Case Name: UTAH HOTEL CO. v. INDUSTRIAL COMMISSION et al.
Court: Utah Supreme Court
Jurisdiction: Utah
Decision Date: 1944-08-28
Citations: 107 Utah 24
Docket Number: No. 6648
Parties: UTAH HOTEL CO. v. INDUSTRIAL COMMISSION et al.
Judges: McDONOUGH and WADE, JJ., concur.
Reporter: Utah Reports
Volume: 107
Pages: 24–44

Head Matter:
UTAH HOTEL CO. v. INDUSTRIAL COMMISSION et al.
No. 6648.
Decided August 28, 1944.
(151 P. 2d 467.)
See 16 C. J. S. Constitutional Law Sec. 171, 42 Am. Jur. 507.
Judd, Ray, Quinney & Nebeker, of Salt Lake City, for plaintiff.
Go-over A. Giles, Atty. Gen., Fred F. Dremann, of Salt Lake City, and Zar E. Hayes, Asst. Atty. Gen., for defendants.

Opinion:
WOLFE, Chief Justice.
Certiorari to review an order of the Industrial Commission holding the petitioner liable under Title 42, Chapter 2a, U. C. A. 1943, for certain contributions to the unemployment compensation fund.
The petitioner, Utah Hotel Company, operates the Hotel Utah at Salt Lake City. In connection with the hotel and in the same building, the petitioner operates various dining rooms which are equipped for dancing. For the entertainment of its guests and others, it conducts dancing as well as serving meals and: refreshments. In the operation of the dining services and dancing facilities, it furnishes bands, orchestras, and other entertainers for the pleasure of its patrons. These bands usually fall into two groups or classifications. Some made up of local musicians were called "local bands." Others known as "name bands" or "traveling bands" were made up and organized outside of the state and had acquired a degree of prominence and notoriety extending outside of their home state. These latter bands or orchestras performed under a trade name, usually the name of their leader, who had attained national or near national reputation as a leader and conductor of dance orchestras.
The arrangements for the appearance of these bands or orchestras, usually for periods of one to three month stands, were made by the hotel management. In addition, the hotel occasionally brought in special entertainers or features, usually traveling artists for a one night stand. For convenience, these various types will be referred to hereafter as "local bands," "name bands" and "specialty features." The hotel paid the salary or earnings of each of these groups during their stands. About 1938 some difference arose between the hotel company and the Industrial Commission regarding liability for unemployment taxes on the amount paid these musicians and entertainers, with the result that in 1939 lawsuits were pending between them in the District Court of Salt Lake County, and in the State Supreme Court and some matters were still pending before the Industrial Commission. In that year the hotel company and the Industrial Commission, through its Department of Employment Security, entered into an oral agreement by way of settlement of the suits and matters then pending in the courts and before the Commission. The substance of the agreement was that plaintiff was to pay unemployment taxes on all members of "local orchestras" made up of local talent — or what might be called intrastate orchestras, but would not be required to pay any taxes on "name bands" — or what might be considered interstate orchestras. Until the filing of the claims involved in the present action, the parties operated under this agreement.
In 1941, the manager of the hotel company, while in California, engaged Freddy Nagel's orchestra for a four weeks stand at the Hotel Utah. This is admittedly a "name band." The agreement was made with Nagel or with his booking agency. None of the other members of the orchestra were contacted personally or consulted by the hotel manager. Nagel's orchestra filled its engagement at the hotel. The hotel company paid over the agreed price to Nagel and he in turn paid the players their portions. Roy Edward Crawford, a member of the orchestra, subsequently being unemployed, filed a claim for unemployment benefits, which the Industrial Commission allowed and called upon the hotel company to pay into the unemployment compensation fund, payroll taxes covering the amount paid to Nagel's orchestra. The company disputed liability and this presents case number one.
Another matter arising at about the same time involves what are called "specialty features" procured by the hotel company for the entertainment of its guests. Contracts for these attractions are made through a local booking agency, and there is no contract between the hotel company and the performers until they arrive. These are usually one night stands, the performers being on tour through the country under direction of booking managers. The Industrial Commission ordered the hotel company to remit to it payroll taxes on all these acts, which the hotel company contests, and presents case number two. The order of the commission in both cases was retroactive to the third and fourth quarters of 1940. By stipulation of the parties the two matters are consolidated and presented as a single case.
The petitioner raises the point that it was not required under the Employment Security Act, Title 42, Chapter 2a, U. C. A. 1943, to pay contributions into the Unemployment Compensation Fund money paid either to the "name bands" or to the "speciality features." Under the holding of this court in Singer Sewing Machine Co. v. Industrial Comm., 104 Utah 175, 134 P. 2d 479 (on petition for rehearing, 104 Utah 196, 141 P. 2d. 694, 695), it cannot be successfully contended that the "name bands" or the "speciality features" were not performing "services" for "wages" as those terms are defined by the act. The interpretation and construction of the act as set forth in the Singer Sewing Machine case are controlling here. In the opinion written on petition for rehearing, supra, we said that the Employment Security Act includes relationships not within the common law relationship of master and servant; that a service relationship exists whenever personal services are performed for wages; and that once such service relationship is found to exist, the provisions of Sec. 19 (j) (5) invoked "to determine whether or not the service relationship found to exist is one which is included within or one which is excluded from the operations of the Act. If such service relationship is one which meets, conjointly, the provisions of (a), (b) and (c) of Sec. 19 (j) (5) the employment is filtered or culled out from the operations of the act, and benefits cannot be received, nor does tax liability exist. If, however, the service relationship is one that does not meet conjointly the provisions of (a), (b) and (c) of 19 (j) (5) it remains as employment within the act and the employer is liable for the tax or contribution thereon."
Sec. 19 (j) (5) reads:
"Services performed by an individual for wages or under any contract or hire shall be deemed to be employment subject to this act unless and until it is shown to the satisfaction of the commission that—
"(A) such individual has been and will continue to be free from control or direction over the performances of such services, both under his contract of hire and in fact; and
"(B) such service is either outside the usual course of the business for which such service is performed or that such service is performed outside of all the places of business of the enterprise for which such service is performed; and
"(C) such individual is customarily engaged in an independently established trade, occupation, profession, or busines of the same nature as that involved in the contract of service."
The service relationships involved herein meet the requirements of both (A) and (C). But the Act requires that the service relationships meet the requirements of (A), (B) and (C) conjointly. Singer Sewing Machine case, supra. The Commission's decision is based on the finding that the services herein involved did not meet the requirements of subsection (B).
It must be admitted that the services here performed were not "outside of all the places of business" of the petitioner, since the contracts all specifically provided that service should be rendered in the hotel. Nor were the services performed outside the usual course of the petitioner's business. The record abounds with evidence that it was usual and customary for the hotel to furnish entertainment in connection with the operation of its dining rooms and to furnish dance bands in connection with the operation of its dancing facilities. It thus appears that there was a service relationship, for wages, and that such relationship did not meet, conjointly, the requirements of Section 19 (j) (5). The Commission correctly held "name bands" and "speciality features" to be service relationships within the Act and that the hotel company was liable thereon for contributions to the unemployment compensation fund.
The petitioner next contends that the agreement between the Commission and the petitioner in settlement of similar disputes in 1939 was and is binding on the Commission and prevents recovery by the Commission in this case. This argument is not tenable. The agreement is at the most merely an administrative interpretation of the Act and of the petitioner's liability thereunder. The Commission had the authority to interpret the Act, for such is a necessary condition precedent to its administration, but such interpretation was not binding. This is pointed out by Von Baur, "Federal Administrative Law," Sec. 73, 74, wherein it is stated:
"The nature of the administrative process in executing a statutory scheme requires that administrative agencies not only determine the administrative questions involved, hut apply the law in the first instance as well — that is, that they also venture an initial decision on the judicial questions. Otherwise, as a practical matter, the agencies could not function. A 'decision' or 'finding' by an administrative agency upon a judicial question is never a binding decision, for under the doctrines of supremacy of law and the separation of powers a binding decision of a question of law affecting private rights may only be made by an appropriate court acting judicially. Thus, although as a practical or procedural matter an administrative agency must venture a decision upon such a question of law, such questions are always open for independent judgment of an appropriate court acting judicially . And a binding decision on a simple judicial question, such as a question of statutory construction, may only be made by an appropriate court acting judicially." See also Gellhom, "Administrative Law — Cases and Comments," p. 313.
The point involved in the settlement of the earlier group of cases was whether, under Sec. 42-2a-19, the hotel company was an employer of the orchestra members or not. In the agreement the Commission concluded that "name bands" and "speciality features" were not within the statute. This was purely a question of law and the erroneous interpretation of the statute by the Commission could not have the effect of changing liability under the statute nor estop-ping the Commission from later changing its interpretation.
In so holding, we appreciate the fact that the hotel company is now in a position under which it will be penalized for abiding by and relying upon a regulation or interpretation of the Department of Employment Security. This interpretive agreement was, after all, promulgated by the state's own agency and the individual who chooses to conform to it rather than ignore it should not suffer from his law abiding attitude even though he bases his actions on an invalid regulation. Therefore, as a general proposition we sympathize with the view that an individüal should not have to run the risk of a change of administrative interpretation which may result in a retroactive change in regulations to his disadvantage. Although, in view of these factors a contrary result might seem to be a desirable one when applied to the facts of this particular case, the consequences which will flow from such a holding strike at the very heart of the relationships between administrative tribunals, the legislature and the courts.
We deem it essential to a clear understanding of the problems implicit in this matter to note at the outset that regulations of administrative tribunals are not all birds of a feather. A failure to note this fact will inevitably lead to hazy thinking and erroneous concepts. The weight which should be given to a prior administrative regulation will to a large extent be dependent upon the type of regulation involved. Regulations may be promulgated pursuant to a specific delegation of legislative power. In prescribing such regulations, the administrative tribunal, within designated limits, may actually be making the law or prescribing what the law shall be. In prescribing such a regulation the tribunal in effect legislates within the boundaries marked out for its action by legislative enactment. On the other hand, the administrative tribunal may, by adopting a given regulation, only purport to interpret what the legislature meant by its statutory language. Such a regulation is nothing but an administrative opinion as to what the statute under construction means. See Von Baur, 'Federal Administrative Law," p. 487, Sec. 489, wherein it is stated that the interpretative regulation is nothing more "substantial than an administrative construction or interpretation of a general term in a statute — that is, an administrative guess at a judicial question."
From the statement of the case in the briefs of counsel, it is clear that the so-called regulation under construction in this case is nothing more than an initial guess by the administrative tribunal as to what the statute (Sec. 42-2a-19) means. In the petitioner's brief it is stated that the "point determined did not involve the tax or the collection thereof, but rather involved deciding 'the question of whether, under Section 42-2a-19, the hotel company was an employer of orchestra members or not." As we have now determined that Section 42-2a-19 did make the hotel company an employer of orchestra members, it is difficult to see upon what basis it could be held that the erroneous administrative construction of this statute could change it. An administrative interpretation out of harmony and contrary to the express provisions of a statute cannot be given weight. To do so would in effect amend the statute. Construction may not be substituted for legislation. United States v. Missouri Pac. R. Co., 278 U. S. 269, 49 S. Ct. 133, 73 L. Ed. 322.
In Manhattan General Equipment Co. v. Commissioner of Internal Rev., 297 U. S. 129, 56 S. Ct. 397, 400, 80 L. Ed. 528, the court held that an administrative regulation which was contrary to the statutory provision was a nullity. In so holding, the court said:
"The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity. (Citing cases.) And not only must a regulation, in order to be valid, be consistent with the statute, but it must be reasonable. (Citing cases.) The original regulation as applied to a situation like that under review is both inconsistent with the statute and unreasonable.
"The contention that the new regulation is retroactive is without merit. Since the original regulation could not be applied, the amended regulation in effect became the primary and controlling rule in respect of the situation presented. It pointed the way, for the first time, for correctly applying the antecendent statute to a situation which arose under the statute. See Titsworth v. Commissioner of Internal Revenue, 3 Cir., 73 F. 2d 385, 386. The statute defines the rights of the taxpayer and fixes a standard by which such rights are to be measured. The regulation constitutes only a step in the administrative process. It does not, and could not, alter the statute. It is no more retroactive in its operation than is a judicial determination construing and applying a statute to a case in hand."
True, there is a statute (Title 26 U. S. C. A. Int. Rev. Code, § 3791 (b) expressly referring to the retroactive effect of Treasury Regulations. But the cases do not place the holding upon the language of the statute. In fact the court in the Manhattan case, supra, expressly states that it did not consider the regulation under consideration to be retroactive in effect. If it were not retroactive, a statute authorizing retroactive regulations could have had no effect upon the court's decision. The case stands clearly for the doctrine that when an administrative tribunal makes an "initial guess" as to what effect a statute has, that guess is not to any extent binding on the courts or upon the administrative tribunal which made said erroneous guess. When a new regulation is passed or when the statute is for the first time considered by the courts, it seems clearly correct to state that the new rulings are not retroactive, but that they are in fact but the first correct application of the law.
The difference in approach which should be taken when it appears that the administrative body is acting in a legislative capacity to interpret statutes or other regulations is stressed in Arizona Gro. Co. v. Atchison, T. & S. F. R. Co., 284 U. S. 370, 52 S. Ct. 183, 186, 76 L. Ed. 348. The case turned upon the question of whether the Interstate Commerce Commission had the power to award reparations for shipments which had moved under rates which had been previously approved by said Commission. The Commission had established rates for the railroad, which rates were put into effect. Later the Commission determined that it had established a rate which was too high and ordered the railroad to lower its rates; it also ordered the railroad to pay reparations to shippers on the theory that the original rates which had been in effect had been too high. The court held that this could not be done. In so holding, the court said:
"The Commission's error arose from a failure to recognize that, when it prescribed a maximum reasonable rate for the future, it was performing a legislative function, and that, when it was sitting to award reparation, it was sitting, for a purpose judicial in its nature. In the second capacity, while not bound by the rule of res judicata, it was bound to recognize the validity of the rule of conduct prescribed by it, and not to repeal its own enactment with retroactive effect. It could repeal the order as it affected future actions and substitute a new rule of conduct as aften as occasion might require, but this was obviously the limit of its power, as of that of the Legislative itself."
WMle the distinction between the various types of administrative regulations has not yet crystallized in the court opinions, it is noted in a marked way in current legal writings. 'See Von Baur, Federal Administrative Law, p. 489; Alvord, Treasury Regulations and the Wilshire Oil Case, 1940, 40 Col. L. Rev. 252; Lee, Legislative and Interpretive Regulations, 1940, 29 Geo. L. J. 1; Feller, Addendum to the Regulations Problem, 1941, 54 Har. L. Rev. 1311; and articles cited therein.
In Alvord's article in 40 Col. L. Rev. 252, the distinction is clearly drawn. He notes that the issue is not one of nomenclature, but is far more fundamental. The article points out that "Legislative Regulations" are prescribed pursuant to a specific delegation of legislative power. They purport to prescribe for the future a rule of general application. They have the force and effect of law. On the other hand "Interpretive Regulations" are merely the administrator's construction of a statute. In the case of legislative regulations, the questions before a court for judicial determination, if a regulation is attacked, are only whether the delegation of power was valid, whether the regulation was within that delegation, and, if so, whether it was a reasonable regulation under a due process test. Alvord states that the courts will not and should not substitute their opinions for that of the administrative officials in determining the policy of legislative regulations. On the other hand, where an interpretive regulation is involved, the ultimate question before the court is: What does the statute mean?
In the Article by Lee in 29 Geo. L. J. 1, the point is made that:
"Some if not the majority of the regulations issued under most regulatory acts are interpretive. Such regulations express the views of the administrative officer or agency as to the meaning or application of general requirements of a regulatory act, the construction that will be followed in administering the act. Interpretive regulations (except where they have been 'ratified' by Congress) have validity in judicial proceedings only to the extent that they correctly construe the statute and then, strictly speaking, it is the statute and not the regulation to which the individual must conform."
The article notes that one who chooses to rely upon an interpretive regulation does so at his own peril and stands the risk of it not being followed by the courts. It notes that in some cases Congress has imposed statutory limitations remedying the harsh results which are occasioned by an administrative officer or agency changing its interpretation of a statute and then going further and applying to past events the new interpretive regulation rather than the regulation which had been in force at the time of the event. Reference is made to the Securities and Exchange Act of 1934 in which it is provided that:
"No provision of this Act imposing any liability shall apply to any act done or omitted in good faith in conformity with any rule or regulation of the [Commission] notwithstanding that such rule or regulation may, after such act or omission, be amended or rescinded or be determined by judicial or other authority to be invalid for any reason." 15 U. S. C. A. § 78w(a).
Lee states that:
"Such a provision accomplishes two results. It necessarily leaves the statutory rule unchanged and thereby protects the individual who chooses to rely on the statute rather than on the regulation. However, if the individual chooses to rely not on the statute but on the Government's own regulation such a provision also protects the individual up to the time that the invalidity of the regulation is determined either by decision of the court or by amendment or rescission by the administrative officer or agency, and futher protects the individual against retroactive amendment or rescission of the regulation."
The various sections of Title 42, U. C. A. 1943 imposed liability upon the hotel company to make a contribution for the fund. This liability was created by statute. It existed even though the tribunal charged with the administration of the Act erroneously thought that Act did not apply in the case of "name bands." Such an erroneous construction could not have the effect of amending the statute or of can-celling the statutory liability of the employer. To hold otherwise would permit the administrative tribunal to, in effect, amend a statute by the adoption of erroneous interpretive regulationi. Construction is not legislative and should not be given that effect.
The order of the Commission is affirmed.
McDONOUGH and WADE, JJ., concur.