Unemployment taxes and personal tax liability for employers

Claimants are not the only folks having trouble with unemployment.

Many employers think that incorporation protects them from individual liability. Not so. In particular, for unpaid unemployment taxes there are specific provisions for holding an individual owner of a company (and others, see below) responsible and liable for unpaid unemployment taxes. Besides interest and penalties, the Department will work out payment plans, intercept tax refunds, place liens on property, revoke professional licenses, levy bank accounts, and even garnish wages from later employment to recoup unpaid unemployment taxes.

In 2013, the Department proposed several changes to make it easier for employers to get the administrative penalties and interest connected with unpaid unemployment taxes waived. See Memorandum RE: 27 November 2012 DWD legislative proposals to Advisory Council (13 Jan. 2013) at 46-50. And, prior to the Great Recession, the Department had created a special work group to assist new employers with understanding unemployment issues and taxes.

Somewhere along the line, the Department changed course, particularly with small employers. The work group to assist employers disappeared, and the Department started pursuing anyone connected with small employers for unpaid tax liabilities despite those collections efforts being legally deficient.

The Department also began changing the law of personally liability in ways that were not acknowledged at the time.

Wis. Stat. § 108.22(9) sets forth the personal liability provision in unemployment law. Under this provision, a person is personally liable for unpaid unemployment taxes when the following four criteria are met:

  1. That person is an officer, employee, member, manager, partner, or other responsible person of an employer,
  2. That person has control or responsibility for paying unemployment taxes,
  3. That person willfully fails to pay those unemployment taxes, and
  4. That person was subject to proper collection efforts by the Department.

Prior to 2015, Wis. Stat. § 108.22(9) (the 2013 version) varied significantly from its current form. The requirement for being a “responsible person” was first put forward statutorily by the Department itself in proposal D15-05 (19 Feb. 2015) to the Unemployment Insurance Advisory Council and was enacted in § 91 of 2015 Wis. Act 334. While the proposed change was described as a way of making sure members of a partnership could be found liable for unpaid unemployment taxes, the proposal also indicated that the scope of personal liability was limited to “responsible persons.” As explained in the Department’s proposal:

This proposal will create a more level playing field because it will ensure that responsible persons are not able to avoid personal liability for unpaid UI contributions simply because they chose a particular form of business entity. It also provides flexibility for the department to impose personal liability if the Legislature creates other business forms (such as a Low-Profit Limited Liability Company or “L3C”).

Proposal D15-05 at 2. In a memorandum dated 19 March 2015 that was provided to the Advisory Council, the Department offered an explanation of what it considered to be a responsible person based on both state income tax rulings as well as Commission precedent.

The proposed amendment to section 108.22(9) is designed to permit an assessment of personal liability for unpaid unemployment insurance contributions against individuals who, by nature of their “status, duty and authority,” are responsible for filing the contribution reports and paying the taxes. This is similar to the way that LIRC currently interprets section 108.22(9) and is consistent with the federal IRC and the Wisconsin Revenue Statute.

Memorandum to the Unemployment Insurance Advisory Council (19 March 2015) at 2. As explained in this memorandum:

the Tax Appeals Commission, which reviews assessments of the Wisconsin Department of Revenue, has interpreted the term “responsible person” broadly and it “gauges responsibility by examining whether the person had the actual or de facto authority to withhold, account for, or pay the taxes, the duty to pay the taxes, and whether the person intentionally breached that duty.” Sandberg v. Wisconsin Department of Revenue, Wisconsin Tax Appeals Commission, ¶401-491, (Nov. 18, 2011).

And the Tax Appeals Commission held that “the responsible person determination is pragmatic and based on considerations of substance, rather than form. It boils down to the fact that the crucial inquiry is whether the person had the effective power to pay the taxes — that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.” Id (internal citations omitted). The Tax Appeals Commission in Sandberg found that the son of the business owner was not a “responsible person” for the purposes of the Wisconsin Revenue Statute because “evidence showed that the business, in fact, was a ‘one-man show’ where his father, Kenneth Sandberg, was ‘that man.'” Id.

Id. (footnote omitted).

So, it would seem that individual liability should be limited to those owners and individuals who have designated or actual authority for unemployment tax matters, regardless of the title or status of that person. After all, the persons actually responsible for paying unemployment taxes should be the person liable for those taxes when they go unpaid, not any possible director or even employee of the company.

And, that perspective made sense until Proposal D17-07, in which the Department proposed eliminating the 20% ownership threshold. The change was explained this way:

removing the ownership interest requirement from Wis. Stat. § 108.22(9)

And, the fiscal impact, according to the Department, was minimal:

Trust Fund Impact: This proposal would have a negligible but positive impact on the Trust Fund. Without the 20% threshold, this change would streamline investigations into assigning the debt. Some nonprofits do not have a clear owner, so this may make assigning personal liability in cases involving nonprofits easier. However, in general, individuals the department is trying to assign personal liability to already meets the 20% threshold and thus would not result in a significant impact to collections.

Proposal D17-07 (23 May 2017) at 19. The Advisory Council approved of this change, and it was enacted as part of 2017 Wis. Act 157.

So, because the Department re-wrote this individual liability law broadly, it is now free to ignore its own arguments about how the targets of the Department’s collection efforts would be limited. So, the Department for the past several years has expanded who it targets for debt collection to include ANY employee or individual in its discretion it thinks it can collect from.

A December 2020 decision by the Labor and Industry Review Commission concerning a sprawling, for-profit enterprise illustrates just how expansive these debt collections efforts have become: Rice Mgmt., Inc. et al., UI Hearing Nos. S1900089MW-117MW (Kevin Breslin), UI Hearing Nos. SI900262MW-290MW (Robert Parkins), UI Hearing Nos. S1900291MW-319MW (Mary Jo Parkins), UI Hearing Nos. S1900320MW-348MW (Gina Mignano), and UI Hearing Nos. S1900349MW-77MW (Anthony Carriero) (30 Dec. 2020)

Note: In the briefing before the Commission, I represented one of the individuals pursued for debt collection, the assistant controller, Anthony Carriero.

The Department only pursued two out of five partners, all of whom raked in millions (the two were Kevin Breslin and Williams Burris, Jr.,, and Burris settled his case with the Department prior to hearing and withdrew his appeal) for collection efforts. But, several lower level employees and former employees were targeted (including an assistant controller, who reported to a controller, who reported to a CFO, who in turn reported to a managing partner), apparently for no other reason than that the Department had their names and contact information.

Of the four requirements for personal liability, both the administrative law judge and the Commission found that the second and third factors were obviously not met for the defendants other than Breslin. But, in examining the first requirement, the Commission provided the first extended analysis of all the changes the Department has wrought, and the result shows just how broad debt collection in unemployment law now reaches.

This part of the statute has undergone some changes in recent years. Prior to 2015, the statute provided that before a person could be found personally liable, the individual had to be “an officer, employee, member or manager holding at least 20% of the ownership interest of a corporation or of a limited liability company” subject to Chapter 108. In 2015, the legislature changed this so that the individual could be “an officer, employee, member, manager, partner, or other responsible person holding at least 20 percent of the ownership interest of a corporation, limited liability company, or other business association” subject to Chapter 108. It appears that the impetus to broaden the statute in 2015 was to include managing partners of limited liability partnerships as persons who could be found personally liable for the contributions owed by an LLP, and to ensure that those people could be found responsible even if they chose another business entity. However, if the person did not own 20% of the business, the condition still was not met. In 2018; the statute was changed again, and it now provides that before a person can be found personally liable for an organization’s unpaid unemployment insurance taxes, the first condition that must be met is that the person must be or must have been “an officer, employee, member, manager, partner, or other responsible person of an employer…”

As the appeal tribunal noted, there is little case law on the first condition with the new statutory language. Previously, the analysis for this condition was focused on whether the individual owned 20% of the business and the nature of the business. With the recent law changes, the legislature has expanded who can be found personally liable to persons beyond the listed titles and without regard to ownership, and it has expanded the application of the law to any employer rather than just to corporations, limited liability companies, or other business associations.

The appeal tribunal paraphrased this condition as requiring that the individual “has a special relationship with the company.” Under this interpretation, in addition to determining whether the individual was an officer or employee, etc., the appeal tribunal questioned whether the individual was also a “responsible person” of the employer and analyzed whether the individual’s particular duties made that owner, officer, or employee a “responsible person” of the employer. In this reading of the statute, the word “other” in the statute was read to imply that any officer or employee, etc., must also be a “responsible person” as well, and, therefore, the decision maker must decide whether the person is a “responsible person” under this first condition in addition to determining whether the person was an officer or employee, etc. In the Carriero decision, for instance, the appeal tribunal found that the words “or other responsible person of the employer” now acted to modify the word “employee” to differentiate employees who have greater responsibilities from those who do not.

While it is true that an individual may not be found personally liable unless the individual was responsible to pay the unemployment insurance taxes, the commission concludes that this analysis is generally more appropriately addressed under, the second condition, where the commission has historically examined whether an individual is a “responsible person” for purposes of personal liability. This is consistent with the federal case law, which looks at who has a duty to collect and pay over the tax as a “responsible person.” It is thus not necessary to duplicate the analysis for both the first and second conditions, as the appeal tribunal did here. With this reading of the statute, the first condition is fairly simple. If the individual is an officer, employee, member, manager, or partner of the employer, the condition is met with no ownership requirement. The appeal tribunal essentially acknowledged this in one set of decisions by noting, e.g., “Mr. Parkins had no stake in the LLC, but he was indeed an officer, so he therefore satisfies this element.” It is also possible that someone who does not have the status of an officer, employee, member, manager, or partner of the employer could be found personally liable if that person had other authority or was otherwise responsible for the business of the employer, such as a financial agent or a family member. Only if a person is not an officer, employee, member, manager, or partner of the employer, is it necessary, for purposes of this condition, to determine whether the person is an otherwise responsible person of the employer. This clarifies the first condition and also avoids unnecessary duplication of the analysis of whether a person is also a “responsible person” for the payment of unemployment insurance contributions under the second condition.

* * *

Accordingly, each of the putative debtors was at least an officer, employee, member, manager, or partner of the employer.

Rice Mgmt., Inc. et al. at 21-2 (footnotes omitted, emphasis in original). In other words, this first requirement will only really matter when the Department is pursing an individual who has no direct, formal role with the debtor employer (such as the employer’s legal counsel or accounting form). In all other cases, it is met if the person has any connection at all with the debtor employer.

Note: This reference to legal counsel should indicate to the lawyers out there just how far reaching this individual liability could extend. I could see the Department now easily extending personally liability to the attorneys who could have prevented the unemployment taxes from going unpaid, since such a claim is similar if not identical to what the Department argued in this case for the non-partners.

As demonstrated in Rice Mgmt, the second and third requirements still follow traditional analysis and requirements. So, individuals who are not actually responsible or in control of tax liabilities may still avoid personal liability.

But, the fourth requirement — service of proper collection efforts — has, like the first requirement, in practical terms become a non-issue. Previous to all of these changes, notices of unpaid taxes to the corporate entity would be served on the corporate premises, and so those who controlled the company would also have notice. Now, with the number of possible debtors expanded to employees and even persons who have no formal connection at all to the company, they will have no idea about these unemployment debts and the associated collection efforts until charged with personal liability. In this Rice Mgmt case, for instance, Robert Parkins had left the company in early 2017, around six months before any collection efforts were undertaken. Yet, this fourth requirement was satisfied by the Department against him.

The Commission decision is lengthy (40 pages) but deserves a close and extended reading. As numerous employers may not have survived the pandemic, many may find the Department knocking on their doors — and the doors of others — about unpaid unemployment taxes. This decision is the current legal framework for these cases.