Indiana Court Clarifies That Burden of Proof in Unemployment Tax Successorship Cases Is on Government

Unemployment insurance in Indiana, like virtually all states, is financed by a tax on employers. The employer contributions are charged proportionally against an employer’s experience account: the greater the number of unemployment claims, the more that employer must contribute to the unemployment fund. Each year, the Department of Workforce Development (DWD) determines the contribution rate applicable to each employer. How that rate is calculated can be a point of substantial contention between the DWD and employers.

There are several ways a new employer can be assigned an unemployment tax rate. When a new company acquires the organization, trade or business of another employer, or acquires substantially all the assets of another employer for the purpose of continuing that employer’s business, the new employer assumes the original employer’s tax rate. This process is called successorship. A recent Indiana case, Diversified Technical Services, Inc. v. Indiana Dep’t of Workforce Development, explained how successorship should — and shouldn’t — occur.

The Transaction at Issue

Pokey, Inc. owned Diverse Technical Services (Diverse), a staffing agency that helped place retired ALCOA employees in temporary post-retirement positions with ALCOA in Indiana. Diverse shut down its operations in November 2014, and its 45-person labor force was transferred to a third party.

Separately, Diversified Technical Services, Inc. (DTS) was incorporated in July 2015. DTS offered safety training and consulting services, project management and funding services, and electrical design and safety services.

DTS’s owner was aware of Diverse’s closing, as he had spent time at the local Alcoa plant. He approached Pokey’s owners with “an offer to pay for the name, goodwill and accounts receivable of Diverse” with the goal of “opening […] the door at Alcoa.” In September 2015, DTS and Diverse executed an Asset Purchase Agreement wherein DTS acquired Diverse’s name, goodwill and accounts receivable from two manufacturing facilities.

In October 2015, a DTS accountant contacted the DWD to file for a new employer account, called an Unemployment Account Application & Disclosure Statement. The accountant answered one question on the form to reflect that DTS had acquired 100 percent of a disposer Indiana corporation, Pokey, Inc. The form was signed and submitted to the DWD.

Based on the form, the DWD concluded that DTS had acquired the complete business of Diverse, and in November 2015, the DWD issued a Notice of Complete Disposition of Business to New Acquirer to DTS, identifying DTS as the acquirer and Diverse as the disposer. The notice stated that “Our records show you acquired the complete business on or about 6/26/2015 from the named disposer.” Three days later, the DWD issued a Merit Rate Delinquency Notice to DTS going back to January 2011, demanding $170,776.25 be paid within ten days. DTS protested.

The Hearing Before the DWD

In a hearing before a DWD Liability Administrative Law Judge (LALJ), the DWD’s witness testified that the DWD had relied upon the form submitted by DTS’s accountant and had no independent knowledge of the assets formerly held by Diverse. All of DTS’s witnesses denied having any knowledge of what assets Diverse had to sell or what percentage were acquired by DTS.

DTS argued that it acquired no property from Diverse, that the assets it did acquire were not substantially all of Diverse’s assets and that DTS was in a different business offering different services than Diverse. Furthermore, the evidence showed that Diverse ceased doing business as a staffing agency and transferred its employees to a different company, and that DTS’s accountant made a written representation that was not founded upon her personal knowledge or information provided to her.

Despite this evidence, the LALJ found that a complete acquisition had been achieved, or, more particularly, that DTS had not established the absence of a complete acquisition. Though the LALJ initially advised the parties that the DWD bore the burden of proof to establish successorship, she then concluded that DTS had failed to provide adequate proof of non-acquisition of assets. Ultimately, the LALJ issued an order denying DTS’s protest, finding that DTS “acquired the organization, trade, or business, or substantially all of the assets of Diverse’s business,” becoming a successor employer.

The Court of Appeals Weighs In

Only “employers” are required to pay into and fund the unemployment insurance system. “Employer” is defined to include an entity that:

...acquires the organization, trade, or business within this state of another [employer], and any [entity] which acquires substantially all the assets within this state of [another] employer used in or in connection with the operation of such trade or business, if the acquisition of substantially all such assets of such trade or business results in or is used in the operation or continuance of an organization, trade, or business.

As the Court noted, this provision requires a determination of not only (i) whether “substantially all” the assets were acquired, but also (ii) whether those assets were used to substantially continue the same or similar business.

But, the Court found, the statutes do not require an employer to prove a negative: that it did not acquire substantially all the assets. Rather, an employer is to be treated as a successor employer when the employer has acquired the organization, trade or business — or substantially all the assets of — another employer. The DWD is responsible for determining the successorship status of an acquiring employer. It follows, the Court explained, that the DWD must have an adequate basis for making this determination.

In this case, the evidence fell short. The record showed that, after the presentation of evidence, what assets Pokey or Diverse held prior to DTS’s acquisition remained unknown. Thus, it was impossible to determine on the limited record whether DTS acquired “substantially all” of those assets.

The Court went further, though: regardless of the percentile apportionment of assets, “clearly the intangibles purchased by DTS were insufficient to support continuation of the business conducted by Diverse.” Crucially, DTS did not acquire Diverse’s employees: “the essence of an ongoing staffing business.” Even a “most generous consideration of the DWD’s evidence would reveal no more than DTS ‘acquire assets from which it built a new business.’” Under those circumstances, an employer is not a successor employer.

The Court reversed the LALJ’s determination, allowing DTS to obtain a new employer tax rate.