Justices agree subsidiaries are not new employers

Emphasizing its ruling only deals with determining the proper merit rate for unemployment fund contributions, the Indiana Supreme Court ruled a manufacturer did not create employers through its new subsidiaries, so it wasn’t entitled to a lower rate.

In Franklin Electric Company, Inc. v. Unemployment Insurance Appeals of the Indiana Dept. of Workforce Development, No. 93S02-1102-EX-89, Franklin Electric Co., which makes pumps, decided in 2002 to split the company into two new subsidiaries – one for manufacturing and one for sales. Franklin Electric retained 100 percent ownership in both entities while serving as corporate headquarters for the two.

An accounting firm believed that the two new subsidiaries would be eligible for a new unemployment insurance experience account with the rate of 2.7 percent. Franklin Electric’s experience rating was near 5 percent. The Department of Workforce Development investigated the company and determined that Franklin Electric didn’t “dispose of a distinct and segregable portion of its organization, trade, or business” and recalculated Franklin Electric’s merit rate. It demanded back payments, interest and a 10 percent penalty.

The liability administrative law judge affirmed the determination that the three entities were a single employer, but declined to impose penalties. The Indiana Court of Appeals affirmed, and the justices also agreed with the LALJ’s determination.

The manufacturing and sales subsidiaries didn’t acquire a distinct and segregable portion of Franklin Electric’s business, so they didn’t qualify as “employers” under the laws governing unemployment compensation arrangements, wrote Chief Justice Randall T. Shepard. The two subsidiaries combined formed essentially the same business as before the change –  Franklin Electric still does the payroll and provides benefits to all the companies, in addition to paying the workers’ compensation coverage for the entities.

“Today’s holding is a narrow one,” he wrote. “It deals only with the language ‘distinct and segregable’ as used in the unemployment statutes and only concerns determining the proper merit rate for unemployment contribution. The instant ruling neither calls into question the validity of the wholly owned subsidiary arrangement, nor holds that the creation of a wholly owned subsidiary can never result in the new entity becoming a separate employer.”

The justices agreed that imposing a penalty against Franklin Electric would be inappropriate because the company filed its reports to determine status in good faith based on advice from the accounting firm.