APPEAL from a judgment of the Superior Court of Sacramento County, Lloyd G. Connelly, Judge. Affirmed. (Super. Ct. No. 07CS00915).
The opinion of the court was delivered by: Raye, J.
CERTIFIED FOR PUBLICATION
In State Unemployment Tax Act (SUTA) "dumping," one employer transfers employees or payroll wages to another employer in order to take advantage of the other employer's lower unemployment insurance tax rate. In essence, the first employer "dumps" payroll with a higher contribution rate into the second employer's unemployment insurance account with a lower rate. The Legislature directed plaintiff Employment Development Department (Department) to stop such rate manipulation and provided a procedure for doing so.
Real parties in interest Screaming Eagle, Inc., and Payday California, Inc. (Payday) provide payroll services for television production companies. The Department issued an assessment against Screaming Eagle for underpaying its unemployment insurance contributions. An administrative law judge (ALJ) determined the assessments should be set aside because the Department had not followed the appropriate procedures. Defendant California Unemployment Insurance Appeals Board (Appeals Board) affirmed the ALJ's decision. The trial court reversed the Appeals Board, finding the Department's assessment comported with the statutory requirements.
Screaming Eagle appeals, challenging the trial court's interpretation of the statutory scheme for determining whether rate manipulation is taking place and issuing assessments based on such a determination. Amici curiae Strategic Outsourcing, Inc., California Chamber of Commerce, and California Taxpayers' Association filed briefs in support of Screaming Eagle and the Appeals Board. We shall affirm the judgment.
FACTUAL AND PROCEDURAL BACKGROUND
This case involves the interplay between two statutes: Unemployment Insurance Code sections 135.2 and 1127.5.*fn1 Because the parties' contentions relate to the specific wording of each statute, we present them in their entirety.
Section 135.2 pertains to two or more businesses constituting one employing unit and states: "(a) If two or more business enterprises are united by factors of control, operation, and use, the [D]irector [of Employment Development (director)] may determine that the business enterprises are one employing unit. [¶] (1) Control of a business enterprise shall include, but not be limited to, ownership of a majority interest in an organization, ownership of the assets used to conduct the business enterprise of the organization, security arrangements or lease arrangements regarding the assets used to conduct the business enterprise of the organization, or contract when the ownership, stated arrangements, or contract provide for or allow operation of the business enterprise. [¶] (2) Operation of the business enterprise, includes, but is not limited to, management, personnel policies, operating procedures, pricing, collections, and financing of the business enterprise. [¶] (3) Control of two or more business enterprises shall be united if the majority interest in, or control of, each organization is in one individual, entity, association, or other organization. [¶] (4) Unity of operation is evidenced by central financing, accounting, and management of each business enterprise which includes, but is not limited to, common management, personnel policies, operating procedures, pricing, collections, and financing. [¶] (5) The use of two or more business enterprises shall be united if they share a general system of operation and the enterprises are organized for common purposes, and each is coordinated with, or is a part of, the entire operation. [¶] (b) This section shall be subject to subdivision (e) of Section 982 and subdivision (d) of Section 1127.5." (Italics added.)*fn2
Section 1127.5 governs the determination of correct employers and the reporting of entities not correct employers, and states: "(a) If the director determines that an individual or entity that is reporting employee wages pursuant to Section 1088 or other applicable sections is not the correct employer of the employees whose wages are reported, the director shall determine the correct employer and, subject to this section, shall apply the provisions of this code to the correct employer. [¶] (b) Upon a determination made under subdivision (a), the director shall give notice of the determination pursuant to Section 1206 to both of the following: [¶] (1) To the individual or entity reporting employee wages of the determination that the individual or entity is not the correct employer of the reported employees. [¶] (2) To the individual or entity determined to be the correct employer of those reported employees. [¶] The notice shall contain a statement of the facts and circumstances upon which the determination was based. An individual or entity so noticed shall have the right to petition for review of the determination within 30 days of the notice, as provided in Section 1222. [¶] (c) During the pendency of a petition for review pursuant to subdivision (b), the individual or entity responsible for reporting employee wages pursuant to Section 1088 or other applicable sections shall be determined as follows: [¶] (1) When an individual or entity that has reported employee wages appeals a director's determination that it is not the correct employer of the employees whose wages were reported, that individual or entity shall continue to so report employee wages, provided the employees in question are still on its payroll, until a decision on its appeal is final, whether or not the individual or entity determined to be the correct employer by the director appeals that determination. [¶] (2) When the individual or entity determined by the director to be the correct employer appeals that determination, but the individual or entity determined not to be the correct employer does not appeal the director's determination, then the individual or entity determined to be the correct employer by the director shall report employee wages from the date it received notification pursuant to subdivision (b), and, provided the employees in question are still on its payroll, shall continue to do so at least until a decision on its appeal is final. [¶] (d) When a director's determination that an individual or entity is the correct employer of employees whose wages have been reported by another individual becomes final: [¶] (1) The individual or entity so determined to be the correct employer may be assessed for any underpayment of employer contributions pursuant to Article 8 (commencing with Section 1126) of Chapter 4 of Part 1 of Division 1. No assessment shall be issued for any period prior to the effective date of this section based on which individual or entity is the correct employer, unless the correct employer committed fraud in violation of this part. [¶] (2) The individual or entity which had reported employee wages prior to the finality of the director's determination of the correct employer of the employees whose wages were so reported may file a claim for refund for any overpayment of employer contributions pursuant to Section 1178. No claim for refund may be filed for any period prior to the effective date of this section based on which individual or entity is the correct employer unless the department has issued an assessment based on fraud pursuant to paragraph (1)." (Italics added.)
Real parties in interest Screaming Eagle and Payday provide payroll services to entertainment business clients. The two companies process time records, compute wages and taxes, issue paychecks, withhold and pay taxes, and file tax reports for companies that produce television programs and commercials.
Screaming Eagle and Payday are run by the same person, operate from the same office, share the same corporate officers and administrative staff, and share the same address and telephone numbers. In addition, they share the same centralized management and accounting system.
In 2002 Screaming Eagle reported a payroll of $16.4 million at an unemployment insurance contribution rate of 0.7 percent. In 2003, after the Department assigned Screaming Eagle an unemployment insurance rate of 5.4 percent, Screaming Eagle's reported payroll dropped to $1,500. In contrast, after the Department assigned Payday a rate of 1.7 percent in 2003, it reported a payroll of $14.4 million for the first three quarters, a steep increase from its payroll the previous year of $11,250.
In November 2003 a Department auditor prepared a report in which she concluded that Screaming Eagle and Payday were a single employing unit. After analyzing the payroll transfers between the two entities, the Department issued an assessment of $600,123.39, based on the difference between the contributions paid at the 1.7 percent rate and the amount that should have been paid at the assigned 5.4 percent rate.
The notice of assessment was accompanied by a notice of duplicate accounts, informing real parties in interest that the Department had discontinued Payday's account and ordering both companies to report all further payroll contributions under Screaming Eagle's account at the rate of 5.4 percent. Subsequently, the Department issued a second assessment covering the fourth quarter of 2003 in the amount of $135,521.45 plus penalty and interest, based on the same grounds as the first assessment. Screaming Eagle and Payday petitioned for review of the assessments, ultimately arguing that the Department erred in not following the procedure set forth in section 1127.5, subdivisions (a) through (d).
Following an evidentiary hearing, the ALJ determined the Department's assessments against Screaming Eagle should be set aside. The ALJ considered the statutes in question and framed the issue: "The basic question is did the legislature intend only to be authorizing the department to use its normal assessment procedures when it referenced subdivision (d) of 1127.5 in section 135.2, or did it expect the department to then also follow the previous subdivisions of section 1127.5 before issuing an assessment when making a determination under section 135.2."
The ALJ considered the wording of the statutes, noting: "[Subdivision] (d) of 1127.5 includes more than just a cross-reference to the normal assessment procedures. It also provides that the assessments are not to be made until after the director's determination becomes final. Subdivisions (a) and (b) do provide a procedure to determine when the director's decision becomes final. There are no other provisions of the [Unemployment Insurance] Code which provide a process for determining when the decision is final. Normally, the department makes a decision and issues an assessment as a result of that decision. There is no process or necessity to determine if that decision is final. These are unique provisions added to section 1127.5. [¶]... It is also apparent that by referencing 1127.5(d), the legislature must have intended that the director's decision under 135.2 become final under 1127.5 before an assessment resulting from that decision is issued."
The ALJ applied this interpretation of the statutes to the Department's assessment against Screaming Eagle and concluded: "[T]he assessment and the determination under section 135.2 were made on the same day. The assessment was not made after the director's decision under 135.2 had become final pursuant to section 1127.5. Accordingly, the assessment was premature under section 1127.5 and is therefore set aside." The Department appealed the ALJ's decision to the Appeals Board.
The Appeals Board Decision
The Appeals Board affirmed the ALJ's ruling, finding the Department's assessments against Screaming Eagle were premature since the Department failed to comply with section 1127.5. The Appeals Board reasoned: "We agree with the finding of the administrative law judge that the legislature considered the unity of enterprise determination by the director under code section 135.2 duplicated the requirements of section 1127.5(a), (b) and (c); and, section 1127.5(d) was referenced in section 135.2 to insure that the director's determination under 135.2 is final under section 1127.5 before an assessment is issued as a result of the unity of enterprise determination."
The Trial Court's Decision
The Department filed a petition for writ of mandate and administrative mandamus. The trial court granted the petition for writ of administrative mandate, setting aside the Appeals Board's decision and directing the Appeals Board to enter a decision reinstating the assessments against Screaming Eagle.
The trial court held that the Board's interpretation of section 135.2's reference to section 1127.5, subdivision (d) -- making the notice and hearing procedures of section 1127.5, subdivisions (a) through (c) "applicable to unity of enterprise determinations under section 135.2 and preventing petitioner from issuing an assessment resulting from a unity of enterprise determination until the procedures in subdivisions (a), (b) and (c) have been completed -- is incorrect. Respondent's interpretation is contrary to the language of section 135.2, the language of the statutory provisions referenced in 135.2, ...