EMPLOYER STATUS DETERMINATION

Softek Contractual Services, Inc.

This is the determination of the Railroad Retirement Board

concerning the status of Softek Contractual Services, Inc. (SCSI)

as an employer under the Railroad Retirement Act (45 U.S.C. sec.

231 et seq.) (RRA) and the Railroad Unemployment Insurance Act (45

U.S.C. sec. 351 et seq.) (RUIA).

SCSI began providing services to the Escanaba & Lake Superior 

Railroad (E&LS) in January 1993. SCSI was incorporated in January

1993 as a privately held corporation. Its sole stockholder and

Chief Executive Officer is Mr. Gary R. Micheau. SCSI employees are

laborers who provide cleaning, welding, sand blasting, painting and

mechanical repair for the E&LS. SCSI does not provide service to

any other railroad carrier. It does offer some computer related 

services to the general public and provides computer services and

technicians to the Michigan Law Enforcement Network.

In addition to the services shown above, SCSI employees perform

service for the E&LS pursuant to a contract between the E&LS and

General Electric Railcar Services to repair and refurbish rail

cars.

The maintenance and railcar repair work is performed by SCSI on the

property of the E&LS. The E&LS provides the facilities, equipment 

(overhead cranes, car movers, welding machines, scaffolding and

other parts needed to perform mechanical maintenance), and supplies 

(welding rod, blast and paint) used by SCSI personnel. SCSI

provides basic tools and safety equipment, however, a review of

SCSI billings shows that the E&LS has reimbursed the SCSI for the

safety eyeware used by the SCSI employees.

A review of a billing invoice dated December 9, 1993, also shows

that approximately 73 SCSI employees were providing services to the

E&LS. SCSI derives approximately 75% of its revenues from its

contract with the E&LS. There is no written contract between SCSI

and E&LS. SCSI is paid on a cost plus fee basis. E&LS pays all

employees' wages, PICA, medicare, federal, and state taxes plus

pays a service fee of 5% of the total gross payroll to SCSI. In

addition, SCSI is reimbursed for workers' compensation insurance 

premiums, payroll taxes, accident fund of Michigan payments, state

unemployment insurance taxes,safety eyeware used by SCSI employees,

equipment rental charges, and printing charges.

E&LS employees inspect and have final approval on all railcar 

repair work performed by SCSI. E&LS employees inspect and approve 

all welding and mechanical railcar repairs performed by SCSI. An 

E&LS employee repairs and services the welding equipment used by

SCSI employees. Finally, an E&LS employee places orders for and

distributes parts to SCSI employees.

BCD 1996-30
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Softek Contractual Services, Inc.

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

§ 231(1) (a) (1)), insofar as relevant here, defines a covered 

employer as:

(i) any express company, sleeping-car company, and

carrier by railroad, subject to subchapter I of chapter

105 of Title 49;

(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 (other than trucking service,

casual service, and the casual operation of equipment and 

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.

SCSI clearly is not a carrier by rail. Further, the available 

evidence indicates that it is neither controlled by nor under 

common ownership with any rail carrier nor controlled by officers 

or directors who control a railroad. Therefore, SCSI is not a

covered employer under the Acts.

This conclusion leaves open, however, the question whether the

persons who perform work for SCSI under its arrangements with the

E&LS should be considered to be employees of that railroad rather 

than of SCSI. 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 in

to the staff of the 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 * * * .
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Softek Contractual Services, Inc.

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 the 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

in the way he performs such work.

Based on the evidence before it, the Board finds that although with 

respect to the final outcome of the work E&LS exercises a

significant degree of control over the services performed for it by

SCSI employees, there is not sufficient evidence to establish that

employees of SCSI are subject to control, supervision, and

direction from E&LS as to the manner of performance of their work.

Consequently, the control test of paragraph (A) is not met.

The tests set forth under paragraphs (B) and (C) would hold an 

individual a covered employee if he is integrated into the

railroad's operations even though the control test in paragraph (A)

is not met. In practice, the Board in applying paragraphs (B) and

(C) has followed Kelm v. Chicago, St. Paul, Minneapolis and Omaha

Railway Company, 206 F. 2d 831 (8th Cir. 1953), and has not used 

paragraphs (B) and (C) to cover employees of independent 

contractors performing services for a railroad where such

contractors are engaged in an independent trade or business and the

arrangement has not been established primarily to avoid coverage 

under the Acts.

The first question to be answered therefore is whether SCSI itself

may be considered to be a truly 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 an opportunity for profit or loss;

e.g., Aoaracor, 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.

The record establishes SCSI was initially in the business of

providing computer hardware, software, and computer support

activities to customers other than E&LS. However, in January 1993,

SCSI also undertook to provide by contract certain other services 

for the E&LS not related in any way to SCSI's original business.

With regard to these services provided by SCSI to the E&LS
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Softek Contractual Services, Inc.

beginning in January 1993, a majority of the Board, the Management

Member dissenting, finds that SCSI is not truly an independent 

contractor, and accordingly, that the Kelm decision does not apply.

The majority of the Board bases this decision on the facts

described below. First, SCSI was not in the business of providing

the types of services at issue here prior to its contract with the

E&LS. Along with work that it undertook, SCSI also acquired many 

of the same employees who performed service for the railroad as

employees of another company. SCSI has very little investment in

connection with the services it provides for the E&LS. The

maintenance and railcar repair work is performed by SCSI on the

property of the E&LS. The E&LS provides the facilities, equipment 

(overhead cranes, car movers, welding machines, scaffolding and

other parts needed to perform mechanical maintenance) , and supplies 

(welding rod, blast and paint) used by SCSI personnel. SCSI

provides basic tools and safety equipment, however, a review of

SCSI billings shows that the E&LS has reimbursed the SCSI for the

safety eyeware used by the SCSI employees.

A majority of the Board, the Management Member dissenting, also

finds it significant that although SCSI derives approximately 75%

of its revenues from its contract with the E&LS, there is no

written contract between SCSI and E&LS. Finally, there is no risk

of loss for SCSI in connection with the services it provides for

E&LS. SCSI is paid on a cost plus fee basis. E&LS pays all

employees' wages, FICA, medicare, federal, and state taxes plus

pays a service fee of 5% of the total gross payroll to SCSI. In

addition, SCSI is reimbursed for workers' compensation insurance

premiums, payroll taxes, accident fund of Michigan payments, state

unemployment insurance taxes,safety eyeware used by SCSI employees,

equipment rental charges, and printing charges.

Since a majority of the Board has determined that Kelm would not

preclude a finding of employee status under either section 

1(d)(1)(B) or 1(d)(1)(C) of the Railroad Retirement Act, the Board 

must now determine whether the individuals in question meet either 

of those definitions. The evidence of record shows the individuals 

provided by SCSI perform personal services for E&LS. The evidence 

also establishes that the individuals are integrated into the

operations of the E&LS. Accordingly, in the opinion of a majority

of the Board, the individuals furnished by SCSI to the E&LS are

employees of the E&LS and their service is creditable as employee 

service under the Railroad Retirement and Railroad Unemployment

Insurance Acts pursuant to sections 1(d) (1) (C) and 1(e) of those

Acts, respectively.
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Softek Contractual Services, Inc.

Based on the above discussion, the Board finds SCSI not to be a

covered employer under the RRA and RUIA but finds that the

employees of SCSI performing services for E&LS are statutory

employees of that railroad.

^ Glen L. Bower

Attachment
DISSENT OF THE 

MANAGEMENT MEMBER

Softek Contractual Services, Inc.

I differ from the majority vote in their finding that Softek contractual Services, Inc.

(SCSI) is not an independent contractor and consequently that Kelm v. Chicago. St. Paul.

Minneapolis and Omaha Railway Company. 206 F. 2d 831 (8th Cir. 1953) does not apply.

The key factors that the majority based their decision on is that: 1) SCSI was not performing

a similar type of business prior to contracting to do rail car repair for the Escanaba fit Lake

Superior Railroad (EfitLS) and that SCSI only performs these types of services for EstLS; 2) 

that SCSI acquired the necessary personnel to carry out the contract from a prior company

doing business with EscLS; 3) the employees of SCSI perform the work on EstLS's property

using EstLS's equipment; and 4) there is no written contract between the parties and SCSI

is paid on a cost-plus basis.

The first two factors should not weigh heavily in finding SCSI not to be an independent

contractor. First, there is no requirement that an independent contractor must perform work

for more than one client. Secondly, hiring trained employees from a previous company

performing similar work is good business sense and should not be viewed as diminishing the

independent nature of the resulting business. Based on the current record under review, I find

SCSI to be an independent contractor; and, by application of the Kelm decision, SCSI's

employees are not covered under the Railroad Retirement and Railroad Unemployment

Insurance Acts.

Jerome F. Kever