351 P.3d 197
Wash. Ct. App.2015Background
- Dr. Armand operated a dental practice as a sole proprietorship since 1966 and signed written "association agreements" (1990 and 2004) with Drs. Loretta and Louise stating they were not partners and setting compensation and termination terms.
- During 2010–Q1 2012 the practice paid Drs. Loretta and Louise flat percentages of production (initially 35%, later 40%); billing and payments were processed under Dr. Armand’s name and deposited to his accounts.
- The Employment Security Department audited the practice after discovering unpaid unemployment taxes and concluded Drs. Loretta and Louise were employees; it assessed $1,896.37 in back taxes, penalties, and interest against Dr. Armand.
- At hearing Dr. Armand testified the parties had orally converted their relationship into a partnership (profit-sharing based on ~60% overhead → ~40% net to each dentist) and that the written association agreements had been effectively modified or rescinded.
- The ALJ and the Department commissioner adopted findings that the association agreements remained effective, concluded the daughters were employees (not partners), and affirmed the assessment; the superior court affirmed on judicial review.
Issues
| Issue | DeFelice's Argument | Department/Respondent's Argument | Held |
|---|---|---|---|
| Whether Drs. Loretta and Louise were "in employment" under the Employment Security Act or partners (thus not employees) | The dentists had orally formed a partnership; profit distributions and operational conduct show co-ownership and shared profits | The written association agreements remained effective (not terminated in writing); reporting as a sole proprietorship and 1099 treatment show they were not partners | Held: substantial evidence supports agency finding they were employees; partnership rejected |
| Whether profit distributions (flat 40% to daughters; residual to Dr. Armand) indicate partnership profit-sharing | Flat percentage distributions plus practice operation show intent to share profits and function as partners | Payment mechanics reflect remuneration for personal services (wages) paid by the employer; distributions do not establish partnership | Held: court defers to agency fact findings that payments constituted wages and did not prove partnership |
| Whether failure to file partnership tax/forms and continued sole‑proprietor registrations preclude partnership status | Form and tax filings are not dispositive; substance controls—conduct can create a partnership despite filings | Continued sole-proprietorship registration, tax reporting, and lack of partnership filings support absence of partnership | Held: agency's reliance on registration and reporting, combined with other facts, is supported by substantial evidence |
| Whether the association agreements could be orally modified/terminated so an oral partnership formed | Agreement could be orally modified or abandoned by conduct; parties’ testimony and financial practices support oral change to partnership | Agreements required termination as specified; absence of written termination means agreements persisted | Held: agency credited that the agreements remained in force; appellate court upheld that factual determination as supported by substantial evidence |
Key Cases Cited
- W. Ports Transp., Inc. v. Emp’t Sec. Dep’t, 110 Wn. App. 440 (2002) (agency interpretations and burden on party asserting invalidity)
- Tapper v. Emp’t Sec. Dep’t, 122 Wn.2d 397 (1993) (APA standards govern judicial review of Employment Security Department decisions)
- Smith v. Emp’t Sec. Dep’t, 155 Wn. App. 24 (2010) (deference and standards for reviewing commissioner’s adoption of ALJ findings)
- Bengston v. Shain, 42 Wn.2d 404 (1953) (partnership requires joint ownership and joint right of control; profit sharing gives rise to partnership presumption)
- Penick v. Emp’t Sec. Dep’t, 82 Wn. App. 30 (1996) (definition of "employment" under Employment Security Act focuses on personal services and payment of wages)
- William Dickson Co. v. Puget Sound Air Pollution Control Agency, 81 Wn. App. 403 (1996) (deference to agency factual findings; do not reweigh credibility)