Opinion
C062986 Super. Ct. No. 34-2008-80000038-CU-WM-GDS
09-30-2011
EMPLOYMENT DEVELOPMENT DEPARTMENT, Plaintiff and Respondent, v. CALIFORNIA UNEMPLOYMENT INSURANCE APPEALS BOARD, Defendant; SUMMIT RESOURCES SERVICES, INC., et al., Real Parties in Interest and Appellants.
NOT TO BE PUBLISHED
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
In this appeal, we consider whether defendant Employment Development Department (Department) must comply with the procedural requirements set forth in Unemployment Insurance Code section 1127.5, subdivisions (a), (b), and (c) before issuing an assessment against employers determined to be unified enterprises under sections 135.1 and 135.2. While this case was pending on appeal, we issued an opinion in Employment Development Department v. California Unemployment Insurance Appeals Board (Screaming Eagle, Inc.) (2010) 190 Cal.App.4th 178, review denied February 16, 2011, S189314 (Screaming Eagle), holding that the Department need not comply "with section 1127.5, subdivisions (a), (b), and (c) as a prerequisite to the Department's issuance of assessments against employers determined to be unified enterprises under sections 135.1 and 135.2." (Id. at p. 193.) The trial court reached the same conclusion in this case. Accordingly, we shall affirm the judgment.
Undesignated statutory references are to the Unemployment Insurance Code.
On July 8, 2011, we granted the parties' joint request for permission to file simultaneous supplemental briefs addressing the application of Screaming Eagle to this case.
FACTUAL AND PROCEDURAL BACKGROUND
In late 2003, an auditor with the Department's Unemployment Rate Manipulation Team prepared a report in which she concluded that real parties in interest -- Summit Resources Services, Inc.; CASUB-56, Inc.; AZ SUB-49, Inc.; CASUB-60, Inc.; Summit Services, Inc.; Amlease Corporation; SOI-23 of FL, Inc.; Strategic Outsourcing, Inc.; SOI-16 of TN, Inc.; SOI-27 of CA, Inc.; CASUB-56, Inc.; EOI, Inc.; and SOI of AR, Inc. (Summit entities) -- constitute a unity of enterprise under sections 135.1 and 135.2.
"Sections 135.1 and 135.2 codify the concept of unity of enterprise. Under these provisions, the Department is authorized to consolidate multiple businesses united by factors of ownership or control into a single employing unit for purposes of determining the rate of employer contributions." (Screaming Eagle, supra, 190 Cal.App.4th at p. 189.) Of particular relevance here, both sections 135.1 and 135.2 state: "This section shall be subject to subdivision (e) of Section 982 and subdivision (d) of Section 1127.5." (§§ 135.1, subd. (f); 135.2, subd. (b), italics added.)
On December 31, 2003, the Department sent a "NOTICE OF DUPLICATE ACCOUNTS AND NOTIFICATION OF ASSESSMENT" to the Summit entities, stating in part: "[W]e find that you were assigned duplicate employer account numbers. California law provides that a business enterprise may have only one account number for payroll tax reporting purposes." The notice advised that the Department had discontinued all but one of the account numbers assigned to the Summit entities and directed that all further payroll contributions be reported under Summit Resources Services, Inc.'s account number at the rate of 5.4 percent. According to the notice, the purpose of the Department's review was "to ensure that employers subject to the California Unemployment Insurance Code have properly reported their workers under the correct account number and [unemployment insurance] Rate. This promotes a level playing field for business competition within the state. Unemployment insurance experience rates in California are calculated utilizing a formula based on the reserve account balance and average base payroll of the business. Switching payroll to lower rated accounts, for the purpose of lowering [unemployment insurance] taxes is called State Unemployment Tax Avoidance (SUTA dumping) and may constitute intent to evade or fraud under Section 1128(a) of the California Unemployment Insurance Code."
The accompanying "NOTICE OF ASSESSMENT" assessed the Summit entities $625,993.58, including penalty and interest, for the period January 1 through September 30, 2003. The notice was issued in accordance with section 1127. Under "EXPLANATION," the notice said, "[y]ou have used multiple [Department] account numbers for the purpose of circumventing the California Unemployment Insurance rating system."
On January 29, 2004, the Summit entities filed a petition for reassessment with the Board, arguing the Department erred in not following the procedures set forth in section 1127.5 subdivisions (a)-(d) in issuing the assessment. Meanwhile, they paid the assessment in full, converting their petition for reassessment into a petition for refund. (§ 1179.5.)
On June 14, 2007, the Summit entities moved to strike the Department's December 31, 2003, notice of duplicate accounts and assessment and to dismiss the proceedings. The motion was based on the ground, among others, that the Department failed to comply with the requirements of section 1127.5, subdivisions (a), (b), and (c) prior to issuing the assessment.
The administrative law judge (ALJ) agreed with the Summit entities and set aside the December 31, 2003, assessment and the notice of duplicate accounts and assessment. The Department appealed, and on March 13, 2008, the Board affirmed the decision in its entirety.
The Department filed a petition for writ of mandate and administrative mandamus in the trial court. The court granted the petition for writ of administrative mandate, directed the Board to set aside its March 13, 2008, decision, and enter a new and different decision reinstating the December 31, 2003, assessment.
The trial court also directed the Board to consolidate for a full hearing on the merits the January 29, 2004, petition for reassessment and a petition filed February 23, 2007, concerning a second assessment issued on January 26, 2007, in the amount of $979,186.79 based upon fraud committed by the Summit entities. The Summit entities do not challenge that portion of the court's ruling.
The Summit entities filed a timely notice of appeal.
DISCUSSION
The Summit entities contend the trial court erred in (1) "finding that the [Department's] actions were [not] the kind that fall within the meaning of Section 1127.5, even though they were based on a unitary determination under Sections 135.1 or 135.2," and "[a] unitary determination made under Sections 135.1 and 135.2 [does not] require[] compliance with all of Section 1127.5." The determination of these issues is governed by our recent decision in Screaming Eagle.
In that case, a Department auditor determined that Screaming Eagle, Inc. and Payday California, Inc. were a single employing unit under section 135.2 and, after analyzing the payroll transfers between the two entities, issued an assessment. (Screaming Eagle, supra, 190 Cal.App.4th at p. 185.) The notice of assessment was accompanied by a notice of duplicate accounts, which informed the entities that the Department had discontinued Payday's account and ordered both companies to report all further payroll contributions under Screaming Eagle's account and at its rate of 5.4 percent. (Ibid.)Screaming Eagle and Payday petitioned for review of the assessment, arguing that the Department erred in not following the procedures set forth in section 1127.5, subdivisions (a)-(d) in issuing the assessment. (Ibid.)An ALJ agreed, and determined the assessment should be set aside. (Ibid.)The Department appealed, and the Board affirmed the ALJ's decision in its entirety. (Id. at p. 186.) The Department filed a petition for writ of mandate and administrative mandamus in the trial court. (Ibid.)The trial court found that only subdivision (d) of section 1127.5 applies to unity of enterprise determinations under section 135.2. (Id. at pp. 186-187.) Accordingly, it granted the petition for writ of administrative mandate, set aside the Board's decision, and directed the Board to enter a decision reinstating the assessments against Screaming Eagle. (Id. at p. 186.)
Screaming Eagle appealed, arguing, as the Summit entities do here, that "assessments based on unity of enterprise determinations are correct employer assessments, and the procedure for correct employer assessments applies to assessments based on unity of enterprise determinations." (Screaming Eagle, supra, 190 Cal.App.4th at p. 191.) We framed the issue as follows: "[W]hether section 135.2, subdivision (b), by incorporating by reference subdivision (d) of section 1127.5, also incorporates subdivisions(a), (b), and (c) of section 1127.5." (Id. at p. 188.) In answering this question in the negative, we noted that "section 135.2 references only section 1127.5, subdivision (d); it makes no mention of the other subdivisions, nor does it use the term 'correct employer.'" (Id. at p. 191.) We also observed that "nothing in the legislative history reflects a legislative intent to apply section 1127.5, subdivisions (a), (b), and (c) to the unity of enterprise determination made under sections 135.1 and 135.2," and that "[n]othing in the record supports . . . [the] assertion that the Legislature intended compliance with section 1127.5, subdivisions (a), (b), and (c) as a prerequisite to the Department's issuance of assessments against employers determined to be unified enterprises under sections 135.1 and 135.2." (Id. at p. 193.) Finally, we found that sections 1127.5 and 135.2 "refer to two different determinations involving two different procedures," explaining: "The issue in a unity of enterprise determination is not which of two employers is the correct employer, but whether or not an employer is basically a nonindependent entity whose purpose is to avoid paying a higher unemployment insurance tax rate. Therefore, unlike in the correct employer situation, there is no need to assign responsibility for reporting employee wages to one employer pending review. Section 1127.5, subdivisions (a), (b), and (c) set forth a procedure for two distinct employers; a unity of enterprise determination delineates one consolidated employer that does not require the same procedures." (Id. at pp. 193-194.)
Applying our analysis in Screaming Eagle here, we conclude that the Department's action, which was virtually identical to the Department's action in Screaming Eagle, is properly characterized as a unity of enterprise determination, which is distinct from a correct employer determination, and that the Department was not required to comply with the procedures set forth in section 1127.5, subdivisions (a), (b), and (c) before issuing the December 31, 2003, assessment. (Screaming Eagle, supra, 190 Cal.App.4th at pp. 191-194.) Accordingly, the trial court did not err in granting the petition for writ of administrative mandate, setting aside the Board's decision, and directing the Board to enter a decision reinstating the assessment.
Given our decision, we necessarily reject the Summit entities' claim that the trial court erred in not granting the cross-writ of mandate compelling the Department to pay the refund ordered by the Board.
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DISPOSITION
The judgment is affirmed. California Unemployment Insurance Appeals Board shall recover its costs on appeal. (Cal. Rules of Court, rule 8.278(a)(1)).
BLEASE, J. We concur:
RAYE, P. J.
HULL, J.