No. 14917 IN THE SUPREME COURT OF THE STATE OF MONTANA

STANDARD CHEMICAL MANUFACTURING COMPANY, a corporation, Plaintiff and Respondent,

THE EMPLOYMENT SECURITY DIVISION OF THE MONTANA STATE DEPARTMENT OF LABOR AND INDUSTRY; THE BOARD OF LABOR APPEALS OF THE MONTANA STATE DEPARTMENT OF LABOR MJD INDUSTRY;MICHAEL J. WHALEN, JAMESW. MURRY, and DOUGLAS R. HANSIN ,as members of the Board of Labor Appeals, Defendants and Appellants.

Appeal from: District Court of the First Judicial District, Honorable Peter G. Meloy, Judge presiding. Counsel of Record: 

### For Appellants: Robert J.Campbel1, Helena, Montana For Respondent: Scribner,Huss and Mulroney, Helena,Montana



## !a[+q , ;.7q Filed:

,r -.,-. - Submitted on briefs: November 7, 1979 Decided:

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### Mr. Justice John Conway Harrison delivered the Opinion of the Court.

This is an appeal from a judgment holding that respondent is exempt from paying unemployment compensation tax on Persons it employs as salesmen. The judgment was rendered in the District Court of the FirstJudicial District, in and for the County of Lewis and Clark, the Honorable Peter G. 

### Meloy presiding. Respondent is a Nebraska corporation engaged in the manufacturing, distributing and wholesaling of livestock nutritional products. Respondent markets its products in twenty-three states through the use of certain salesman,who

are called "contract distributors"or "distributordealers." The salesmen are recruited by a division manager, who explains the nature of the products as well as respondent's method of distribution, and then enters into contracts for distribution. Once they are recruited, the salesmen purchase a saleskit for $40.00, which ismailed by respondent to either the salesman or his division manager. Accompanying the kit are supply order forms, salesmanuals, and other promotional sales items. Most of the salesmen employed by respondent are farmers, ranchers or persons involved in the livestock industry. There are no required hours and the salesmenmay work parttime. Salesmen receive no formal training except for occasional assistance in determining a customer's nutritional needs or a problem relating to toxicity. While the salesmendo not represent themselves as agents of the company, order formsnevertheless reflect the name of the company. The contract for sale, for example, is made between respondentand the customer. Payments for the products are made by check payable to either respondentor

### the salesman or by case payable to the salesman. Respondent furnishes a suggested retailprice for its products, but salesmen are not bound by the price. They may even barter for the products. Respondent extends credit to customerson the basis of prior approved credit applications,which must be obtained by the salesmen. When credit is approved and established, it is the responsibility of respondent to collect from the customer. Salesmenmay also extend credit to customers. They are liable to respondent,however, for the costs of goods sold. When salesmen order products, the wholesale purchase price is charged to the account of the salesman and he is individually responsible for loss, damage and contamination. The salesmanmay return the merchandise upon express approval,however, and receive a credit. Commissions

are paid to the salesmenweekly, and the amount of the commission is the difference between customer sales price and the wholesale price. Respondentmaintains five companywarehouses or merchandise banks inMontana. Salesmen are also permitted to have storage facilities,but must first receive permission from the company and must build them at their own expense. Approximately 20 

### to 30 

### percent of the salesmen have storage facilities. Merchandise is generally delivered to the company warehouses by respondent and may be picked up there by customers. There is a conflict in the testimony as to whether respondent delivers orders directly to customers. Both respondentand its salesmen have the right to terminate their contractat any time. At the conclusion of the relationship, salesmen leave with only a customer list and perhaps a greater knowledge of the nutritional needs oflivestock. This appeal arises out of a determination made by the Employment Security Division and the State Board of Labor Appeals that respondent's salesmen were "employees"within the terms of the provisions of Title 39, Chapter 51, Montana Code Annotated. Respondent filed an action in District Court to overturn those administrative decisions. On May 7, 1979, the District Court granted respondent judgment, holding that respondent was not subject to unemployment compensation tax on those persons acting as its salesmen. The following issue is raised for our consideration on appeal: Whether the District Court erred in determining that respondent's salesmenwere "independent contractors"and

were therefore exempt from unemployment compensation tax on those persons pursuant to Title 39, Chapter 51, Montana Code Annotated. This Court has previously used two tests as guidelines in determining whether servicesperformed by an individual for wages are deemed employment or are those of an independent contractor. See St. Regis Paper Co. v. Unemployment Comp. Comm'n (1971), 157Mont. 548, 487 P.2d 524; Pat Griffin Co. v. Employment Security Comm'n (1974), 163 Mont. 529, 519 P.2d 147. The first test is the so-called "ABC" test and is established by statute: "Serviceperformed by an individual for wages is considered to be employment subject to this chapter unless and until it is shown to the satisfaction of the division that: "(A) such individual has been and will continue to be free from control or direction over the performance of such services,both under his contract and in fact;"(B) such service is either outside the usual course of the business for which such service isperformed, or that such service isperformed outside of all the places of business of the enterprise for which such service is performed; and "(C) such individual is customarily engaged in an independently established trade, occupation, profession,or business." Section 39-51-203(4), MCA. Wages are defined in section 39-51-201,MCA, as 

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# . all remuneration payable for personal services, including commissions and bonuses and the cash value of all remuneration payable in any medium other than cash." All three of the stated conditionsmust exist or the services performed will be deemed to be employment. Griffin, supra, at 533, 519 P.2d at 150. The statute shall be reasonably applied and will not be distorted to allow persons who

are truly independent in their operations to be held employeesmerely for tax purposes and resulting benefits derived from an employer-employee relationship. Griffin, supra. To keep the distortion at a minimum, this Court has used another test derived from common lawprinciples as an additional guideline: "While section 87-148(j)(5),R.C.M. 1947 [nowsection 39-51-203(4)

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### , is used as a guide in the determination of the relationship between an employer and an individual performing services, the well-established test in determining whether an individual is an employee or an independent contractor is also a guide to be used. As we did in St. Regis, we here reiterate this test as expressed in Shope v. City of Billings, 85Mont. 302, 306, 278 P. 826, 827: "'An independentcontractor is one who renders service in the course of an occupation,and represents the will of his employer only as to the result of his work, and not as to the means whereby it is accomplished,and is usually not paid by the job. (And see Neyman v. Pincus, 82 Mont. 467, 267 

### P. 805.)'"The vital test indeterminingwhether a person employed todo a certainpiece of work is a contractor or a mere servant, is the control over the work which isreserved by the employer. Stated asa general proposition, if the contractor isunder the control of the employer, he is a servant; if not under such control, he is an independent contractor.

### " Griffin, 519 P.2d at150. In this case, two administrativebodies, the Employment SecurityDivision and the StateBoard of Labor Appeals, were confrontedwith a mixed question of law and fact, namely whether respondent's salesmen might be deemed to stand in the relationshipof "employment.

### " That question not only involved the determination of several underlying facts to establish the economic relationshipbetween respondent and its salesmen, but it alsoinvolved the specific application of a statutecontaining a broad statutory term. In questions of thiskind, where the agency isentrusted and charged with administering the statuteand making necessary, initial factual determinations, it iswell settled that a reviewing court's function is limited. Where factualdeterminations

arewarranted by the record and have a reasonable basis in law, they aretobe accepted. It isnot the court's function to substitute itsown inferences of factfor those of

an administrative tribunal oragency, where facts are supported by evidence inthe record. NLRB v. Hearst Publications (1943), 322 U.S. 111, 133, 64 S.Ct. 851, 860, 88 L.Ed. 1170,

Section 2-4-704, MCA states: 

### "(2) The courtmay not substituteitsjudgment for thatof the agency asto the weight of the evidence on questions of fact. The courtmay affirm the decision of the agency orremand the case for further proceedings. The court may reverse ormodify the decision if substantialrightsof the appellant have been prejudiced because the administrative findings, inferences, conclusions, ordecisions are:"(a)inviolation of constitutional or statutory provisions; "(b)inexcess of the statutory authority of the agency; "(c)made upon unlawful procedure; 

### "(dl affected by other error of law; "(e)clearlyerroneous inview of the reliable, probative, and substantial evidence on the whole record; "(f)arbitrary orcapricious orcharacterized by abuse of discretionorclearlyunwarranted exercise of discretion; or "(g)because findings of fact, upon issue essential tothe decision, were notmade although requested. Here, the Employment SecurityDivision and the State Board determined that, forunemployment compensation tax purposes, respondent's salesmen were employees. The District Court overturned those determinations and held that they were clearly erroneous inview of the reliable, probative and sustantial evidence on the record. The court then found thatrespondent's salesmen were "independent contractors." Upon this appeal, we areconfronted with the task of determiningwhether the District Court committed an abuse of discretion. Atthe outset, we recognize that the element of right of control is themost crucial factor which distinguishes "employees" from "independent contractors." This element is

common toboth the "ABC" and common lawtests. We also recognize that theright of control is a very closequestion under the particular factsand circumstances of this case. There are several factorswhich suggest thatrespondent retained the right tocontrol its salesmen: salesmen were recruited by a divisionmanager; they purchased $40.00 sales kits; they were assigned toparticular territories inwhich

### they could distribute products; respondent recommended sales prices for itsproducts; sales were made on respondent's contracts and forms;and respondent extended credit to customers. There are also several other factorswhich suggest that respondentdid not have the right of control: salesmen received no formal training; they could work parttime; they furnished their own transportation and paid their

own expenses; they could deviate from the recommended price and barter for products; they could extend credit to customers; they were not required to file reports; and they were responsible for damage, loss or contamination. Where the issue of control is so close and there is sufficientcredible evidence on the record which would allow reaching opposite conclusions,we think that a findingwhich overturns another as being "clearlyerroneous" is an abuse of discretion. Where the DistrictCourt's reviewing function is limited,as in this case, the findings of administrative agencies and tribunalsmust be sustained where there is sufficient credible evidence in the record. In view of the closeness of this case, however, we also feel it is necessary to consider another element of the "ABC" 

### test, which is controlling in our jurisdiction. That test, unlike the common law test, goes beyond the issue of control. In particular, we make reference to element "C" 

### of the "ABC"test, the question of whether an individual is customarily engaged in an independently established trade, occupation, profession or business. To uphold the findingsof the District Court, we must be able to say that respondent's salesmen here are customarily engaged in an independently established trade, occupation or business.We have never had occasion to construe or interpret what ismeant by an "independently established business" under part "C" of section 39-51-203(4), MCA. Several other jurisdictions with statutes identical to ours, however, have interpreted the phrase. InVermont, for example, an "independently established business" is an enterprise in which a claimant is able to engage in an independent activity without any hindrance from any individual whatsoever. Vermont Securities, Inc. v. Unemployment Compensation Comm'n (1954), 118Vt. 196, 201, 104A.2d 915, 917;Bluto v. Dep't of Employment Sec. (1977), 135Vt. 205, 373 A.2d 518, 521. In Maine, an "independently established business" is an enterprise in which an individual has a proprietary interest to the extent that he could operate without hindrance from any

source. Hasco Manufacturing Co. v. Maine Employ. Sec. Comm'n (1962), 158Me. 413, 185A.2d 442, 445; Fournier v. Maine Employ. Sec. Comm'n (1965), 161Me. 48, 206 A.2d 925, 926. Illinois also adopts the "proprietary interest" test. Hart v. Johnson (1979), 68 Ill.App.3d 968, 386 N.E.2d 623. In Hart, the Illinois court stated: 

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# . it is apparent that the act contemplates that one who is engaged in an independent enterprise is an individual who has a proprietary interest in such business to the extent that he can operate samewithout hindrance from any individualwhatsoever and whose business also is free from control. Here, the so-called dealers had no business to sell or give away. They were dependent on the appellant for their employment



# . . .Although appellanturges that the individuals were free to carry other lines, it is a fact that there is no evidence that any individuals did so. [Citationomitted.]" Hart, 386 N.E.2d at 629. An "independently established business" in New Jersey is one thatwill survive the termination of a particular service relationship. In Gilchrist v. Division of EmploymentSecurity (19571, 48 N.J.Super. 147, 137A.2d 29, 35, the New Jersey court stated: "The fact that a salesman who works on commission must rely on his efforts and ability to secure orders tomake a livelihood does not necessarily mean thathe isworking for himself asan entrepreneur orbusinessman, within the intendment of test C. The double requirement that an individual must be 'customarily engaged' and 'independently established' calls for an enterprise that exists and can continue toexistindependently of and apart from the particular service relationship. The enterprise must be one which is stable and lasting--one thatwill survive the termination of the relationship." We alsonote with interest several other states within thisjurisdiction thathave statutes similartoours. Idaho, Oregon and Utah have statutes which contain parts "A" and "C" of the "ABC" test. Part "C" of those statutesadds that the "independently established business" must be "of the same nature asa contract for service." Idaho has established three factors tobe considered indetermining whether an individual isengaged inan independent business: (1)Does the worker have authority tohire subordinates? (2) Does the worker own major itemsof equipment? (3)Would either party be liable to the other for a preemptory terminationof the business relationship? Hammond v. Dep't of Employment (1971), 94 Idaho 66, 480 P.2d 912, 914; Swayne v. Dep't of Employment (1969), 93 Idaho 101, 456 P.2d 268, 272. InUtah importance isplaced upon the independence of the business. An "independently established business" must exist independent of the services under consideration inthe

sense that it is the whole of which the particular ser771ce isa part. Leach v. Board of Review of Industrial Com'n (1953), 123Utah 423, 260 P.2d 744, 748. In Oregon, case lawholds that an independently establishedbusiness isan enterprisewhich is created and exists apart from a relationship with a particular employee and whichsurvives the termination of that realtionship. The continued existence of the business does not depend upon a relationship with a particular employer. Timberland Sales, Inc. v. Employment Division (1975), 20 0r.App. 192, 530 P.2d 880, 883-884;Kirkpatrick v. Peet (1967), 247 Or. 204, 428 P.2d 405, 409-10; Baker v. Cameron (1965), 240 Or. 354, 401 P.2d 691, 696. The Oregon legislature has also enunciated additional criteria to determine whether an enterprise is an independently established business: "(A)The individual customarily has two or more effective contracts. (B)The individual as a normal business practice utilizes separate telephone service,business cards and engages in such commercial advertising as is customary in operating similar businesses.

(C)The individual is recognized by the Department of Revenue as an employer. (D)The individual furnishes substantiallyall of the equipment, tools and supplies necessary in carrying out his contractual obligations to his clients." 0r.Rev.Stat. § 657.040 In this case, both the Board and the District Court entered specific findingswith respect to part "C"of the "ABC"test. The Board stated: "The salesmenwere not engaged in independently established businesses as a result of their association with the company, and would not have saleable businesses if they terminated their relationship with the company. They were not engaged in independently established businesses, but merely salesmenwho worked on a commission basis.

### " The District Court stated: 

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. . The salesmen are livestock 'nutritional experts' capable of analyzing and adjusting the nutrition of their customer's livestock. [Citations to transcript omitted.] This is a skill they could sell after their relationship with Standard Chemical is ended. It does notmatter that they would not have a business to sell. A lawyer, for example, does not have a saleable business, only a marketable skill. Thus, it is clear that the third requirementof the 'ABC' test is fulfilled."Upon a review of therecord before us, we find that the District Court abused itsdiscretion inholding thatrespondent's salesmen wereindependent contractors and were not subject tounemployment compensation benefits. Respondent's salesmen here areemployees. They have no independently established business of their own. Their "business" does not exist independently and apart from their relationshipwith respondent. They are, rather, dependent upon respondent for their employment. Should their relationshipwith respondent terminate, their "business" would also terminate aswell. They have no authority tohire subordinates; they have the right, asdoes respondent, to terminate their employment; and, they have no liability for a peremptory termination of their relationship. It isalsodoubtful whether respondent's salesmen may truly be called "nutritional experts." There is little formal training the salesman receive from which to gain such expertise. Respondent only occasionally assists its salesmen indetermining customers' nutritional needs and inproblems relating to toxicity. For these reasons, we hold that theDistrictCourt abused itsdiscretion and that respondent's salesmen are employees. Accordingly, thejudgment of the DistrictCourt is reversed

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We concur: