Court Opinion

ID: 2688062
Source: CourtListenerOpinion
Date Created: 2014-07-31 21:45:49.572538+00
Date Added: 2024-06-11T13:17:27.644253
License: Public Domain

IN THE COURT OF APPEALS OF IOWA

                            No. 3-1114 / 13-0609
                             Filed April 16, 2014

STARK CONSTRUCTION and
CHARLES STARK,
    Petitioners-Appellees,

vs.

JOHN LAUTERWASSER,
     Respondent-Appellant.
________________________________________________________________

      Appeal from the Iowa District Court for Linn County, Ian K. Thornhill,

Judge.

      A workers’ compensation claimant appeals a judicial review order

reversing the agency’s decision that he was an employee and not an

independent contractor. REVERSED AND REMANDED.

      Thomas M. Wertz and Daniel J. Anderson of Wertz & Dake, Cedar

Rapids, for appellant.

      Matthew G. Novak of Pickens, Barnes & Abernathy, Cedar Rapids, for

appellees.

      Heard by Vogel, P.J., and Tabor and McDonald, JJ.
                                          2

TABOR, J.

       We must decide if the workers’ compensation commissioner properly

concluded an injured carpenter was working as an employee of a construction

company and therefore was eligible for benefits. Because substantial evidence

supports the commissioner’s fact findings, and his application of the law to those

facts was not “irrational, illogical, or wholly unjustifiable,” we reverse the district

court and remand for determination of the remaining issues.

I.     Background Facts and Proceedings

       John Lauterwasser has been a carpenter for more than two decades. For

many years he was a full-time employee of Don Risdahl Builders and performed

work for his own company, J.B. Construction, on weekends. In 2009, the flow of

projects coming into Risdahl Builders slowed down. So in May of that year,

Lauterwasser started doing carpentry work for Stark Construction, a company

owned by Charles Stark.

       Lauterwasser was working for Stark at the Bloomsbury Farms in Atkins on

September 18, 2009, when his saw kicked back and his left index and middle

fingers ran across the blade.         Stark and co-worker Ben Schafer rushed

Lauterwasser to the hospital where he underwent surgery to repair tendon

damage.

       Lauterwasser provided information to the hospital that he was employed

by Don Risdahl Builders and was self-insured. On a September 21, 2009 follow-

up visit to the doctor, Lauterwasser said he was not covered by workers’

compensation insurance and was the person responsible for the medical billing.
                                        3

Lauterwasser participated in physical therapy until December 9, 2009, when he

asked to be released because of the lack of insurance. Lauterwasser returned to

his work with Stark in late 2009.

       When Lauterwasser filed his 2009 taxes he reported the $20,423 in pay

he received from Stark as income for his subcontractor business. Lauterwasser

also received $13,293 in wages from Risdahl Builders in 2009.

       On May 7, 2010, Lauterwasser filed a claim for benefits under the workers’

compensation act, claiming he was Stark’s employee on the date of his injury.

On June 18, 2010, Stark filed an answer denying Lauterwasser was ever an

employee of his construction company and seeking dismissal of the claim.

       A deputy workers’ compensation commissioner held a hearing on

Lauterwasser’s claim on May 11, 2011. The deputy heard from Lauterwasser,

Stark, Schafer, and Roger Nelson, who also did construction work with Stark.

The deputy issued his arbitration decision on July 12, 2011, concluding

Lauterwasser failed to prove he was an employee as that term is defined in Iowa

Code section 85.61(11) (2009). The deputy relied on the “common business

practice in the Benton and Linn County areas” where a carpenter would contract

with a client and then bring other carpenters on as “subcontractors” to complete

the job.

       Lauterwasser appealed the deputy’s decision to the commissioner,

arguing “overwhelming evidence supports a finding that claimant is an employee

of Stark and not an independent contractor.” The commissioner agreed with

Lauterwasser, observing: “All of the men who testified at the hearing—including
                                          4

claimant and Stark—appear to have consistently engaged in or been the victim of

worker misclassification.” The commissioner issued the final agency order on

August 14, 2012, reversing the arbitration decision and awarding Lauterwasser

permanent partial disability benefits, healing period benefits, and medical

expenses. Stark sought judicial review.

       On March 29, 2013, the district court reversed the final agency action.

The court elevated the “intent of the parties” over all other considerations

relevant to determining whether a claimant qualifies as an employee under

chapter 85. The court reasoned:

              The Commissioner found the parties and witnesses intended
       to work for one another as sub-contractors with the intent to
       circumvent workers’ compensation laws. The Court cannot find any
       evidence, whether by testimony or documentation, that supports
       the Commissioner’s decision. Both the deputy and Commissioner
       applied the same facts to the correct legal authorities. However,
       the Commissioner’s determination that the parties’ intent should
       not, be considered because they intended to evade workers’
       compensation law is not supported by any evidence in the record.
       This lack of evidence leads the court to conclude the
       Commissioner’s conclusion was illogical . . . .

       Lauterwasser now appeals from the judicial review order.

II.    Standard of Review

       Judicial review of agency action is governed by Iowa Code section

17A.19(10). We will apply administrative law standards to see if we reach the

same result as the district court. Burton v. Hilltop Care Center, 813 N.W.2d 250,

255–56 (Iowa 2012). The particular standard of review depends on the aspect of

the agency’s decision challenged in the petition for judicial review. Id. at 256.
                                        5

      Stark’s petition for judicial review challenged the commissioner’s definition

of “employee.”   When a substantive term within the special expertise of the

agency is being interpreted, the agency is vested with the power to interpret that

provision. Renda v. Iowa Civil Rights Comm’n, 784 N.W.2d 8, 14 (Iowa 2010).

The legislature did not delegate any interpretative authority to the commissioner

to interpret the definition of “employee” in chapter 85. Staff Mgmt. v. Jimenez,

839 N.W.2d 640, 648 (Iowa 2013). Therefore, neither the district court nor our

court on appeal is required to defer to the commissioner’s interpretation of the

term “employee.” We may substitute our own judgment if the commissioner

improperly defined that term. See Renda, 784 N.W.2d at 14-15.

      Stark’s petition for judicial review also challenged the commissioner’s

findings of fact. Because the commissioner’s factual determinations are “clearly

vested by a provision of law in the discretion of the agency,” both the district

court and our court on appeal give deference to the commissioner's factual

determinations if they are based on substantial evidence, viewing the record as a

whole. See Larson Mfg. Co. v. Thorson, 763 N.W.2d 842, 850 (Iowa 2009).

“‘Substantial evidence’ means the quantity and quality of evidence that would be

deemed sufficient by a neutral, detached, and reasonable person, to establish

the fact at issue when the consequences resulting from the establishment of that

fact are understood to be serious and of great importance.”           Iowa Code

§ 17A.19(10)(f)(1); Thorson, 763 N.W.2d at 850. The question is not whether the

evidence supports a different finding, but whether the evidence supports the

finding actually made. Meyer v. IBP, Inc., 710 N.W.2d 213, 218 (Iowa 2006).
                                            6

       Finally, Stark’s petition for judicial review challenged the commissioner’s

application of the law to the facts. Courts will not reverse that application unless

it is “irrational, illogical, or wholly unjustifiable.” See Neal v. Annett Holdings, Inc.,

814 N.W.2d 512, 518 (Iowa 2012).

       On appeal, Lauterwasser contends the district court erred in determining

the intent of the parties was a controlling factor in defining who is an employee.

He also argues the district court “did not properly apply ‘substantial evidence’

review and improperly substituted the court’s judgment for that of the agency.”

Finally, Lauterwasser asserts the district court erred in deciding the

commissioner’s application of the law to the facts was illogical. If our application

of the chapter 17A standards noted above yields the same conclusions as the

district court, we affirm; if we reach different conclusions, we reverse.            See

Democko v. Iowa Dep’t of Natural Res., 840 N.W.2d 281, 286 (Iowa 2013).

III.   Analysis

       We start by discussing the definition of “employee” in chapter 85, as well

as the multi-factor tests adopted by our courts to differentiate between

employees and independent contractors. We then turn to the question whether

the record contained substantial evidence to support the agency’s fact finding.

Finally, we determine whether the agency’s application of the law on employee-

employer relationships to Lauterwasser’s circumstances was irrational, illogical or

wholly unjustifiable.
                                        7

      A. The Governing Law

      The workers’ compensation act provides coverage for “all personal injuries

sustained by an employee arising out of and in the course of the employment.”

Iowa Code § 85.3(1); Meyer, 710 N.W.2d at 220. The act defines an employee

as “a person who has entered into the employment of, or works under contract of

service, express or implied, or apprenticeship, for an employer . . . .” Iowa Code

§ 85.61(11).   The act also lists certain people who do not meet this broad

definition, including independent contractors.   See id. § 85.61(11)(c)(2).     In

construing these legislative definitions, our courts have indulged a “measure of

liberality” and “doubt as to whether a claimant was an employee or independent

contractor is resolved in favor of the former status.” See Daggett v. Nebraska-

Eastern Exp., Inc., 107 N.W.2d 102, 105 (Iowa 1961); see also Usgaard v. Silver

Crest Golf Club, 127 N.W.2d 636, 639 (Iowa 1964) (noting act is “liberally

construed to extend its beneficent purpose to every employee who can fairly be

brought within it”). Furthermore, the workers’ compensation statute is “intended

to cast upon the industry in which the worker is employed a share of the burden

resulting from industrial accidents.” Caterpillar Tractor Co. v. Shook, 313 N.W.2d

503, 506 (Iowa 1981) (explaining theory that ultimate cost is born by the

consumer as the cost of the production).

      Initially, Lauterwasser, as claimant, must establish that at the time of his

injury he was rendering services for Stark. See Everts v. Jorgensen, 289 N.W.

11, 13 (Iowa 1939). The burden then shifts to Stark to prove Lauterwasser was

an independent contractor and not an employee. Daggett, 107 N.W.2d at 106.
                                           8

        Stark testified he had a verbal agreement with Lauterwasser that if he

needed work, Stark would hire him as a subcontractor at an agreed-on hourly

rate.   The name chosen by the parties to describe their relationship is not

conclusive.       Practitioners     in   workers’   compensation      law    recognize

misclassification can occur:      “In an attempt to avoid the cost of providing

protection to their workers, employers have historically tried to establish an

independent contractor relationship for their workers.” 15 James R. Lawyer, Iowa

Practice Series, Workers’ Compensation § 3:1, at 19 [hereinafter Lawyer]; see

also 3 Larson’s Workers’ Compensation Law § 63.01, at 63-3 [hereinafter

Larson] (quoting General Accounting Office study estimating “15% of all

employers misclassify 3.4 million workers as independent contractors annually”).

A close look at the underlying relationship is necessary to properly determine

whether Lauterwasser was an employee or an independent contractor. See 15

Lawyer, § 3:1, at 19.

        1.     Multi-factor tests

        When the issue is an individual’s status as an employee versus an

independent contractor, many factors are relevant. See Nelson v. Cities Serv.

Oil Co., 146 N.W.2d 261, 265 (Iowa 1966). In determining the existence of an

employer-employee relationship, the Nelson court pointed to the following five

factors:

        (1) the right of selection, or to employ at will, (2) responsibility for payment
        of wages by the employer, (3) the right to discharge or terminate the
        relationship, (4) the right to control the work, and (5) the identity of the
        employer as the authority in charge of the work or for whose benefit it is
        performed.
                                         9

Id.

       The Nelson court described an independent contractor as “one who

carries on an independent business and contracts to do a piece of work

according to his own methods, subject to the employer’s control only as to

results” and endorsed the following eight-factor test:

       (1) the existence of a contract for the performance by a person of a
       certain piece or kind of work at a fixed price; (2) independent nature
       of his business or of his distinct calling; (3) his employment of
       assistants, with the right to supervise their activities; (4) his
       obligation to furnish necessary tools, supplies, and materials; (5)
       his right to control the progress of the work, except as to final
       results; (6) the time for which the workman is employed; (7) the
       method of payment, whether by time or by job; (8) whether the work
       is part of the regular business of the employer.

Id. at 264–65.

       2.     The parties’ intent

       The Nelson court also called attention to “another possible element which,

when applicable, might be used with others as an aid in determining whether one

person is or is not the employee of another, to-wit: the intention of the parties as

to the relationship created or existing.” Id. at 265. The Nelson court warned that

looking at intent “standing alone” could be “somewhat misleading.” Id. The court

then quoted comment m, under section 220 of the Restatement (Second) of

Agency, which explained:

       It is not determinative that the parties believe or disbelieve that the
       relation of master and servant exists, except insofar as such belief
       indicates an assumption of control by the one and submission to
       control by the other. However, community custom in thinking that a
       kind of service, such as household service, is rendered by servants,
       is of importance.
                                         10

Id. Nelson stated the trier of fact may, where appropriate, use the subjective

standard of the parties’ intent “to the extent it serves to shed light upon the true

status of the parties concerned.” Id.

       Our supreme court discussed the parties’ intention again in Henderson v.

Jennie Edmundson Hospital, 178 N.W.2d 429 (Iowa 1970). There, the court said

“in addition to the five . . . elements we recognize the overriding element of the

intention of the parties as to the relationship they are creating may also be

considered.”   Henderson, 178 N.W.2d at 431.          Henderson cited Nelson and

Usgaard as supporting that conclusion. Id.

       “With [those] rules in mind,” the Henderson court focused on the

commissioner’s finding that the second factor—payment of some compensation

by the employer—had not been proved by Henderson, who was injured while

enrolled in a nurse’s aide training course for which she did not receive any

wages. Id. at 431–33. The court also noted: “[I]t did not appear under the entire

record it was the intention of the claimant or the hospital authorities to enter into

the relationship of employer-employee.” Id. at 433.

       In an appeal involving unemployment benefits, the supreme court

discussed workers’ compensation cases appearing to hold “the intent of the

parties is conclusive in determining whether an employment relationship exists.”

Gaffney v. Dep’t of Emp’t Servs., 540 N.W.2d 430, 434 (Iowa 1995) (reviewing

Nelson and Usgaard).      Justice Neuman opined:       “Closer inspection reveals,

however, that those two cases do not support that holding.” Id. The Gaffney

court suggested the parties’ intent remained just one of several factors to be
                                       11

considered, and primarily only to settle the question whether the would-be

employee has submitted to the control of the would-be employer. Id.

      Finally, we address the concept of evasive intent.        In its ruling, the

commissioner suggested the case law provided the following: “Where both

parties by agreement state they intend to form an independent contractor

relationship, their stated intent is ignored if the agreement exists to avoid

workers’ compensation laws.” The district court similarly stated: “If both parties

intend to form a sub-contractor relationship for the purpose of avoiding workers

compensation laws, that intent is ignored and the standard rests on the five

factors.” We are unable to find this principle expressly stated in Iowa case law.

This concept does appear in a treatise examining when the contractual

designation of an independent contractor relationship may be disregarded: “If the

attempt to contract to specify a particular legal relationship is found to be

designated as an evasion of the Worker’s Compensation Act, it will of course be

disregarded.” 3 Larson, § 61.05, at 61-8. The treatise further states: “But, even

without the imputation of such an evasive intent, the contractual designation of

the relationship as employment or contractorship may be so plainly and

completely at odds with the undisputed facts that the contractual designation

must be disregarded.” Id.

      3.     Community custom

      Community custom may be considered in determining if “a kind of service,

such as household service” is provided by employees. Nelson, 146 N.W.2d at

265. But community custom only matters if a question exists as to which party
                                         12

controlled the work. See Burr v. Apex Concrete Co., 242 N.W.2d 272, 276 (Iowa

1976) (examining custom at construction site in a borrowed servant context).

         The Restatement (Second) of Agency, cited in Nelson, looked to

community custom to find an employee relationship even when there was an

absence of control by the employer.         See Restatement (Second) of Agency,

§ 220, cmt. m, illus. 11 (1958) (“A household servant working under an

agreement where his employer will not interfere with the servant’s conduct is an

employee where community custom regards people engaged in household

service as employees”). Neither Nelson nor the Restatement Second suggests

community custom should act as a counterweight when there exists a clear

finding the employer controlled the work.

         4.    Legal standards identified by the agency and district court

         With the governing statutes and case law on employee-employer

relationships in mind, we now turn to the question whether the agency properly

interpreted that law. Lauterwasser’s argument on appeal presents another layer,

namely whether the district court missed the mark in its articulation of the legal

tests.

         The district court concluded the agency used the correct legal standard; it

was the application of that standard to the facts that the district court dubbed as

illogical. In challenging the judicial review order, Lauterwasser argues the district

court skewed the legal test for determining who qualifies as an employee. He

asserts the court erred in viewing the parties’ intent as the controlling factor. We

agree with Lauterwasser’s assertion.
                                          13

       The district court placed a burden upon Lauterwasser “to show the facts

meet the five-prong test and that the parties intended for his relationship with

Stark to be an employment relationship.”           That description of the burden

misinterprets the governing law. The parties’ intent to establish an employee-

employer relationship is not a mandatory factor that must be established by the

claimant. The subjective standard of the parties’ intent may be considered by the

trier of fact “to the extent it serves to shed light upon the true status of the parties

concerned.” Nelson, 146 N.W.2d at 265.

       But the most important consideration in determining if a person is an

employee or independent contractor is “the right to control the physical conduct

of the person giving service. Id. “If the right to control, the right to determine, the

mode and manner of accomplishing a particular result is vested in the person

giving service [that person] is an independent contractor, if it is vested in the

employer, such person is an employee.” Id. (quoting Schlotter v. Leudt, 123

N.W.2d 434, 436 (Iowa 1963)(internal quotations omitted)). Only if that control is

debatable, does the trier of fact need to consider the parties’ intention or

community customs. See id.

       We conclude the commissioner recognized the proper factors to consider

when determining an employee for compensation purposes.                   We likewise

conclude the district court improperly elevated the intention of the parties as the

factor that “looms over all other considerations.”               The district court’s

misstatement of the legal test impacted its conclusion concerning the application

of the law to the facts.
                                        14

      B. Factual Findings

      We next consider whether substantial evidence supports the agency’s

findings of fact relevant to the employment relationship.

      The deputy and the commissioner agreed on most of the pertinent facts.

For instance, Stark paid Lauterwasser wages of thirty dollars an hour for his

carpentry work. Stark kept track of hours Lauterwasser worked and paid him at

the end of every week. Lauterwasser would sometimes bring his adult son to

assist on the job, and Stark would provide Lauterwasser wages to pay his son.

Stark told Lauterwasser what job to go to each day. Lauterwasser could not

change the way the work was to be performed. Stark set the time the work was

to be completed.    Stark had the ability to fire Lauterwasser or reprimand him.

Stark controlled the contracts with the customers, as well as the beginning and

end of the work day and what the next project would be. All the responsibility for

quality of the work fell to Stark. Stark ordered supplies needed for the project.

Lauterwasser brought basic tools to work, but Stark would provide some of the

more specialized tools.

      Lauterwasser also had his own carpentry business, J.B. Construction.

Before working for Stark, Lauterwasser was employed by Don Risdahl Builders.

In that job, Lauterwasser received a W-2 statement showing his earnings.

Lauterwasser testified he knew the difference between receiving a W-2

statement and a 1099 form. In 2008, Lauterwasser earned $30,562.00 from his

employment with Risdahl Builders and $3,100.00 in gross income as an

independent contractor.     According to Lauterwasser’s 2009 tax records, he
                                         15

received $13,293 in wages from Risdahl Builders. For 2009, Lauterwasser also

listed $20,423 in income from his subcontractor business, the same amount he

was paid by Stark. Lauterwasser also admitted in his testimony that on a 2009

tax schedule he deducted $5,734 for advertising from the income he received

from Stark, but that he did not actually do any advertising.

       The commissioner also found that on the day of his injury, September 18,

2009, Lauterwasser “made numerous statements that contradict his assertion

that he is an employee of Stark.” Lauterwasser indicated on hospital forms that

he was an employee of Risdahl Builders and that his saw accident was not a

work injury. Stark testified he overheard Lauterwasser tell hospital staff he was

self-employed and uninsured.

       The district court did not express any dissatisfaction with any of these

factual findings. The only determination by the commissioner challenged in the

judicial review was his finding “the parties and witnesses intended to work for one

another as subcontractors with the intent to circumvent the workers

compensation laws.”        The district court stated: “[T]he Commissioner’s

determination that the parties’ intent should not be considered because they

intended to evade workers compensation law is not supported by any evidence in

the record.”

       We do not share the district court’s concern on this point. Initially, the

record included testimony from Roger Nelson that it was common in the Linn

County area for construction companies to pay subcontractors more than

employees because they did not have to “pick up their insurance.”             That
                                        16

testimony could raise a fair inference that the work relationships were structured

to maximize the amount of take-home pay and not to reflect the true balance of

responsibilities.

       But more critically, we are not required to reverse the commissioner’s

ultimate ruling that Lauterwasser was an employee simply because the record

lacks substantial evidence for one determination regarding the parties’ evasive

intent. “The substantial evidence rule requires us to review the record as a whole

to determine whether there is sufficient evidence to support the decision the

commission made.”     See Woodbury Cnty. v. Iowa Civil Rights Comm’n, 335

N.W.2d 161, 164 (Iowa 1983). A single finding not supported by substantial

evidence may be set aside. Id.

       When we review the record in its entirety, we find substantial evidence to

support the commissioner’s conclusion that Lauterwasser carried his burden to

show Stark exercised the kind of control over Lauterwasser’s work assignments

and conditions that reflect an employer-employee relationship. Because the right

to control the work was obviously vested in Stark, we need not resort to

assessing the parties’ subjective intent. See Nelson, 146 N.W.2d at 265. But

even if we were to give the same primacy to the parties’ intention as the district

court did in its ruling, we would not find their designation of the relationship as

one of general contractor and subcontractor to be controlling. That designation

was “so plainly and completely at odds with the undisputed facts” that we may

disregard it, even without imputing an evasive intent to the parties.       See 3

Larson, § 61.05, at 61-8.
                                           17

       C. Application Of The Law To The Facts

       Finally, we review the commissioner’s ultimate conclusion to determine if

his application of law to facts is “irrational, illogical, or wholly unjustifiable.” See

Iowa Code § 17A.19(10)(m); Neal, 814 N.W.2d at 526.

       As we have said, it was Lauterwasser’s burden to establish the existence

of an employer-employee relationship at the time he was injured. See D & C

Express, Inc. v. Sperry, 450 N.W.2d 842, 844 (Iowa 1990). The commissioner

cited the accepted factors for determining if an employment relationship existed.

See Nelson, 146 N.W.2d at 265 (listing considerations as (1) the right of

selection (2) responsibility for wages, (3) right to fire, (4) right to control the work,

and (5) identity of the employer as authority in charge of work or for whose

benefit it is performed). Applying those factors to the specific circumstances, the

commissioner concluded Lauterwasser was an at-will employee of Stark—with

Stark having the right of selection as to the employment status and relationship,

full responsibility for the payment of wages, the right to discharge Lauterwasser

at any time, sole control of the work, and Stark was the sole recipient of any profit

from the contracts. The commissioner also properly applied the independent

contractor factors. The commissioner ultimately decided: “[Lauterwasser] worked

in a manner that all other hourly, at-will employees work in the competitive labor

market.” The commissioner disregarded the intention of the parties to form a

general and subcontractor relationship, surmising it was done to evade the

workers’ compensation act and other laws.
                                         18

       The district court’s overreliance on the parties’ subjective intent pushed it

to a different conclusion: “This lack of evidence [that the parties’ intent should not

be considered] leads the court to conclude that the Commissioner’s conclusion

was illogical.”

       Under our deferential standard of review, we cannot uphold the district

court’s reversal. See Iowa Med. Soc’y v. Iowa Bd. of Nursing, 831 N.W.2d 826,

841 (Iowa 2013) (deferring to board’s application of law to fact where it was not

“irrational, illogical or wholly unjustifiable”).       Recognizing the workers’

compensation commission’s expertise in this area, the legislature vested that

agency, not the courts, with the primary jurisdiction for applying the legal tests for

employer-employee relationships. See Larson Mfg. Co., 763 N.W.2d at 850. In

this case, the commissioner exercised that jurisdiction in a rational, logical, and

justifiable manner. Accordingly, we reverse the district court’s ruling and remand

for consideration of the remaining challenges to the commissioner’s award.

       REVERSED AND REMANDED.