially similar definitions, as does section 3231 ofthe Railroad

Retirement Tax Act (RRTA) (26 U.S.C. § 3231).

Rail Safety owns or operates (directly or indirectly through agreement) no

line of railroad; it does not hold itself out as a common carrier; and does 

not provide transportation using rails, rail cars, locomotives or other

railroad instrumentalities. Rail Safety thus is clearly not a carrier by rail

within the meaning of RRA section i(a)(i)(i) quoted above.

To meet the second paragraph ofsection 1(a)(1), a company must both be

under “common control” with a rail carrier, and must perform “service in

connection with” railroad transportation. The language of section

1(a)(1)(h) of the RRA of 1974 is essentially unchanged from that ofthe

predecessor Railroad Retirement Act of 1937. Compare sections i(a), i(m)

Public No.162, 75th Congress (50 Stat. 307, 309) and section 1(a)(1)(h),

Public Law 93-445, (88 Stat. 1305).
r

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Courts have found the control requirement under the 1937 and 1974 Acts to

be met where the stock of the controlled company is owned by a parent

corporation, Utah Copper Co. v. Railroad Retirement Board. 129 F. 2d 358

(10th Cir. 1942); Railroad Concrete Crosstie Corp. v. Railroad Retirement

Board, 709 F. 2d 1404 (11th Cir. 1983); Southern Development Co. v.

Railroad Retirement Board, 243 F. 2d 351 (8th Cir. 1957); by an individual,

Livingston Rebuild Center v. Railroad Retirement Board. 970 F. 2d 295 (7th

Cir. 1992); and by a voting trust, Universal Carloading & Distributing Co. v.

Railroad Retirement Board. 172 F. 2d 22 (D.C. Cir. 1948). Regulations of

the Board at 20 CFR 202.4 further define control by a rail carrier as 

follows:

“A company or person is controlled by one or more carriers, whenever there

exists in one or more such carriers the right or power by any means,

method or circumstance, irrespective ofstock ownership to direct, either

directly or indirectly, the policies and business ofsuch a company or person

and in any case in which a carrier is in fact exercising direction of the

policies and business ofsuch a company or person.”

Regulations ofthe Internal Revenue Sendee promulgated under the RRTA

contain a similar definition of control at 26 CFR 3231(a)-!.2

Section 202.4 ofthe Board’s regulations has remained unchanged since

promulgation under the Railroad Retirement Act of 1937, almost 65 years

ago. See 4 Fed. Reg. 1477, 1478, (April 7,1939). Contemporaneous

administrative rulings show that at the time of promulgation, the Board

intended that section 202.4 encompass not only control of a business

2 That regulation provides that “* * * the term ‘controlled' includes direct or

indirect control, whether legally enforceable and however exercisable or

exercised. The control may be by means of stock ownership, or by

agreements, licenses, or any other devices which insure that the operation

of the company is in the interest of one or more carriers. It is the reality of

control, however, which is decisive, not its form nor the mode of its

exercise.”
through equity ownership, either as proprietor or stockholder, but also “de 

facto” control exercised by overweening power ofthe rail carrier through

contractual provisions over the business decisions of the company. A case 

in point is found in the collective Board decisions concerning the Fred

Flarvey Company. See Legal Opinion L-36-134.25 (Fred Harvey an 

employer under the Railroad Retirement Act of 1935); and Board Order 39­

513, Fred Harvey (adopting Legal Opinion L-39-502, determining coverage 

under the 1937 RRA).

As recounted in those decisions, the Fred Harvey company originated as an

unincorporated business conducted by the company’s founder, Fred

Harvey. After Mr. Harvey’s death, the business wras incorporated as a

closely held corporation owned by his family and associates. No evidence

showed that these individuals also owned any rail carrier, but virtually the

entire business of Fred Harvey consisted of running restaurants and dining

car service for the Atchison, Topeka and Santa Fe Railw-ay. The contract

between Fred Harvey and Santa Fe prohibited Fred Harvey from engaging

in any additional business, or conducting its business other than on Santa

Fe property without the Railway’s approval. Santa Fe prescribed Fred

Harvey’s accounting methods and could inspect its books at any time. Any

Fred Harvey employee had to be fired at Santa Fe’s request. Santa Fe could 

terminate the contract whenever dissatisfied, and then buy Fred Harvey’s

equipment. Santa Fe guaranteed any Fred Harvey operating loss, and

essentially claimed a one-third share of any profit. Further, the president

of Fred Harvey testified to the Interstate Commerce Commission that the

contract made his company “completely subservient to” Santa Fe. See

Atchison. Topeka and Santa Fe Railway Company et ah. 127 I.C.C. 1 (1927),

at 48. The General Counsel and the Board found on these facts that Santa

Fe exercised de facto control over Fred Harvey to an extent that placed Fred

Harvey under common control with the Santa Fe for purposes ofsection

202.4 ofthe regulations.

The de facto control of a business as a basis for determining that a company

performing a service in connection with railroad transportation is under

common control with a rail carrier has been applied sparingly by this

agency in other instances, and has been considered by the courts only once. 

Martin v. Federal Security Agency, 174 F. 2d 364, (3rd Cir. 1949).
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Martin indirectly concerned Legal Opinion L- 44-297, Western Stevedoring

Company. Western operated grain elevators under contract with the

Pennsylvania Railroad. The grain elevators were owned by Pennsylvania

RR and located only in Pennsylvania terminals. Western also used only 

equipment provided by the railroad. Western engaged in no other

business, and derived all its revenue from that single customer. In accord

with Board Order 39-513, the General Counsel found under these facts that

the Pennsylvania exercised de facto control over Western, rendering it

controlled by the railroad. However, w-hen Joseph Martin, a Western

employee, died leaving his widow and children unable to receive monthly

survivor benefits because the 1937 RRA did not provide such benefits at the

time, his widow7 Hannah Martin applied for social security benefits. The

then-Social Security Board denied her application because Western was a

railroad employer, and she sought review in the United States District

Court under the Social Security Act. The District Court found Western to 

be an employer under the Social Security Act, Martin v. Federal Security7

Agency. 73 F. Supp 482,(W.D. Penn. 1947) and the Third Circuit Court of

Appeals (supra) affirmed.

The General Counsel reversed the determination that Western was a

covered employer in 1953, after the Eighth Circuit Court ofAppeals

decision in Kelm v. Chicago. St. Paul Minneapolis and Omaha Railway

Company, 206 F. 2d 831 (8th Cir. 1953). See Legal Opinion L-53-554.

However, in 1979, at the request of the Board, the General Counsel reexamined Martin, and advised in Legal Opinion L-79-41, that the Board 

was not bound to follow7 that decision. Aside from the obvious fact that the

Board wyas not a party to the case, the General Counsel noted that the

District Court decision analyzed the contracts in question and determined

that these did not provide control. The District Court did not itself find as a

matter oflaw7 that the term “control” did not encompass control through

economic power. The General Counsel advised the Board that because the

Court of Appeals first affirmed and adopted the finding of the District

Court, and then offered its opinion ofthe meaning of “control” without

applying the definition to the facts, the legal discussion ofthe Court of 

Appeals became obiter dictum rather than the holding ofthe case.
/

Consequently, the General Counsel advised the Board that whereas Martin

had been previously been misread to prohibit the possibility of de facto 

control through contract, in fact it was limited to the circumstances

peculiar to Western Stevedoring.

I am convinced, based on the General Counsel’s analysis in Legal Opinion

L-79-41, that Martin does not prevent a finding that a company may be 

subject to de facto control for purposes ofsection 202.4 of the regulations.

Moreover, I would find that Rail Safety presents a suitable case for a

determination that Rail Safety’s business is de facto controlled by CN in

accordance with the decision ofthe Board in Fred Harvey, supra. Rail

Safety’s employee staffing must be held to a level acceptable to CN. The

contract provides almost four-fifths of Rail Safety’s total revenues but may

be unilaterally terminated without cause by CN. The copyrights for any 

material prepared by Rail Safety in connection with the CN contract must

be assigned to CN even if a court later finds the material would not

otherwise be CN property. I also would find Rail Safety performs a sendee

in connection with transportation of property by rail, because it trains

employees ofthe CN in elements fundamental to performance oftheir

positions as locomotive engineers, brakemen and conductors.

Even if Rail Safety would not meet the requirements for an employer under

the Acts, the employees of Rail Safety, when performing sendees for

Canadian National under their contract, would be considered deemed

employees of the carrier pursuant to section i(d)(i)(B) and (C) ofthe RRA

and its companion section under the RUIA. These individuals are

rendering professional sendees on carrier property, and the nature oftheir

sendees, training engineers, brakeman and conductors, clearly make their

sendees an integral part of the carrier’s operations. Kelm. cited by the

Majority7, to the extent that it was correctly decided at all, does not apply to

merely nominal “independent contractors”.

V. M. Speakman, Jr.

Date