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Earthgrains Bakery Group, Inc. v. Mississippi Dept. of Employment Sec.

Supreme Court of Mississippi

February 13, 2014

EARTHGRAINS BAKERY GROUP, INC. f/k/a Sara Lee Bakery Group, Inc.

Page 1164

Timothy W. Lindsay, Kristi Haskins Johnson, Ridgeland, attorneys for appellant.

Albert B. White, Madison, Leanne Franklin Brady, attorneys for appellee.


COLEMAN, Justice.

¶ 1. The Mississippi Department of Employment Security (MDES) determined that distributors for Sara Lee Bakery Group, Inc. (now Earthgrains Bakery Group, Inc.) were agent drivers and commission drivers for Sara Lee, rather than independent contractors, such that Sara Lee was required to pay unemployment insurance taxes for the distributors. The circuit court affirmed, and Sara Lee appealed. Finding that MDES failed to apply the law correctly and that its decision was not supported by substantial evidence, we reverse.

Facts and Procedural History

¶ 2. In 2006, Sara Lee restructured its distribution process in Mississippi from having employee distributors to independent contractor distributors. However, in January 2007, MDES determined that Sara Lee's independent contractor distributors actually were employees under Mississippi Code Section 71-5-11(J)(14) because they were " controlled and directed in the performance of their work." [1],[2] MDES found the existence of an employer/employee relationship and required Sara Lee to pay unemployment insurance taxes for the distributors. Sara Lee appealed the decision. A telephonic hearing with an administrative law judge (ALJ) was held on October 26, 2007.

¶ 3. Sara Lee's first witness was Robert Fanelli, who worked for the consulting business that helped Sara Lee put the independent contractor distribution system in place. The transition was made in Mississippi in 2006, and by the time of the hearing, Sara Lee had restructured in fourteen states. Prior to 2004, Sara Lee had a fleet of trucks for distribution and employed all of its distributors nationwide. Sara Lee terminated its distributor employees, and the distributors were given the option to set up their own companies and purchase distribution territories from Sara Lee; they would have the exclusive rights to distribute Sara Lee's products in

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the geographical area that they purchased. Sara Lee is the manufacturer, but it no longer has a distribution arm in the states that have converted to the independent contractor system; the territory owners are the distributors, operating their own independent distribution businesses.

¶ 4. The territory owners are corporations, and Sara Lee has a contract with each distributor corporation, not with individuals. Fanelli explained that these are " setup to be truly independent distributor contractor relationships." He said the contract between Sara Lee and the distributor is meant to be clear that Sara Lee " does not retain any right to control the manner and means of performance" of the distributor, and the agreement specifies that the distributor is to " be an independent contractor for all purposes." Distributors are allowed to sell all or part of their territory to third parties. They are allowed to buy and distribute other products, except products that are direct competitors to Sara Lee. They can hire employees or agents to do any part of the business, such as drive trucks or negotiate prices. The territory owners are responsible for buying or leasing their own trucks, as opposed to Sara Lee providing trucks as it did for its employees under the old system.

¶ 5. The distributors have the option of putting a Sara Lee logo on their trucks, and Sara Lee pays them a weekly advertising fee of $50 if they choose to do that. They can earn an additional $50 per week by purchasing and wearing shirts with Sara Lee's logo on them. The shirts have the words " Independent Operator" under the Sara Lee logo. Distributors are not required to do either of these things, and some choose not to. Sara Lee does not pay wages or salaries to the distributors, other than the weekly advertising fee if the distributors opt to participate. The distributors' profits come from selling the products at a higher price than they paid Sara Lee for them. Distributors incur their own expenses in operating their businesses, including the cost of fuel, vehicle maintenance and insurance, office and administrative expenses, health insurance, and taxes.

¶ 6. Fanelli testified that Sara Lee does not provide instructions for how the distributors should operate their distribution businesses; Sara Lee does not have any control over hiring or firing the distributors' employees or the hours they work; Sara Lee does not provide office space; and the distributors do not submit reports to Sara Lee. Sara Lee does have a right to terminate its contract with a distributor for breach of contract (i.e., failure to deliver products). If the distributor wants to get out of the business, he has to sell the territory. Sara Lee has a right to reject a buyer in a few limited situations, such as if the buyer has had several convictions for driving under the influence or a history of criminal activity, and those terms are in the contract. Sara Lee also has a first right of refusal to buy the territory back at the distributor's asking price.

¶ 7. Sara Lee's second witness was John Shepard, Director of Alternative Distribution Systems for Sara Lee. Shepard explained how Sara Lee converted from an employee distribution system to an independent contractor distribution system by offering current distributors the opportunity to purchase territories. He corroborated Fanelli's testimony that the distributors are independent contractors, not Sara Lee employees. Shepard explained that the distributors resigned as Sara Lee employees, set up S-corporations, and now operate under their own names. Shepard said that the distributors must be S-corporations, and they cannot be individuals or sole proprietorships. Because the distributors

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operate their own distribution companies, they are allowed to sell any products in or out of their territories except products that directly compete with Sara Lee. Shepard testified that the distributors do not receive wages or benefits from Sara Lee; the distributors can hire their own employees; Sara Lee does not have control over the hours the distributors work; Sara Lee does not provide training to the distributors; Sara Lee does not offer health insurance or truck insurance to the distributors; the distributors are responsible for their own taxes; and Sara Lee does not have any involvement with running the distributors' day-to-day businesses. He said the distributors are responsible for all aspects of their businesses, including assuming " all the risk associated with owning and operating that business."

¶ 8. Marlene Harper, Chief of Technical Services for MDES's tax department, testified for MDES. MDES asserted that an agreement is not proof of an independent contractor relationship and that Sara Lee could not " write themselves out from under Unemployment Insurance Law" by saying in their contract that they had an independent contractor relationship. MDES did not present any additional witnesses or evidence.

¶ 9. After the telephonic hearing, on November 21, 2007, MDES sent an Amended Decision to Sara Lee stating that, in addition to being employees under Mississippi Code Section 71-5-11(J)(14), MDES found that the distributors were " commission drivers" of Sara Lee under Section 71-5-11(J)(2). Sara Lee sent a letter to the ALJ stating its opposition to MDES being allowed to amend its decision after the telephonic hearing. Sara Lee maintained that both the original decision of January 31, 2007, and the amended decision of November 21, 2007, were incorrect, as the independent operator distributors did not satisfy the standards for " employment" under either subsection (J)(2) or (J)(14). Sara Lee asked for the November 21 amended decision to be dismissed, but in the alternative, it requested a hearing and an opportunity to brief the issue fully.

¶ 10. On December 13, 2007, the ALJ issued a decision in which he concluded that the independent operator distributors were not employees under Section 71-5-11(J)(14), nor were they " commissioned drivers" under Section 71-5-11(J)(2). However, the ALJ indicated that there was a question as to whether the distributors may be " agent drivers" under subsection (J)(2)(a). The ALJ continued the case on that issue and gave the parties two weeks to request that the matter be reconvened to submit additional evidence. Sara Lee requested that the telephonic hearing be reconvened with the limited purpose of presenting evidence on the agent-driver issue.

¶ 11. The second telephonic hearing was held on February 6, 2008, at which additional evidence was presented and several distributors were called as witnesses. John Shepard, Sara Lee's Director of Alternative Distribution Systems, testified again. In addition to affirming his earlier testimony, Shepard provided further explanation regarding the distributors' profit and their expenses. Shepard explained that the distributors' profits come from their " operating margin," which he said is easy to confuse with commission. Shepard was adamant that the distributors do not make commission, saying, " [T]here is no such thing as a commission on a sale. The margin is what [they] operate under based on their cost of goods and in turn what they sell the product to the customer at. That is their margin." He testified that the distributors incur expenses starting

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with the purchase of their route, which ranges from $35,000 to $100,000. The distributors also have to purchase or lease a delivery truck, purchase vehicle insurance, pay for fuel and maintenance of the truck, obtain health insurance, and cover office and administrative expenses. Shepard said distributors can hire employees if they choose to, and Sara Lee has no control over or involvement in the selection of those employees or drivers hired to ...

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