Rule Steel Tanks, Inc. v. Idaho Department of Labor

Citations: 155 Idaho 812; 317 P.3d 709; 2013 WL 6662324; 2013 Ida. LEXIS 364Docket: 40344-2012

Court: Idaho Supreme Court; December 18, 2013; Idaho; State Supreme Court

Original Court Document: View Document

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The Supreme Court of Idaho affirmed the Industrial Commission's order regarding the transfer of an unemployment tax experience rating account from Diamond Z Trailer, Inc. to Rule Steel Tanks, Inc. This transfer was determined under Idaho Code section 72-1351A(1)(a), which requires evidence of a covered employer, a transfer of business, and common ownership or management between the entities. The Idaho Department of Labor had previously concluded that effective January 1, 2010, Diamond Z’s experience rating account was transferred to Rule Steel after Diamond Z ceased operations in spring 2010 and Rule Steel hired many of Diamond Z's laid-off employees, continuing to manufacture similar products. The appeals examiner found significant commonalities in management and operations between the two companies, including shared executives and a common physical address. Consequently, the commission ruled in favor of the Department of Labor, and Rule Steel’s appeal was denied, with attorney fees awarded to the Department.

Rule Steel challenged the Commission's decision regarding the transfer of trade or business from Diamond Z. The main issue was whether Diamond Z transferred all or a portion of its business to Rule Steel. Rule Steel had the burden of proof, requiring clear and convincing evidence. Idaho Code section 72-1351A(5) outlines factors to consider in determining such a transfer, including the continuation of the business, acquisition of assets, continuity of relationships, transfer of goodwill, accounts receivable, sales correspondence, and workforce retention.

The Commission found substantial evidence supporting Rule Steel's continued operation of Diamond Z's business. Rule Steel manufactured and marketed the same grinders under the "Diamond Z" name and sold replacement parts. It operated from the same premises, retained the same phone number, and acquired some of Diamond Z's equipment. Additionally, Rule Steel successfully transferred Diamond Z’s goodwill and maintained relationships with the same dealers and vendors. Notably, Rule Steel hired 44 of the 60 former Diamond Z employees, constituting 73% of Diamond Z’s workforce, following Diamond Z's closure.

Gregory Burkhart, president of Rule Steel, confirmed the hiring of 30 former Diamond Z workers in June 2009, with an additional 12 in the third quarter and 2 in the fourth quarter of 2009, indicating Rule Steel's acquisition of the majority of Diamond Z's workforce shortly after Diamond Z's dissolution. The Commission found sufficient evidence to conclude that Diamond Z had transferred its business to Rule Steel, rejecting Rule Steel's claim that it did not meet the relevant factors by clear and convincing evidence. Rule Steel subsequently appealed this decision, challenging the Commission's findings regarding the transfer of business under the Employment Security Law.

The court's review of the Commission's final decision is limited to legal questions, including whether the factual findings are supported by substantial evidence. Idaho Code section 72-1351A(5) provides a nonexclusive list of factors for assessing business transfers, with the Commission having discretion in weighing these factors. Key points included:

1. Rule Steel's argument that Diamond Z sold its last grinder in March 2009 and did not sell any until February 2010 was countered by the Commission's finding that Diamond Z ceased operations due to a market decline and was dissolved by December 2009.
2. The Commission determined that Rule Steel was capable of manufacturing the grinders prior to February 2010 but did not do so due to market conditions. It began manufacturing similar grinders once market demand returned and marketed them as “Diamond Z” grinders.
3. The Commission noted Rule Steel's hiring of former Diamond Z employees for marketing efforts.
4. Regarding machinery and equipment, the Commission found that Rule Steel purchased certain assets from Diamond Z’s creditors for $642,036, which included machinery and office equipment used in Diamond Z's operations.

Rule Steel contends on appeal that it acquired assets from a third party, not directly from Diamond Z, and that these assets were integrated into its existing operations. The statute does not mandate direct acquisition from the predecessor employer. The Commission evaluated the means by which Rule Steel obtained the assets and the relevance of acquiring them from one of Diamond Z's creditors. Rule Steel asserts that the assets were utilized in its existing business lines, with testimony indicating that these assets were commonly used across various applications. The statute does not require all acquired assets to be used exclusively for products made by the predecessor.

The Commission noted a significant decline in grinder demand, explaining that Rule Steel's current equipment usage for manufacturing Diamond Z grinders is reduced compared to Diamond Z's pre-economic downturn levels. 

Regarding continuity of business relationships, while it is undisputed that Diamond Z terminated its dealer contracts, Rule Steel established contracts with several former dealers. Although Rule Steel did not engage all of Diamond Z's dealers, the Commission deemed this only one factor in their analysis. 

The Commission found that Rule Steel acquired Diamond Z's goodwill, maintaining the 'Diamond Z' name due to its market value, an assertion supported by testimony regarding negotiations during Diamond Z's foreclosure. 

On accounts receivable and sales correspondence, the Commission found limited evidence for both, but acknowledged that the absence of evidence on these factors does not negate their consideration, as the statute does not require all factors to be present.

Finally, the Commission determined that Rule Steel hired 44 of the 60 Diamond Z employees laid off in May 2009, accounting for 73% of the workforce. The hiring occurred over several months, with most employees retrained for Rule Steel's operations, though only one manager from Diamond Z was hired, splitting duties between the two companies. Due to market conditions, Rule Steel did not require the same number of employees as Diamond Z for grinder production.

The central issue is whether Diamond Z's business was fully transferred to Rule Steel, rather than Rule Steel's capability to produce grinders at the same level as Diamond Z prior to market decline. The Commission determined that Rule Steel did not provide clear and convincing evidence to support its claim that Diamond Z did not transfer its trade or business, concluding that Rule Steel effectively subsumed Diamond Z's operations, with the only change being the business name. Rule Steel failed to demonstrate that the Commission's findings lacked substantial evidence or that it misapplied facts to the law. 

Regarding the potential partial transfer of Diamond Z's experience rating account under Idaho Code section 72-1351(5)(b), Rule Steel contended that if a business transfer occurred, the appeals examiner should have mandated a pro rata reduction of the experience rating. However, the statute applies when a successor acquires only part of a covered employer’s business, whereas Rule Steel acquired all of Diamond Z's operations, which exclusively involved grinder manufacturing. Rule Steel's argument that the statute should pertain only to employees from the predecessor was deemed inconsistent with the statute's language. The statute specifies a pro rata transfer of the experience rating account based on the wages of covered employees related to the transferred business, requiring a joint application from both parties within 180 days for approval by the director.

The statute applies when a successor continues part of a predecessor's business. In the case of Krick Equipment, Inc., which transitioned from an excavation and grading contractor to a leasing company, an employee formed Super Grade, Inc. and acquired equipment from Krick. The Department of Commerce and Labor ruled Super Grade a successor employer since Krick did not fully transfer its business. In contrast, Diamond Z, which solely manufactured grinders and was dissolved, did not meet the successor criteria under Idaho Code section 72-1351(5)(b).

Both parties sought attorney fees on appeal under Idaho Code section 12-117. However, Rule Steel, the non-prevailing party, was not entitled to fees as it failed to challenge key material facts and did not demonstrate that it was not a successor employer. Its appeal merely requested a reweighing of factors considered by the Commission, which is not permitted. The Department of Labor, as the prevailing party, is awarded reasonable attorney fees. The order of the Industrial Commission is affirmed, and the Department of Labor is granted costs and attorney fees on appeal, with Chief Justice Burdick and Justices J. Jones, Horton, and Pro Tem Schroeder concurring.