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United States District Court 

For the Northern District of California 

IN THE UNITED STATES DISTRICT COURT 

FOR THE NORTHERN DISTRICT OF CALIFORNIA 

BLUE LAKE RANCHERIA and BLUE LAKE 

RANCHERIA ECONOMIC DEVELOPMENT 

CORPORATION, 

Plaintiffs, 

v. 

UNITED STATES OF AMERICA, 

Defendant. 

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Case No. 08-4206 SC 

ORDER RE: CROSS-MOTIONS FOR 

SUMMARY JUDGMENT

I. INTRODUCTION

 Plaintiffs Blue Lake Rancheria and Blue Lake Rancheria 

Economic Development Corporation ("Plaintiffs") filed this suit for 

a refund of federal unemployment taxes paid on behalf of Mainstay 

Business Solutions ("Mainstay"), which is an unincorporated 

enterprise of the Blue Lake Rancheria Indian Tribe. Compl., Docket 

No. 1. Defendant United States of America ("United States") has 

denied Plaintiffs' previous request for a tax refund. Id. ¶ 6. 

 Plaintiffs and the United States have both filed cross-motions 

for summary judgment. Docket Nos. 26 ("US MSJ"), 27 ("Pls.' MSJ"). 

Both motions have been fully briefed. Docket Nos. 40 ("US Opp'n"), 

41 ("Pls.' Opp'n"), 45 ("Pls.' Reply"), 48 ("US Reply"). Having 

considered all of the briefing, the Court concludes that the matter 

is appropriate for decision without oral argument. For the reasons 

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stated below, the Court GRANTS the United States' Motion for 

Summary Judgment and DENIES Plaintiffs' Motion for Summary 

Judgment. 

II. BACKGROUND

A. Overview of Federal Unemployment Taxes

 Under the Federal Unemployment Tax Act ("FUTA"), there is 

"imposed on every employer . . . for each calendar year an excise 

tax, with respect to having individuals in his employ, equal to . . 

. 6.2 percent . . . of the total wages . . . paid by him during the 

calendar year." 26 U.S.C. § 3301.1

 The term "total wages" can be 

somewhat misleading, since FUTA exempts from its definition of 

"wages" all payment to a single employee in excess of $7000. See

id. § 3306(b)(1). This effectively caps the wages relevant for 

calculating FUTA liability at $7000 per employee. 

 The scheme set down by FUTA is not purely federal in nature; 

rather, the statute is part of a joint federal-state unemployment 

insurance program. See Inlandboatmen's Union of Pac. Nat'l Health 

Benefit Trust v. United States, 972 F.2d 258, 259 (9th Cir. 1992). 

"Prior to 1935, very few states had enacted unemployment 

compensation schemes. Absent federal encouragement, states had 

been reluctant to impose an unemployment tax for fear of placing 

themselves at a competitive disadvantage with respect to business 

interests." Id. (citing Steward Machine Co. v. Davis, 301 U.S. 

548, 588 (1936)). To this end, FUTA encourages states to create 

their own unemployment insurance funds, and allows taxpayers to 

 

1

 Unless otherwise noted, all statutory citations are to the 

Internal Revenue Code ("IRC"), Title 26 of the United States Code. 

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United States District Court

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credit the amount of contributions paid to the state fund against 

the 6.2% federal tax imposed by FUTA. See 26 U.S.C. §§ 3302-03.2

 

The ceiling for this credit is capped, and the applicable cap in 

this case was set so as to reduce the amount of federal 

unemployment taxes to no less than 0.8% of the "total wages" for 

each person in Mainstay's employ. See id. § 3302(b); Pls.' MSJ at 

4; US Reply at 12 n.5. 

 Section 3306(c) provides an exception to the definition of 

"employment" for the purposes of FUTA taxes, such that services 

performed "in the employ of a State, or any political subdivision 

thereof," are not considered "employment" for the purpose of 

calculating wages or determining liability under FUTA. 26 U.S.C. 

§ 3306(c)(7). In 2000, this provision was amended to extend the 

exception to include "service performed . . . in the employ of an 

Indian tribe, or any instrumentality" thereof. Community Renewal 

Tax Relief Act of 2000, Pub. L. No. 106-554, § 166(a), (d), 114 

Stat. 2763, 2763A-627 (2000). The clear purpose of this amendment 

was to exempt Indian tribes from FUTA liability to the same extent 

as state governments. See H.R. Conf. Rep. 106-1033, p.*1000 (2000) 

("[A]n Indian tribe (including any subdivision, subsidiary, or 

business enterprise chartered and wholly owned by an Indian tribe) 

is treated like a non-profit organization or State or local 

government for FUTA purposes (i.e., given an election to choose the 

 

2

 Section 3302(b) also provides for an "additional credit," if an 

employer is entitled to pay less than the maximum amount due for 

state unemployment taxes, equal to the difference between the 

amount actually paid and the maximum amount chargeable by the 

state. 26 U.S.C. § 3302(b). This allows the states to create 

incentives for employers, by charging certain employers lower state 

unemployment taxes without those tax cuts being countervailed by 

higher federal unemployment taxes. 

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reimbursement treatment).").3 This amendment allowed Indian 

tribes, like government employers, to elect "to pay (in lieu of 

[regular state unemployment taxes]) into the State unemployment 

fund amounts equal to the amounts of compensation attributable 

under the State law to such service." 26 U.S.C. § 3309. In other 

words, FUTA not only exempts Indian tribes from federal 

unemployment tax liability, but also requires states to give each 

Indian tribe a chance to opt out of paying state unemployment 

taxes, so long as the Indian tribe elects to reimburse the state 

for the actual costs of providing unemployment benefits to its own 

employees (the "reimbursement method"). 

B. Overview of Mainstay's Business

 Blue Lake Rancheria is a federally recognized Indian tribe, 

located primarily in Blue Lake, California. Compl. ¶ 1. It 

consists of about fifty-three members. See Green Decl. Ex A ("Blue 

Lake Rancheria Website").4 According to Plaintiffs, in May of 2003 

 

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 Plaintiffs have submitted a Request for Judicial Notice, Docket 

No. 33, which includes three documents that demonstrate that the 

2000 amendment "intended the exemption of tribes from FUTA tax to 

further the long-held federal goal of promoting tribal economic 

development and self-sufficiency," Pls.' MSJ at 5. These documents 

are relevant as background, however they are not probative of the 

issue at hand, i.e., the intended scope of the FUTA exemption as to 

state governments or Indian tribes. Although the Court DENIES 

Plaintiffs' Request for Judicial Notice, it notes that the message 

of the attached documents -- that Congress intended by this 

amendment to assist Indian tribes -- is evident on the face of the 

statute. This denial therefore does not affect the outcome of this 

Order. 

4

 Phyllis Green ("Green"), Internal Revenue Agent, submitted a 

declaration in support of the US MSJ. Docket No. 27. Plaintiffs 

have objected to much of this declaration, including the attached 

printout of the Blue Lake Rancheria Website, on the basis that 

Green has not established personal knowledge of the facts 

represented therein. Docket No. 43. The Court OVERRULES 

Plaintiffs' objection with respect to this website, and takes 

judicial notice of this document. Because these facts are not 

subject to reasonable dispute, and are capable of determination 

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the tribe established Mainstay Business Solutions ("Mainstay"), 

which operates as "an employee staffing organization." Id. Since 

2006, Mainstay has been under the control of the Blue Lake 

Rancheria Economic Development Corporation, a tribal corporation, 

and Plaintiffs contend that Mainstay continues to operate as a 

subdivision or instrumentality of the tribe. Id. ¶¶ 1-2. Since 

its establishment in 2003, Mainstay "experienced explosive growth." 

Hansen Decl. ¶ 4.5 Plaintiffs claim that, during 2003 and 2004, 

Mainstay was responsible for paying the wages of approximately 

39,000 employees located in three states. Compl., ¶¶ 8-9. 

 According to Plaintiffs, Mainstay's business involves 

providing temporary and permanent employee staffing services to 

small and medium-sized businesses, primarily in the state of 

California. Id. ¶ 2. In order to do this, "Mainstay entered into 

a Standard Customer Agreement with each of its clients, and hired 

the client's employees as its own." Id. In effect, Mainstay then 

leased those employees back to its client, while maintaining 

payroll and other responsibilities related to human resource 

management. See Pls.' MSJ at 6. It also operated as a temporary 

staffing company, whereby "Mainstay entered into a Third Party 

Agreement with the temporary staffing agency, and hired its own 

employees the 'temps' referred by the agency to its own clients." 

Hansen Decl. ¶ 2. Most (70-75%) of the individuals that Mainstay 

 

using sources whose accuracy cannot reasonably be questioned, 

judicial notice is appropriate. See New Mexico ex rel. Richardson 

v. BLM, 565 F.3d 683, 702 n.22 (10th Cir. 2009) (taking judicial 

notice of data on web sites of federal agencies). The Court finds 

the website, which purports to be maintained by the tribe itself, 

to be reliable. 

5

 Michael Hansen ("Hansen"), CEO of Mainstay during 2003 and 2004, 

submitted a declaration in support of Plaintiffs' Motion for 

Summary Judgment. Docket No. 31. 

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so employed were from the leasing side of its business. Id. ¶ 3. 

 When Mainstay signed a contract with new clients, it would 

send a Human Resource Manager ("HRM") to its clients' work sites to 

meet "with the employees in groups and individually to inform them 

that Mainstay would be their new employer, to review Mainstay's 

employment policies, . . . and to ensure that all Mainstay new hire 

paperwork was filled out by each employee . . . ." Sparks Decl. 

¶ 3.6

 The employees were told that "their daily work activities 

would be directed by supervisors at the worksite, and their wages, 

benefits, employment rules and related policies would be directed 

by Mainstay." Id. ¶ 4. The HRM would also meet with the client 

and its managers and supervisors (some of whom were also becoming 

Mainstay employees). Id. ¶ 3. Mainstay told its clients that 

"[t]he goal of the working relationship between our two companies 

is to relieve you of these time consuming hassles so you can 

concentrate on your real job, managing your business." Sparks 

Decl. Ex. 2 ("Management Guide") at 4. 

 While Mainstay would integrate itself "into areas involving 

employee services, [the clients'] employees still work for [the 

clients'] company and [the clients] still direct their day-to-day 

activities in the workplace." Id. at 4. Mainstay's Employee 

Handbook reflected that the employees' "day-to-day job duties, 

hours and activities will be directed and supervised by management 

at your worksite company." Sparks Decl. Ex. 1 ("Employee 

Handbook") at 5. The clients were required to "furnish Mainstay 

with employee job descriptions, written notice of any material 

 

6

 Anne Sparks ("Sparks"), Director of Client Services for Mainstay, 

submitted a declaration in support of Plaintiffs' Motion for 

Summary Judgment. Docket No. 32. 

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change in an employee's assignment, and employee time cards." 

Hansen Decl. ¶ 3. Mainstay would invoice its clients for the 

employees' wages, although Mainstay would pay the employees whether 

the clients paid the invoices or not. Id. ¶¶ 13-14. 

 After Mainstay had hired its clients' previous employees, the 

employees would be paid through Mainstay's payroll, and Mainstay 

would provide the employees with worker's compensation insurance 

and employee benefits, and would provide its clients with 

assistance in complying with applicable local, state and federal 

employment laws. Hansen Decl. ¶ 3. Pursuant to its various 

Standard Customer Agreement Forms, "Mainstay maintained the right 

to recruit, screen and hire employees for assignment at its 

clients' businesses; maintained responsibility for terminating 

employees, and maintained the right to determine and set the level 

of pay and fringe benefits for employees." Id. ¶ 5, Exs. 1, 2, 3 

(collectively, "Standard Customer Agreements"). Mainstay would 

maintain personnel files and payroll records, withhold and report 

taxes, and issue W-2 forms to the employees. Hansen Decl. ¶ 5; 

Standard Customer Agreements. The clients would be unable to alter 

the compensation or benefits of the employees without Mainstay's 

"express written agreement." See Standard Customer Agreements. 

Under the terms of the contracts, clients could decide that they no 

longer wished to "accept the service of any particular Mainstay 

solutions employee," at which point they would notify Mainstay.7 

Id. Similarly, Mainstay directed its clients to seek approval from 

 

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that it would "attempt to place that employee with a leasing or 

temporary staffing agency client in the local community," Hansen 

Decl. ¶ 7, however "Mainstay did not attempt to place individuals 

terminated for misconduct or absenteeism," Sparks Decl. ¶ 16. 

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Mainstay before they hired job applicants, although the 

responsibility for interviewing the employees apparently fell upon 

the clients' management. See Management Guide at 6-7. 

C. Mainstay's Tax Liabilities

 During the years 2003 and 2004, Mainstay fully paid the amount 

due for its federal FUTA taxes, and did not assert immunity as an 

Indian tribe "[b]ecause Mainstay's exempt status . . . had not been 

fully resolved . . . ." Hansen Decl. ¶ 17. Mainstay is now 

seeking a refund for the federal unemployment taxes that it paid 

during this period. During the year 2003, it paid $722,047 in 

federal unemployment taxes; in 2004 this figure rose to $1,283,892, 

for a total of $2,005,939 over this two-year period. Strouse Decl. 

¶¶ 2-3, Exs. 1, 2.8 

 During 2003 and 2004, Mainstay did not initially pay for its 

liabilities for state unemployment taxes through the reimbursement 

method, and instead paid state unemployment taxes just as a 

nontribal taxpayer would pay. Id. Ex. 3 ("ALJ Order") at 2. In 

2005, an administrative law judge ("ALJ") for the California 

Unemployment Insurance Appeals Board issued a decision that allowed 

Mainstay to use the reimbursement method to cover its liabilities 

for the state portions of its unemployment taxes. The ALJ stated 

that, under California Law, Mainstay "is a temporary staffing 

agency." Id. at 3. Under section 605 of the California 

Unemployment Insurance Code ("CUIC"), an employee of a temporary 

staffing agency is considered the employee of that agency for the 

purposes of the CUIC, even though the employee's work was performed 

 

8

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declaration in support of Plaintiffs' Motion to Dismiss. Docket 

No. 29. 

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for the agency's client, regardless of "the common law rules 

applicable in determining the employer-employee relationship . . . 

." CUIC § 606.5(a), (c). The ALJ reasoned that "[a]lthough the 

actual services of Mainstay Business Solutions employees are 

services of individuals that work for third-party customers, they 

are employees of Mainstay under section 606.5 of the [CUIC], and 

the primary operation of Mainstay Business Solutions was for the 

benefit of Blue Lake Rancheria." ALJ Order at 6-7. The ALJ also 

reasoned that because Mainstay's revenues were used for tribal 

purposes, Mainstay "is performing services for the benefit of Blue 

Lake Rancheria as well as Mainstay." Id. at 7. Mainstay may 

therefore elect to pay for its state unemployment tax liabilities 

as an Indian tribe, through the reimbursement method. 

III. LEGAL STANDARD

A. Summary Judgment

 Summary judgment under Rule 56(c) of the Federal Rules of 

Civil Procedure may be granted where the pleadings and materials on 

file show "that there is no genuine issue as to any material fact 

and that the moving party is entitled to judgment as a matter of 

law." A moving party that will have the burden of proof on an 

issue at trial must "affirmatively demonstrate that no reasonable 

trier of fact could find other than for the moving party." 

Soremekun v. Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 

2007). Where the nonmoving party will have the burden of proof at 

trial, the moving party "can prevail merely by pointing out that 

there is an absence of evidence to support the nonmoving party's 

case." Id. If the moving party fails to persuade the court that 

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there is no genuine issue of material fact, then "the nonmoving 

party has no obligation to produce anything, even if the nonmoving 

party would have the ultimate burden of persuasion at trial." 

Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102 

(9th Cir. 2000). However, if the moving party meets its initial 

burden, then the burden shifts to the nonmoving party to produce 

evidence supporting its claims or defenses. Id. 

B. Burden of Proof

 "In a refund suit, the taxpayer bears the burden of proving 

both the error in the assessment and the amount of refund to which 

he is entitled." Brown v. United States, 890 F.2d 1329, 1334 (5th 

Cir. 1989); see also American Airlines, Inc. v. United States, 204 

F.3d 1103, 1108 (Fed. Cir. 2000) (rejecting plaintiff's argument in 

refund suit that United States had burden of proof; listing cases). 

"Because the government will not have the burden of proof on [the 

plaintiff's] refund claim, it can meet its summary judgment 

obligation by pointing the court to the absence of evidence to 

support it. Once the government does so, [the plaintiff] must go 

beyond his pleadings and designate specific facts showing there is 

a genuine issue for trial." Cooper v. United States, 513 F. Supp. 

2d 747, 751 (N.D. Tex. 2007) (citing Celotex Corp. v. Catrett, 477 

U.S. 317, 324-25 (1986)). 

C. Statutory Interpretation

 Although state and local statutes related to taxation "are to 

be construed liberally in favor of Indians, with ambiguous 

provisions interpreted to their benefit," Yakima v. Confederated 

Tribes, 502 U.S. 251, 269 (1992), the Ninth Circuit has recognized 

that "there is a different standard for exemptions from federal 

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taxation," Ramsey v. United States, 302 F.3d 1074, 1078 (9th Cir. 

2002). "The different standards stem from the state and federal 

government's distinct relationships with Indian tribes. . . . For 

this reason, all citizens, including Indians, are subject to 

federal taxation unless expressly exempted." Id. (citations 

omitted). Where language exists to support an express exemption, 

the Court must "consider whether it could be 'reasonably construed' 

to support the claimed exemption." Id. (citing Hoptowit v. 

Commissioner, 709 F.2d 564, 566 (9th Cir. 1983)). 

IV. DISCUSSION

 The outcome of this case turns on whether those Mainstay 

employees whom it leases to its clients ("Leased Employees" or 

"LEs") should be considered "in the employ" of Mainstay for the 

purpose of reading the tribal exception to FUTA, 26 U.S.C. 

§ 3306(c)(7). The United States contends that the exception will 

only apply where a tribal body is the common law employer of 

employees at issue. See US MSJ at 17. The United States argues 

that Mainstay is liable not as the common law employer of the LEs, 

but instead as a "statutory employer," i.e., the entity that is not 

the recipient of an employee's services, but which has control of 

the payment of an employee's wages, as recognized in a related 

provision of the IRC. See id.; 26 U.S.C. § 3401(d)(1). According 

to the United States, as an employee-leasing company, Mainstay is 

liable for FUTA payments as the statutory employer of the LEs, but 

its liability must be determined and calculated by reference to the 

LEs' common law employers -- the customers of Mainstay for whom the 

LEs purportedly performed their services. Id. Because its 

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customers were not tribal entities,9 the tribal exception to the 

definition of "employment," found in § 3306(c)(7), should not 

apply. Id. Mainstay contends that the § 3306(c)(7) exception 

applies even if it is merely the statutory employer of the LEs, and 

that, in any event, it is also the common law co-employer of the 

LEs. Pls.' MSJ at 20-24. 

A. How the Tribal Exception Operates

 The Court begins its analysis with the language and structure 

of FUTA. FUTA liability depends upon a circuit of overlapping 

definitions, and it is necessary to examine each term in order to 

understand how the tribal exception operates. As previously noted, 

FUTA imposes "on every employer . . . for each calendar year an 

excise tax, with respect to having individuals in his employ, equal 

to . . . 6.2 percent . . . of the total wages . . . ." 26 U.S.C. 

§ 3301. The tribal exception states that "services performed . . . 

in the employ of an Indian tribe" is not considered "employment." 

Id. § 3306(c)(7). The tribal exception is therefore an exception 

to the definition of "employment." Notably, FUTA's liability 

provision, § 3301, does not directly use the term "employment." 

However, FUTA's liability provision does expressly use the terms 

"employer" and "wages," id. § 3301, and both of these terms do 

incorporate the statutory definition of "employment." Id. §§ 

3306(a)-(b). In most situations, the tribal exception therefore 

operates by eliminating the statutory "employer" as well as 

statutory "wages." 

 To reiterate, the tribal exception does not specifically state 

 

9

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its clients, and has never suggested that its clients were eligible 

for any exemption under FUTA. 

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that Indian tribes are exempt from FUTA liability -- rather, it 

states that "services performed . . . in the employ of an Indian 

tribe" is not considered "employment" for the purposes of 

construing FUTA. Id. § 3306(c)(7). Generally, FUTA borrows the 

concept of "employment" from the common law. In most employment 

situations, where none of the twenty-one different exceptions to 

"employment" found in § 3306(c) apply,10 "employment" exists 

whenever services are performed "by an employee for the person 

employing him." Id. § 3306(c). To determine whether services are 

provided by an "employee," FUTA borrows the definition of 

"employee" from FICA, § 3121(d), which includes "any individual 

who, under the usual common law rules applicable in determining the 

employer-employee relationship, has the status of an employee." 

Id. §§ 3121(d)(2), 3306(i). The tribal exception therefore 

normally operates by eliminating the existence of statutory 

"employment" where services performed in a common law relationship 

between an employer and employee would normally lead to the 

existence of "employment."11

 As noted above, the definition of "employment" is critical to 

the creation of FUTA liability in two different ways. The first 

way that "employment" is used by FUTA is to define "wages." FUTA 

imposes liability upon employers based upon the "total wages" paid 

to individuals in its employ. Id. § 3301. Wages are defined as 

 

10 Examples of other exemptions include agricultural labor, 

domestic service, service performed in the employ of one's son, 

daughter or spouse, and service performed in the employ of a 

religious, charitable, or educational institution. See 26 U.S.C. § 

3306(c). 

11 FICA does create several additional categories of "employee," 26 

U.S.C. § 3121(d), however no party has argued that any of these 

categories are relevant to this dispute. 

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"all remuneration for employment," up to the first $7000 of 

remuneration. Id. § 3306(b). Therefore if there is no 

"employment," there can be no "wages" and there will be no basis 

for FUTA liability. This is one way that an exception to the 

definition of "employment" -- such as the exclusion of services 

provided to a tribal body -- can result in an exception to 

liability under FUTA. 

 The second way that "employment" is used by FUTA is to define 

"employer." An "employer" is anyone who (A) during a calendar 

quarter, pays wages of at least $1500, or who (B) employed at least 

one individual "in employment" on at least twenty days during a 

calendar year or preceding calendar year, each day being on a 

different calendar week. Id. § 3306(a). Under the first prong, in 

the absence of "employment" there will be no wages, and therefore 

no "employer." Under the second prong, no individual would be 

employed "in employment," and thus there would be no "employer." 

An exception to "employment" -- such as the exclusion of services 

provided to a tribal body -- can therefore render FUTA inoperative 

by eliminating the existence of a statutory "employer."12

 The Court makes two observations based upon the textual 

analysis of FUTA and its tribal exception. First, it is clear that 

the exceptions to FUTA liability, including the tribal exception, 

 

12 The Court notes that this statutory definition of "employer" was 

added in 1970. See Employment Security Amendments of 1970, 91 Pub. 

L. No. 373, 84 Stat. 695 (1970). The purpose of this amendment was 

apparently "to narrow the scope of the 'small employer' exception 

to the FUTA definition of 'employer,'" which certain taxpayers were 

apparently abusing to avoid FUTA liability. See Cencast Servs., 

L.P. v. United States, 62 Fed. Cl. 159, 162 (Fed. Cl. 2004) 

(discussing history and implications of FUTA's definition of 

"employer"). The Court notes that the role of FUTA's definition of 

"employer" has been limited, at least in the calculation of FUTA 

liability. See id. 

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operate by removing both statutorily defined "wages" and "employer" 

from an otherwise normal employment relationship. Consequently, if 

the situation of a particular taxpayer requires that other 

provisions of the IRC control the determination of whether an 

"employer" or "wages" exist, this will obviously raise questions 

about how or whether the exceptions should apply. As this Order 

discusses below, Mainstay's relationship with its LEs requires this 

Court to examine other provisions to resolve its FUTA liability. 

 Second, the text and structure of FUTA generally premises FUTA 

liability upon the existence of common law employment relationships 

-- i.e., if there is no "employee," §§ 3121(d), 3306(i), and 

therefore no "employment," § 3306(c), and therefore no "wages," 

§ 3306(b), or "employer," § 3306(a), both of which are required by 

the general liability provision of § 3301. This textual reading is 

consistent with the IRS' historical interpretation of FUTA. The 

IRS has long focused on the common law employer as the relevant 

employer for assessing FUTA liability, even where other entities 

are responsible for paying the wages of employees. The United 

States cites a number of rulings that show that the common law 

employer has historically been the proper employer for imposing 

FUTA and FICA liability, even though a third party is actually 

responsible for paying the employees in question. See, e.g., Rev. 

Rul. 57-145, 1957-1 C.B. 332 (1957); Rev. Rul. 57-316, 1957-2 C.B. 

626 (1957); see also S.S.T. 154, 1937-1 C.B. 391 (1937) (Treasury 

ruling stating that, where employee performs work for subsidiary 

but is paid by parent company, "the subsidiary for which the 

services are performed is considered the employer"); Rev. Rul. 69-

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316, 1969-1 C.B. 263 (1969) (same).13 

B. The Role of Statutory Employers

 One should not conclude from the above discussion that a 

typical employee-leasing company, having no common law employment 

relationship with its LEs, faces no FUTA liability. Although it is 

not apparent on the face of FUTA, there is another way that an 

entity can assume liability as an "employer," which is well 

supported by case law. The portion of the IRC that governs the 

withholding of income taxes, 26 U.S.C. §§ 3401 et seq., also 

addresses the concept of a "statutory employer." Section 3401(d) 

first defines "employer" in accordance with the common law 

definition of employer, i.e., "the person for whom an individual 

performs or performed any service, of whatever nature, as the 

employee of such person." 26 U.S.C. § 3401(d). However, the 

provision goes on to state that, "if the person for whom the 

individual performs or performed the services does not have control 

of the payment of the wages for such services, the term 'employer' 

. . . means the person having control of the payment of such 

wages," except for the purpose of determining "wages" under § 

3401(a). Id. § 3401(d)(1). This provision "establishes that the 

statutory employer, having control of the payment of wages, is 

responsible for withholding, paying and reporting employees' 

federal income taxes." See Cencast Servs., L.P. v. United States, 

62 Fed. Cl. 159, 162 (Fed. Cl. 2004). 

 An entity that is not a common law employer can therefore 

become an "employer" for withholding purposes if the entity is the 

 

13 A thorough discussion and analysis of these same rulings appears 

in the decision issued by the Court of Federal Claims in Cencast 

Servs., 62 Fed. Cl. 159. 

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"statutory employer," i.e., the one who pays the wages for work 

performed for a separate common law employer. In Otte v. United 

States, the Supreme Court determined that statutory employers under 

§ 3401(d)(1) are also employers for the purpose of the Federal 

Insurance Contribution Act ("FICA"), 26 U.S.C. § 3101 et seq. 419 

U.S. 43 (1974). Other courts have since interpreted FUTA to 

require statutory employers to pay FUTA taxes, even though they may 

not be the common law employers of their employees. See, e.g., 

Consol. Flooring Servs. v. United States, 42 Fed. Cl. 878, 879 

(Fed. Cl. 1999) ("Courts have uniformly interpreted Otte to mean 

that § 3401(d)(1) employers are liable for . . . paying FUTA taxes 

. . . ."); see also In re Armadillo Corp., 561 F.2d 1382, 1386 

(10th Cir. 1977); In re Laub Baking Co., 642 F.2d 196 (6th Cir. 

198l). The position of the United States depends upon Mainstay's 

admitted status as a statutory employer,14 since it is arguing that 

Mainstay is liable as a statutory employer of the LEs, even though 

it is not their common law employer. 

C. How the Tribal Exception Operates with Regard to a 

Statutory Employer 

 The Court now turns to the question of how the exceptions to 

the definition of "employment" found in § 3306(c), and the tribal 

exception of § 3306(c)(7) in particular, operate for §3401(d)(1) 

statutory employers. In other words, should a statutory employer 

be liable under FUTA where an employee performs services that would 

be considered "employment" if "employment" is defined by reference 

to the common law employer, but would not be considered 

 

14 Plaintiffs plead that Mainstay is a § 3401(d)(1) employer. See

Compl. ¶ 22. 

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"employment" if that term is defined by reference to the statutory 

employer? The Court concludes "employment" must be defined by 

reference to the common law employer, and that the statutory 

employer must be liable. 

 First, the Court notes that the statutory employer is an 

"employer" for FUTA purposes, no matter which employer is used to 

determine "employment" or evaluate the § 3306(c) exceptions. This 

is because § 3401(d), unlike § 3306(a), defines "employer" without 

reference to "employment." Under Otte and its progeny, a statutory 

employer defined by § 3401(d) is an "employer" for FUTA purposes, 

and this status is not dependent upon the existence of a common law 

relationship. Consol. Flooring, 42 Fed. Cl. at 879; see also

3401(d). The Court sees no reason to read into the text of 

§ 3401(d) the requirement that a statutory employer have an 

"employment" relationship as defined by § 3306(c). Therefore, even 

in the absence of "employment" under § 3306(c), a statutory 

employer is an "employer" for FUTA purposes. The tribal exception 

clearly cannot preclude the existence of a statutory "employer" 

under FUTA. 

 The next question is which employer is relevant to defining 

"employment" for the purpose of establishing whether "wages" exist. 

As previously noted, see Part IV.A, supra, before Otte, the IRS 

considered the common law employer to be the relevant employer. A 

revenue ruling from 1954 presented a question very similar to the 

question now before the Court. See Rev. Rul. 54-471, 1954-2 C.B. 

348 (1954). This ruling might be characterized as the mirror image 

of the situation presented by Mainstay. The ruling involved FUTA 

and FICA liability for demonstrators who were paid by a nonexempt 

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third-party agency, but who provided short-term services for a 

state-owned citrus commission, which was an exempt entity under the 

precursor for the modern § 3306(c)(7). The IRS found that the 

state was the common law employer of the demonstrators, even though 

the nonexempt third-party agency was responsible for reimbursing 

the demonstrators. Based on this, the IRS concluded that "the 

common law relationship of employer and employee existed between 

the [state citrus] commission and the demonstrators and their 

services are excepted from 'employment.'" Id. In other words, the 

existence of a common law employment relationship between the 

demonstrators and the state was sufficient to trigger the exception 

to the definition of "employment." 

 Since Otte was decided, it is clear that the common law 

employer continues to be the relevant employer for defining and 

calculating "wages," even where a statutory employer is present. 

Section 3401(d)(1) specifically states that the statutory employer 

is not considered the "employer" for the purposes of subsection 

3401(a), which sets out a definition of "wages" for withholding 

purposes and is similar to the definition for "wages" set out by 

FUTA, § 3306(b). Similarly, a recent decision issued by the Court 

of Federal Claims reflects that statutory employers must look to 

the common law relationship that exists between the employees and 

their common law employers to calculate "wages" in determining 

their FUTA liability. In Cencast Services, L.P., v. United States, 

the Court of Federal Claims concluded that an employee-leasing 

company, Cencast, which was liable for FUTA payments as the 

statutory employer of its LEs, had to calculate its liability based 

on the "wages" paid on behalf of the LEs' common law employers 

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(i.e., Cencast's customers, the companies to whom Cencast leased 

the services of its LEs, and to whom the LEs provided services). 

62 Fed. Cl. at 183-84. Since FUTA imposes on each employer a duty 

to pay unemployment taxes that are calculated based only on the 

first $7000 of wages paid to each employee, see 26 U.S.C. §§ 3301, 

3306(b)(1), this ruling required Cencast to calculate its liability 

as a percentage of the first $7000 paid to each LE by each of the 

LE's common law employers.15 In short, it is the common law 

employer, and not the statutory employer, that matters when 

calculating wages under FUTA. 

 Although Cencast does not specifically address the issue of 

whether a statutory or common law employer is the relevant employer 

for applying the § 3306(c) exceptions, it does confirm that the 

common law employer is the relevant employer for determining 

"wages" under § 3306(b). The § 3306(c) exceptions are relevant to 

the assignment of FUTA liability in large part because of the role 

that "employment" plays in defining "wages." See Part IV.A, supra. 

The only reasonable and consistent conclusion is to read the 

definition of "wages" as turning on the existence of "employment" 

with reference to the common law employer, and not the statutory 

employer. 

 Plaintiffs point out that the language of the exception refers 

to services performed "in the employ" of a tribal body, instead of 

services "by an employee" of a tribal body. They argue that the 

 

15 For example, if an LE had three common law employers during a 

calendar year, and the LE was paid more than $7000 for services 

provided to each common law employer, then Cencast would be 

required to pay FUTA taxes based on $21,000 of that LE's wages. 

However, if "wages" were calculated based solely upon the LE's 

relationship with Cencast, the statutory employer, Cencast would 

only be liable based on the first $7000 of remuneration. 

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Court should consider the services of the LEs to be services "in 

the employ" of Mainstay, irrespective of the existence of any 

common law employment relationship. Pls.' MSJ at 14-18. 

Plaintiffs rely upon Independent Petroleum Corp. v. Fly, in which a 

panel for the Fifth Circuit based its decision in large part upon 

Congress's use of the phrase "in his employ" in the social security 

tax scheme, instead of "employee." 141 F.2d 189, 190, (5th Cir. 

1944). 

 The Court disagrees with Plaintiffs' reading of the phrase "in 

the employ of . . . ." FUTA never defines this phrase. Plaintiffs 

have not presented a compelling basis for concluding that A should 

be considered "in the employ" of B, simply because A receives 

remuneration from B for services that A performed for C 

(particularly where C reimburses B in full). In this scenario, B 

is a middleman, and not an "employer" in any meaningful sense 

besides the special sense established by § 3401(d)(1). B does not 

directly receive the services of A, though B may benefit from A's 

services just as any vendor receives a benefit from the products 

that it sells. In addition, the most natural reading of this 

phrase does suggest that it relates to the common law employer -- 

FUTA textually and historically relies upon the existence of a 

common law employment relationship to hold an employer liable, and 

it therefore generally holds an employer liable for "individuals in 

his employ" where those individuals are his common law employees. 

See Part IV.A, supra. Even though Independent Petroleum suggests 

that the phrase "in the employ" may be broader than the term 

"employee," it does not suggest that the phrase extends beyond 

common law employment relationships. 141 F.2d 191. Instead, the 

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Fifth Circuit used that language to support its conclusion that an 

officer who effectively performed no duties and received nothing of 

value from the company was not "in the employ" of that company. 

Id. ("Nominal officers such as honorary Vice-presidents and this 

Secretary, who do nothing and are paid nothing, were not intended 

to be made into employees throughout the Act."). 

 Plaintiffs also point out that FUTA imposes liability "with 

respect to having individuals in his employ," § 3301, and argue 

that this must be read to have the same meaning as "in the employ," 

as used by § 3306(c)(7). Pls.' MSJ at 15-16. "Thus, if 

individuals are paid wages 'in the employ' of Mainstay for purposes 

of establishing FUTA tax liability under Section 3301, those same 

individuals should be considered as serving 'in the employ' of 

Mainstay for purposes of the exemption." Id. 

 This Court agrees that, where an employer is an employer 

solely by virtue of his statutory relationship with an individual 

(i.e., a § 3401(d)(1) employer), that individual is clearly "in his 

employ" for the purpose of establishing liability under § 3301. 

See Consol. Flooring, 42 Fed. Cl. at 879. However, the Court 

believes that this is a departure from the general rule that an 

individual will be "in his employ" where a common law employment 

relationship exists. This departure is brought about by Otte and 

its progeny, and may be applied narrowly. The Court concludes that 

the language and structure of FUTA and related IRC provisions 

require the normal reading of "in the employ" under § 3306(c), even 

where the special reading of "in his employ" under § 3301 is 

mandated by the statutory employer context. "Although we generally 

presume that identical words used in different parts of the same 

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act are intended to have the same meaning, the presumption is not 

rigid and the meaning of the same words well may vary to meet the 

purposes of the law." United States v. Cleveland Indians Baseball, 

532 U.S. 200, 213) (2001) (quoting Atlantic Cleaners & Dyers, Inc. 

v. United States, 286 U.S. 427, 433 (1932)) (internal quotation 

marks and brackets omitted). In § 3306(c)(7), "in the employ" is 

read primarily for the purpose of establishing whether the 

remuneration paid to that individual can be considered "wages" 

under FUTA, and "wage" determinations must be made with respect to 

the common law employer. In addition, this reading preserves the 

primacy of the common law employment relationship in evaluating 

FUTA liability, which predates Otte and continues to operate for 

the purpose of calculating employer liability. 

 The Court also recognizes that Plaintiffs' reading of the 

statute would allow non-tribal employers to easily obtain the tax 

advantages that Congress has created for tribal bodies (or, for 

that matter, for other entities exempted under § 3306(c)). Every 

time a nonexempt employer retained the services of an exempted 

employee leasing company, the federal and state unemployment tax 

liability of the employer would change significantly, even though 

the fundamental relationship between the employee and the client 

common law employer would not necessarily be disturbed. This would 

create a theoretically limitless potential for abuse. Congress 

could not have intended its carefully crafted exceptions to FUTA 

liability to be susceptible to such expansion. Plaintiffs' reading 

of the tribal exemption would allow for practices that go well 

beyond Congress's clear goal of providing assistance to tribal 

bodies by putting them on the same ground as state governmental 

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bodies. The United States' reading of the provision avoids this 

potential for abuse. 

 This Court finds that the exception to the definition of 

"employment" for "services performed . . . in the employ of an 

Indian tribe, or any instrumentality" thereof, § 3306(c)(7), is 

only available when an Indian tribe is the common law employer of 

the employees in question. When an Indian tribe is merely the 

statutory employer, the applicability of this exception depends 

upon the employee's relationship with his or her common law 

employer. Where the common law employer is not an Indian tribe, 

and where no other exemption under § 3306(c) applies, the statutory 

employer will be liable under FUTA. 

D. Whether Mainstay is the Common Law Employer of the LEs

 Plaintiffs contend that they are exempt because Mainstay is 

the common law co-employer of its LEs. Pls.' MSJ at 20-23. 

Plaintiff argues that "an individual may be the common law employee 

of both a staffing agency and its customer." Id. at 21 (citing 

Vizcaino v. U.S. Dist. Court for the W. Dist. of Washington, 173 

F.3d 713, 723-25 (9th Cir. 1999).16 The United States responds by 

claiming that the facts that Plaintiffs have presented to describe 

Mainstay's relationship with its LEs are legally insufficient to 

establish a common law employment relationship. US Opp'n at 4-5.17 

 

16 The Court assumes that it is possible for an employee to have 

more than one common law employer for FUTA purposes. The United 

States argues that such an outcome "raises the issue of which 

entity's status is controlling for tax purposes. . . . The 

question could be equally relevant for each of the twenty-one 

section 3306(c) exceptions, as well as comparable social security 

and income tax withholding equivalents." US Opp'n at 19 n.6. 

17 The United States bases its arguments on the declarations 

submitted by Plaintiffs, and also upon the declarations submitted 

in support of the US MSJ by Internal Revenue Agents Green and Larry 

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 The existence of a common law employment relationship depends 

upon a variety of factors: 

In determining whether a hired party is an 

employee under the general common law of agency, 

we consider the hiring party's right to control 

the manner and means by which the product is 

accomplished. Among the other factors relevant 

to this inquiry are the skill required; the 

source of the instrumentalities and tools; the 

location of the work; the duration of the 

relationship between the parties; whether the 

hiring party has the right to assign additional 

projects to the hired party; the extent of the 

hired party's discretion over when and how long 

to work; the method of payment; the hired party's 

role in hiring and paying assistants; whether the 

work is part of the regular business of the 

hiring party; whether the hiring party is in 

business; the provision of employee benefits; and 

the tax treatment of the hired party. No one of 

these factors is determinative. 

Cmty. for Creative Non-Violence v. Reid, 490 U.S. 730, 751-52 

(1989) (citations and footnotes omitted). Relevant IRS regulations 

cite a similar list of factors, stating that an employment 

relationship generally exists: 

when the person for whom services are performed 

has the right to control and direct the 

individual who performs the services, not only as 

to the result to be accomplished by the work but 

also as to the details and means by which that 

result is accomplished. That is, an employee is 

subject to the will and control of the employer 

 

K. Lauer. Docket Nos. 27, 39. Plaintiffs have objected to both of 

these declarations, and argue that the agents fail to establish a 

basis for their personal knowledge of the facts presented, and that 

the Lauer Declaration and attached exhibits also contain 

inadmissible hearsay. Docket Nos. 43, 47. The United States has 

not responded to either objection. The Court finds that Plaintiffs 

have themselves sufficiently described the operation of Mainstay, 

such that reference to both declarations, and the majority of their 

attached exhibits, is unnecessary for the resolution of these 

Motions. The Court therefore assumes, arguendo, that the 

objections are well founded and resolves them in Plaintiffs' favor. 

The objections are SUSTAINED and the relevant portions of each 

declaration and their attached exhibits are STRICKEN. The sole 

exception is the printout of the Blue Lake Rancheria Website, which 

the Court has already addressed in footnote 4, supra. 

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not only as to what shall be done but how it 

shall be done. In this connection, it is not 

necessary that the employer actually direct or 

control the manner in which the services are 

performed; it is sufficient if he has the right 

to do so. The right to discharge is also an 

important factor indicating that the person 

possessing that right is an employer. Other 

factors characteristic of an employer, but not 

necessarily present in every case, are the 

furnishing of tools and the furnishing of a place 

to work, to the individual who performs the 

services. 

26 C.F.R. § 31.3306(i)-1(b). 

 The authority cited by both parties demonstrates that "the 

hiring party's right to control the manner and means" of the 

employee's services is a very important consideration in 

determining the existence of a common law employment relationship. 

See id.; Creative Non-Violence, 490 U.S. at 751. Both parties rely 

heavily upon Revenue Ruling 87-41, 1987-1 C.B. 296 (1987), which 

specifically addresses the question of whether an individual is a 

common law employee of a firm that sells the services of that 

individual to its clients. It offers a list of factors for 

consideration, as well as three hypothetical test cases. Id. 

Notably, it resolves each test case on the basis of whether the 

hiring firm "retain[s] any right to control the performance of the 

services" of the employee. Although it is true that no one factor 

is determinative, Creative Non-Violence, 490 U.S. at 751, the Court 

finds it notable that the IRS afforded this factor so much weight. 

This factor is particularly well suited for determining the nature 

of an employment relationship in the context of a company that 

leases or sells the services of individuals to its clients. 

 Plaintiffs have not provided any evidence that suggests that 

Mainstay possessed "the right to control the manner and means by 

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which the product is accomplished." C.f. Cmty. for Creative NonViolence v. Reid, 490 U.S. at 751. Instead, all evidence submitted 

by Plaintiffs suggests that the employees' "daily work activity 

would be directed by supervisors at the worksite." Sparks Decl. 

¶ 4. The Employee Handbook states that "[y]our day-to-day job 

duties, hours, and activities will be directed and supervised by 

management at your worksite company," Employee Handbook at 5, and 

the Management Guide confirms that "[a]lthough Mainstay will be 

integrated into areas involving employee services, your employees 

still work for your company and you still direct their day-to-day 

activities in the workplaces," Management Guide at 4. 

 The fact that "the "clients' on-site supervisors were also 

Mainstay employees" is irrelevant. See Pls.' MSJ at 22-23. These 

supervisors were "hired by Mainstay at the same time the employees 

were hired by Mainstay." Sparks Decl. ¶ 12. Plaintiffs never 

suggest that Mainstay had any degree of control over the details 

and means of the supervisors' service. Unless Plaintiffs can 

provide a basis for concluding that a common law employment 

relationship existed between the supervisors and Mainstay, the fact 

that Mainstay had a statutory employment relationship with these 

supervisors is of no significance to the question of whether 

Mainstay had the right to direct the means and details of the LEs' 

services. Plaintiffs may not cobble together a common law 

employment relationship from two statutory employment 

relationships. 

 Plaintiffs' brief does include a vague factual assertion that 

may be construed as a claim that Mainstay retained a right to 

control the services provided by the LEs: "Mainstay provides 

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significant continuing oversight and direction concerning the 

overall employment relationship and management of the employees and 

direction concerning the overall employment relationship and 

management of the employees . . . ." Pls.' SJM at 22. To the 

extent that this factual assertion claims "the right to control the 

manner and means by which the product is accomplished," it is 

unsupported by Plaintiffs' affidavits. Plaintiffs allege various 

rights, such as input in the termination and hiring process, 

possession of personnel records, and control over benefits, but 

none of this amounts to supervision as to the means or details of 

service. 

 Similarly, Plaintiffs establish that Mainstay retained limited 

oversight over general aspects of the LEs' relationships with their 

workplaces, such as the investigation of harassment claims, 

discipline, and termination; Mainstay also required its clients to 

"comply with its direction and guidance to manage risks and promote 

employee safety." See Hansen Decl. §§ 7-8; see also Sparks Decl. 

¶ 10 (describing "policies devoted to maintaining a safe and 

healthy working environment"). The Court finds that such general 

oversight rights, which exist for all types of employment and do 

not relate to the details of any particular job, do not suffice to 

give Mainstay the "the right to control and direct the individual 

who performs the services, not only as to the result to be 

accomplished by the work but also as to the details and means by 

which that result is accomplished." 26 C.F.R. § 31.3306(i)-1(b). 

Instead, all evidence submitted by Plaintiffs suggests that the 

rights and duties at the "details and means" level of employment 

remained solely the province of Mainstay's clients. The Court 

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finds that Mainstay has therefore failed to establish this 

important aspect of the employment relationship. 

 Plaintiffs point to several other factors to support the 

existence of a common law employment relationship, such as the fact 

that Mainstay controls the pay and benefits of the LEs (and pays 

the LEs even if its clients fail to reimburse Mainstay). Hansen 

Decl. ¶¶ 5, 14. It furnished the LEs with insurance. Hansen Decl. 

¶ 5. Mainstay directed its clients to undergo safety training and 

risk management, and handled harassment complaints. Id. ¶ 6. It 

also handled certain tax and employment liabilities. Id. ¶ 12. It 

made sure that the LEs "understood" that Mainstay was its employer, 

and required them to sign an agreement to that effect. Sparks 

Decl. ¶ 5. Mainstay's Employee Handbook set out guidelines for a 

wide variety of policies including absenteeism, harassment, 

computer and email usage, appearance, and smoking. See Employee 

Handbook at 11-21. Most significantly, Mainstay maintained the 

right to hire and fire employees, Hansen Decl. ¶ 5; Sparks Decl. 

¶ 6, which is "also an important factor indicating that the person 

possessing that right is an employer," 26 C.F.R. § 31.3306(i)-

1(b).18 

 The Court finds that the facts established by Plaintiffs, even 

when construed in the light most favorable to Plaintiffs, are 

 

18 The United States contends that Mainstay's "right to discharge 

worksite employees is illusory." US Opp'n at 21. Although the 

extent to which Mainstay exercised its right to hire and fire 

appears to be in dispute, it is undisputed that it possessed such 

rights. See Standard Customer Agreements. The Court finds that 

any dispute regarding Mainstay's actual use of such rights is 

immaterial, since even if this Court assumes that Mainstay's rights 

were substantial and regularly utilized, these rights would be 

insufficient to support a common law employment relationship in 

this context. 

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legally insufficient to support the existence of a common law 

employment relationship between Mainstay and its LEs. The Court is 

mindful that Mainstay is a 3401(d)(1) employer that operates by 

hiring its clients' employees as its own, Hansen Decl. ¶ 2, and did 

not fundamentally affect the day-to-day provision of services that 

these employees provided. Mainstay is in the business of assuming 

duties related to pay, benefits, and human resource supervision, as 

described above, and of leasing its employees services to its 

clients -- its relationship to its LEs is not dependent upon the 

nature of the services that they provide. Even assuming that 

Mainstay accepts a more robust set of duties and rights than most 

employee-leasing agencies, the Court finds that it has failed to 

establish that its role is that of a common law employer. 

E. The Significance of the ALJ Order

 Plaintiffs contend that "[t]he dual federal-state system 

created by the 2000 FUTA amendments gives state unemployment 

administrators a significant role in determining whether Tribes 

qualify for exemption from FUTA tax and treatment as reimbursing 

employers." Pls.' MSJ at 18. This Court recognizes that the 

results of its decision may be construed as inconsistent with the 

decision issued by the ALJ. See ALJ Order at 6-7. However, the 

ALJ's decision did not purport to interpret § 3306(c)(7). Nor did 

the ALJ consider the question of whether Mainstay was the common 

law employer of its LEs. Instead, it was based primarily upon 

section 606.5 of the CUIC. See id. Under this provision, an 

employee of a temporary staffing agency is considered the employee 

of that agency for the purposes of the CUIC, even though the 

employee's work was performed for the agency's client, regardless 

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of "the common law rules applicable in determining the employeremployee relationship . . . ." CUIC § 606.5(a), (c). Based on 

this provision, the ALJ concluded that Mainstay's employees were 

providing "services for" Mainstay. Id.

 This Court cannot restrict its interpretation of FUTA by 

incorporating the unemployment code provisions of any particular 

state. Section 606.5 of the CUIC, which is similar to § 3401(d), 

did not require the ALJ to consider the common law employer of 

Mainstay's LEs for the purpose of determining the existence of 

"wages." As previously discussed, the exceptions to the definition 

of employment in FUTA operate by nullifying the existence of 

"wages," §§ 3306(b)-(c), which focus on the common law employer, 

and Mainstay is made a statutory "employer" by § 3401(d)(1) 

irrespective of the tribal exception of the definition of 

"employment." 

 Although it is possible that this ruling may have implications 

for the operation of state law, those questions are not now before 

this Court. Plaintiffs claim that this result will "inequitably 

require Mainstay to grossly overpay its unemployment tax 

liabilities. . . . These amounts would be a windfall for the 

federal government, and would not be shared with the State of 

California to help fund federally mandated extensions of 

unemployment benefits or for other purposes." Pls.' MSJ at 20. 

However, the ALJ's ruling did not require Mainstay to meet its 

state unemployment tax burden through the reimbursement method -- 

it could have opted to pay state unemployment taxes as a regular 

nontribal employer. 26 U.S.C. § 3309(2). Plaintiffs have not 

demonstrated to this Court why Mainstay will be put in a worse 

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position by this Order than any other entity that may not avail 

itself of the exceptions of § 3306(c)(7). 

V. CONCLUSION

 The Court concludes that the tribal exception to "employment" 

of § 3306(c)(7) is only available to an Indian tribe where that 

Indian tribe is the common law employer of the individual in 

question. The Court also finds that the undisputed material facts 

presented by Mainstay are legally insufficient to establish that 

Mainstay is the common law employer of the employees in question in 

this suit. The Court hereby GRANTS the United States' Motion for 

Summary Judgment and DENIES Plaintiffs' Motion for Summary 

Judgment. 

IT IS SO ORDERED. 

Dated: January 7, 2010 

UNITED STATES DISTRICT JUDGE

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