Total and Partial Unemployment TPU 110
Corporate or Union Officer
A. Corporate Officer
Section 622 of the Unemployment Insurance Code (hereafter Code) provides that an individual performing services in his or her capacity as a director of a corporation is not an "employee" of the corporation. Services in his or her capacity as a director includes either:
- Presence at meetings of the board of directors, even though no further service is performed at the meeting.
- Services customarily performed by directors in attending meetings of the board of directors such as prescribing, regulating, and guiding the policies and administration of the corporation or association.
Directors can be officers of the corporation. If they perform services as an officer of the corporation, their wages are subject to UI coverage under Section 621 of the UI Code.
If an individual who is director of a corporation files a claim for unemployment insurance benefits and lists as last employer the corporation on which he served as a director, this would not be the last employer for purposes of filing a claim unless the individual also performed services as an officer or employee of the corporation.
Section 621(a) of the Code provides that "employee" includes any officer of a corporation, e.g., president, vice president, secretary, etc. An individual who is an officer of a corporation is an employee of the corporation even though he or she may be the sole or major stockholder of the corporation. If an officer of a corporation files a claim for unemployment insurance benefits and lists the corporation as last employer, this is appropriate, provided the individual has not performed services as an employee for anyone else prior to filing the claim for benefits
Whenever an individual, who is the officer of a corporation, files a claim for benefits, and the corporation is the last employer, the individual should be scheduled for a determination interview. The purpose for the interview is to establish whether the individual is "unemployed" within the meaning of Section 1252 of the UI Code. It must be established whether the claimant can control his or her own employment. The determination is required irrespective of whether the activity as officer of the corporation is claimant’s primary or secondary employment.
Section 1252 of the UI Code provides, in part, that an individual is "unemployed" in a week in which he or she performs no services and with respect to which no wages are payable to him or her. The interviewer must determine whether the claimant is performing services and, if so, the extent to which he or she is performing services in order to determine whether the claimant is fully employed.
In Precedent Benefit Decision 140, the claimants operated a seasonal food concession business. As husband and wife, they were sole stockholders and corporate officers of the business and traveled the fair circuit from March to October. During the off-season, the claimants performed only minimal activities in connection with the corporation. Such service consisted of negotiating future contracts and overseeing the cleaning and repair of equipment. As they drew no salaries during the off-season, the claimants attempted to draw unemployment insurance benefits. In holding that they were not unemployed, the Board said:
"The claimants control their employment. It is their decision to stop their salaries during the off-season. They alone determine when they will or will not work, and how much they will be paid for such work; and when and for what period the payments will be made. Though they may engage in little or no activity on behalf of the corporation in the off-season, in their capacity as corporate officers, they must be prepared to take appropriate action when the affairs of the corporation so require. In fact, they are in service of the corporation as its officers during the entire calendar year."
The employment status of a corporate officer of another seasonal business was before the Board in Benefit Decision 6696. The claimant in this case was president, chairman of the board of directors, and sole stockholder of the Logging Company. As general manager of logging operations, all major policy decisions of the corporation were made by the claimant. For her services as general manager, the claimant received $880 per month during the logging season. At the end of the season, however, she drew no salary either as a corporate officer or general manager. The Board held that she was at no time unemployed and said:
"The claimant in the present case has at all times been in an employment relationship with the logging company . . . . This employment relationship has two aspects. The corporation employs her as president and board chairman, and she as president and board chairman acting for the corporation, hires herself as general manager of logging operations . . . . She also lays herself off as general manager at the end of the season.
When this occurs she ceases to be employed as general manager but not as president and board chairman, and in this capacity she remains in the employ of the corporation . . . during the off-season the duties and responsibilities of president and board chairman, while minimal, rest upon her, and she alone can discharge each of them as the business of the corporation may require during the winter.
Although she receives no pay for such services, it is by her choice, for as corporate president and board chairman she elected not to compensate herself for such services."
On the other hand, in the case of Cooperman vs. California Unemployment Insurance Appeals Board the court considered a case involving the president and sole stockholder of a corporation which temporarily ceased functioning due to the erratic nature of the motion picture industry. The claimant in this case had for some years rendered services as a cameraman-director as a sole proprietor. He formed a corporation, Image Films, in 1969 to enhance his employment opportunities and to enjoy certain personal liability and tax advantages of incorporation. As president of Image Films, the only compensation the claimant received from the corporation was for his services as cameraman-director based on union scale for such services. Image Films had no other employees or business except supplying the personal services of the claimant. During the period when he claimed benefits the claimant performed no services as cameraman-director and received no compensation. He sought work both as an individual or as an employee of Image Films. As the corporate assets at that point consisted of less than $50, the claimant could draw no salary for the corporate service performed (i.e., seeking work for the corporation). In holding that he was unemployed, the court said:
"In the present case, Cooperman is not separable from Image. If the Board is allowed to prevail, they will merely be exalting form over substance to deprive Cooperman of unemployment insurance benefits.
. . . The motion picture business is erratic and Cooperman never knew when or for how long he would be unemployed. He could not control his employment when none was available.
It would be against the public policy of this State to declare that he is employed solely because he holds the figurehead title of president of Image when he receives no compensation and performs only de minimis services."
From this it can be concluded that a self-incorporated individual can be considered unemployed when the following elements are present:
- Claimant is president and sole stockholder.
- Incorporation was primarily for personal liability and tax purposes.
- The corporation has no other employee, merchandise, or business except supplying the personal services of the claimant
- The temporary cessation of corporate functions stems from circumstances beyond the claimant’s control, e.g., the industry being erratic as opposed to seasonal.
- Claimant is compensated only for the services of his trade and not as president of the corporation.
- No significant managerial affairs are required of the claimant when work in his trade through the corporation is not available, and his corporate activity is limited to seeking work on behalf of the corporation (an adequate ESW).
In Carlsen vs. California Unemployment Insurance Appeals Board, 134 Cal. Rptr. 581, the California Court of Appeal held that Carlsen was "unemployed" within the meaning of Section 1252 of the California Unemployment Insurance Code (hereafter Code) and was eligible for unemployment insurance benefits.
In this case, Carlsen (hereafter claimant) formed a general contracting corporation in 1965. He was president of the corporation, his wife was vice president, and his accountant was secretary-treasurer. All the stock in the company was owned by the claimant and his wife. Shortly after the corporation was formed, the officers decided that no salaries would be paid to the officers because the corporation was too small a business and could not afford to pay salaries to its officers.
The claimant, in his capacity as president, spent evenings and weekends bidding on and negotiating contracts for the corporation. Since the claimant was a carpenter, he worked as such on corporation contracts, receiving union scale wages from the corporation.
Early in September 1974 the claimant became ill and was hospitalized. He was released from the hospital on September 20, 1974, but could not return to work as a carpenter for the corporation because the corporation was unable to obtain any contracts to perform construction work.
The claimant, in his capacity as corporate president, continued to seek jobs for the corporation but was unsuccessful in obtaining any contracts. In September 1974 the claimant, according to his testimony, devoted two hours a week, at most, to his efforts to obtain contracts for the corporation. The claimant applied for work as a carpenter through the union hall, but was unable to obtain such work, and so he applied for unemployment benefits.
The claimant filed a claim for unemployment benefits but was denied benefits on the grounds that he was not "unemployed" since he was still serving as president of the corporation. The claimant filed a writ of mandamus. The trial court stated, "An individual who devotes his services to a corporation-employer, who must be prepared at all times to take appropriate action when the affairs of the corporation so require, and to whom wages are payable, if the individual permitted the corporation to make such payments to him, is not unemployed within the meaning of Section 1252 of the Unemployment Insurance Code."
The trial court held that the claimant, because of his activities as corporation president, was not "unemployed," and thus was ineligible for benefits under Section 1252 of the Code.
The Court of Appeals reversed the decision of the lower court and held that the claimant was eligible for benefits because:
- The claimant was "unemployed" within the meaning of Section 1252 of the Code. The claimant, in spite of his activities as corporation president, had performed no services. No wages were payable to the claimant. There had never been any obligation on the part of the corporation to pay the claimant for his services as president.
- The claimant was unemployed through no fault of his own. Lack of jobs for the corporation and through the union hall was a situation over which the claimant had no control. There was no showing that the claimant had the unilateral authority in the corporate bylaws to pay himself a salary, and thereby make himself "employed."
There was no evidence that the claimant lacked good cause for failing to compensate himself as corporation president. There was no showing the corporation was in a financial position to pay salaries to its officers.
The past history of the corporation showed that its business was not seasonal, but erratic. Thus, even if the claimant had the power to compensate himself as president, he had no duty to control his wages as president so he would not find it necessary to apply for unemployment compensation benefits during the "off season."
- The claimant’s part-time activities as president of the corporation did not render him unavailable for other work under Section 1253(c) of the Code.
In the past he had fulfilled his duties as president while working full-time as a carpenter. His activities on behalf of the corporation were designed merely to increase the likelihood that he would obtain employment as a carpenter through the corporation.
The court discussed the Cooperman case and stated that the crux of that decision was the fact that "the plaintiff’s state of unemployment was a matter over which he had no control and one which was not a result of any deliberate decision to tailor the terms of his employment, and particularly his compensation, in such a way as to avail himself of unemployment compensation benefits to which he should not have been entitled."
Thus, whenever an individual who is an owner/employee of a closely held corporation files a claim for unemployment insurance benefits, to determine where he or she is eligible, we must establish the following:
- Whether the individual is unemployed through no fault of his or her own.
- Whether the individual can control his or her own unemployment or whether the nature of the work is seasonal or erratic.
- Whether the bylaws of the corporation provide for compensation to the individual for his or her services as an officer of the corporation.
- Whether the individual has performed services for the corporation in any capacity other than as an officer of the corporation.
- Whether the individual is seeking work either as an individual or for the corporation and whether the individual is available to a substantial field of employment.
B. Union Officer
Officers of a union are basically the same as corporation officers. If the individual is performing services less than full-time and his/her earnings are not XE, he/she is unemployed. However, the union secretary who is not being paid by the union due to lack of funds yet is spending seven to nine hours per day working on the books is not unemployed.
Union officers are also not unemployed when, during strike activity, they perform their regular services for the union, but are not paid. These union officers are not unemployed because they are still performing the same services that they were performing before the strike began, and the Code states that to be unemployed a claimant must both perform no services and receive no wages.
In some cases a corporation may, although it legally continues to exist, be totally inactive and inoperative, usually because of financial difficulties. If there is no apparent possibility that the corporation is to become active in the foreseeable future, the president’s lack of income and failure to perform services for the corporation are probably not the result of his/her own wishes or desires and constitute circumstances over which he/she has no control. This being the case, he/she can no longer control his/her own employment, nor is his/her inactivity with regard to the corporation of a seasonal or temporary nature. He/she may then be considered an "unemployed" person.
For example, in Precedent Benefit Decision 152 the claimant had been self-employed in a construction cleanup business for six years.
When a contract representing 98 percent of the corporate income expired and he was unable to renew it, the claimant unsuccessfully sought other work for the corporation. He then abandoned his efforts to find work for the corporation, filed a claim, and began looking for work as a truck driver or tractor operator. Although he remained as president and sole stockholder of the corporation when the claim was filed, the claimant was receiving no wages and his services on behalf of the corporation were limited to disposing of its assets to pay outstanding obligations. The Board said:
"The claimant herein is involuntarily unemployed because of the loss of the contract which produced almost all of the corporation’s income. Since the filing of his claim, corporate activity has been minor and limited to the liquidation of the assets of the corporation . . . . The claimant has abandoned all efforts to keep the corporation active . . . . Thus, he did not control his own employment. He was primarily and actively engaged in seeking employment in his regular occupation outside of the corporate activity. Accordingly, we hold that under these limited circumstances, the claimant is an unemployed individual within the meaning of Section 1252 . . . ."
In comparing the circumstances of this case to those involving the logging corporation in Benefit Decision 6696, there are a number of material distinctions. In Benefit Decision 6696, the logging corporation remained solvent and was to continue indefinitely in the operation of logging, following the temporary interruption. The claimant could have arranged to pay herself wages during the nonoperating season. In the present case it was problematical whether the corporate structure would or could be used for other purposes. The claimant was in the process of dissolution of the corporation which was insolvent. He thus was in no position to pay himself wages but was seeking and available for employment outside of the corporate activity.