V.S. Lerch v. UCBR , 180 A.3d 545 ( 2018 )

IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Valerie S. Lerch, :
Petitioner :
:
v. : No. 748 C.D. 2017
: Argued: February 6, 2018
Unemployment Compensation :
Board of Review, :
Respondent :
BEFORE: HONORABLE ROBERT SIMPSON, Judge
HONORABLE MICHAEL H. WOJCIK, Judge
HONORABLE BONNIE BRIGANCE LEADBETTER, Senior Judge
OPINION
BY JUDGE SIMPSON FILED: March 12, 2018
Valerie S. Lerch (Claimant) petitions for review from an order of the
Unemployment Compensation Board of Review (Board), reducing Claimant’s
unemployment compensation (UC) benefits under the Pennsylvania Unemployment
Compensation Law (UC Law).1 The Board reduced Claimant’s UC benefits by $506
per week under Section 402(h) of the UC Law, 43 P.S. §802(h), based on her income
from her part-time self-employment (sideline business). Upon review,2 we reverse
and remand.
1
Act of December 5, 1936, Second Ex. Sess., P.L. (1937) 2897, as amended, 43 P.S.
§§751-919.10.
2
This Court’s review of a final decision by the Board is limited to determining whether
necessary findings of fact were supported by substantial evidence, whether errors of law were
committed, or whether constitutional rights were violated. Johns v. Unemployment Comp. Bd. of
Review, 87 A.3d 1006 (Pa. Cmwlth.), appeal denied, 97 A.3d 746 (Pa. 2014). Where an issue is
one of statutory interpretation, it is a question of law subject to plenary review. Danielle Viktor,
Ltd. v. Dep’t of Labor & Indus., Bur. of Emp’r Tax Operations, 892 A.2d 781 (Pa. 2006).
I. Background
While employed full time, Claimant started a sideline event-planning
business. Claimant is the sole proprietor of the business and has no employees. She
spends between one and eight hours per week on her sideline business. Claimant
testified she spends one to two hours per week on the business most of the year. She
spends five to eight hours per week during busy periods (about a month in the spring
and another month in the fall).
Claimant’s sideline business generated gross revenue of $27,510 in
2015 and $15,635 in 2016. Her federal tax return for 2015 reflected a deduction of
$1,380 for supplies. As her sideline business provides only services, Claimant’s tax
return did not reflect any deduction for the cost of goods sold. However, Claimant
deducted a number of other necessary business expenses, the largest of which was
the cost of renting facilities for the events she planned for her clients. Claimant’s
sideline business operated at a net loss of $5,767 in 2015 and $7,857 in 2016.
Claimant applied for UC benefits after separation from her full-time job
in November 2016. She did not increase the amount of time she spends on her
sideline business after her separation from full-time employment. She remains
available for full-time work.
The Board reduced Claimant’s weekly UC benefit by $506, based on
its calculation of Claimant’s net income from her sideline business. Pursuant to 34
Pa. Code §65.121 (Section 65.121), the Board calculated Claimant’s net business
income by deducting from her gross business income only the cost of supplies (there
2
being no cost of goods sold), which excluded the bulk of Claimant’s business
expenses.
Claimant filed a timely petition for review to this Court.
II. Issues
Claimant presents three issues for review, which we summarize as
follows:
(1) The Board erred in ignoring two 1964 decisions of the
Superior Court invalidating Bureau of Employment Security
Regulation 120 (1960) (Regulation 120), which was identical
to Section 65.121. Further, Section 65.121 is invalid because
the Department of Labor and Industry (Department) was not
free to reenact a regulation after an appellate court recognized
its invalidity.
(2) The regulation is beyond the scope of the Department’s
regulating authority under the UC Law, and is unreasonable
because it treats gross income as net income for service
businesses, thus ignoring the UC Law’s provision for reduction
of UC benefits by the amount of “net earnings” of sideline
businesses.
(3) The Board failed to consider Claimant’s alternative
argument that her sideline business is seasonal and should not
reduce her UC benefits on a year-round basis.
We summarize the Board’s responsive arguments as follows:
(1) The Board is not bound by the Superior Court’s
decisions. The Department’s regulation is legislative rather
than interpretive,3 and therefore the Board and this Court must
follow it.
3
The distinction between a legislative regulation and an interpretive regulation is
discussed below.
3
(2) The regulation is binding because the Department
adopted it pursuant to delegated legislative power, Claimant
did not point to any improper procedure in its adoption, and
Claimant did not overcome the presumption of reasonableness.
(3) Claimant’s evidence concerning the seasonal nature of
her sideline business was too vague to allow accurate proration
of her earnings.
III. Discussion
Section 402 of the UC Law, relating to sideline businesses, provides, in
pertinent part:
An employe shall be ineligible for compensation for any week—
* * * *
(h) In which he is engaged in self-employment:
Provided, however, That an employe who is able and available
for full-time work shall be deemed not engaged in self-
employment by reason of continued participation without
substantial change during a period of unemployment in any
activity including farming operations undertaken while
customarily employed by an employer in full-time work
whether or not such work is in ‘employment’ as defined in this
act and continued subsequent to separation from such work
when such activity is not engaged in as a primary source of
livelihood. Net earnings received by the employe with respect
to such activity shall be deemed remuneration paid or payable
with respect to such period as shall be determined by rules and
regulations of the [D]epartment.
43 P.S. §802(h) (emphasis added).
The language of Section 402(h) remains unchanged from the original
1959 enactment at issue in the Superior Court’s decisions in two companion cases,
4
Department of Labor & Industry v. Unemployment Compensation Board of Review
(Springer), 199 A.2d 481 (Pa. Super. 1964), and Department of Labor & Industry v.
Unemployment Compensation Board of Review (Vitolins) 199 A.2d 474 (Pa. Super.
1964), on which Claimant here relies in support of her primary argument.
Section 201(a) of the UC Law gives the Department authority to enact
implementing rules and regulations. 43 P.S. §761(a). The Department may adopt
such rules and regulations as it deems necessary or suitable, provided that its rules
and regulations are not inconsistent with the provisions of the UC Law. Id.
Following the 1959 amendment of the UC Law adding Section 402(h),
the Department issued regulations governing the adjustment of UC benefits based
on earnings from a sideline business. Regulation 120 prescribed the method of
calculating the net income from the sideline business, by which a claimant’s UC
benefits would be reduced. It provided, in pertinent part: “For a claimant engaged
in a business other than farming, ‘gross income’ from sales and services shall be
reduced by subtraction of the cost, if any, of goods sold. Cost of goods sold shall
include the total cost of merchandise, cost of labor, and cost of material and
supplies.” Regulation 120.
The Department adopted the current regulation, Section 65.121, in
1968, shortly after both the enactment of the Commonwealth Documents Law4 and
the creation of this Court. Section 65.121 provides, in pertinent part: “For a claimant
engaged in a business other than farming, ‘gross income’ from sales and services
4
Act of July 31, 1968 (P.L. 769), 45 P.S. §§1201-1208.
5
shall be reduced by subtraction of the cost, if any, of goods sold. Cost of goods sold
shall include the total cost of merchandise, cost of labor and cost of material and
supplies.” Significantly, Regulation 120 and Section 65.121 are identical except that
Section 65.121 omits Regulation 120’s non-substantive Oxford comma.
A. Effect of the Superior Court Precedents
1. The Vitolins and Springer Decisions
In Vitolins, the claimant and his family operated a farm as a sideline
business. The farm generated its income from the raising and selling of livestock.
After deduction of the expenses of running the farm, it operated at a net loss. For
UC benefit calculations, however, Regulation 120 allowed deductions from gross
income of farms only for “expenses for labor, feed, seeds and plants, fertilizer and
lime.” Vitolins, 199 A.2d at 476. As a result, an initial UC determination reduced
the claimant’s weekly benefits by 85% based on income from the sideline family
business, even though that business was operating at a loss. A referee later modified
the UC benefits award, allowing all of the claimant’s business deductions in
calculating the farm’s net income, and the Board affirmed. The Superior Court
affirmed, reasoning that all deductions were proper notwithstanding the limiting
language in Regulation 120.
The Superior Court explained that before Section 402(h) was added to
the UC Law in 1959, anyone engaged in a part-time sideline business was considered
self-employed and ineligible for UC benefits, even if the business operated at a net
loss. However, anyone employed part-time for wages by another employer could
6
still be eligible for partial UC benefits. Section 402(h) was intended to correct this
“gross inequity” in the UC Law. Vitolins, 199 A.2d at 476-77.
The Superior Court acknowledged the Department’s authority to
promulgate rules and regulations not inconsistent with the UC Law. Nevertheless,
in Section 402(h), the statute’s delegation of regulatory authority recognized the
cyclical nature of many sideline businesses. This necessitated careful allocation of
sporadic sideline income in order to treat UC claimants fairly. The Superior Court
in Vitolins reasoned:
The legislature undoubtedly realized that a self-
employed person’s income might be produced in irregular
amounts and at irregular periods .… It was, therefore,
necessary to devise a method to prorate the fruits of the part-
time self-employment over the entire year to arrive at a fair
estimate of the claimant’s weekly net earnings from such
activity. This task was delegated by the legislature to the
[D]epartment in the following language: ‘Net earnings received
by the employe with respect to [self-employment] shall be
remuneration paid or payable with respect to such period as
shall be determined by rules and regulations of the
[D]epartment.’ We interpret this language, as did the board, to
mean that the [D]epartment has power to make regulations as
to the period. We do not believe that the legislature intended
to delegate to the [D]epartment the power to define ‘net
earnings’ by rules and regulations.
Id. at 477 (emphasis added).
The Superior Court concluded the term “net earnings,” which is not
defined in the UC Law, must have its plain everyday meaning. Citing Jones and
Nimick Manufacturing Co. v. Commonwealth, 69 Pa. 137 (1871), WEBSTER’S NEW
INTERNATIONAL DICTIONARY (2nd ed.), and decisions from other jurisdictions, the
7
Superior Court found that in everyday usage, the “net earnings” of a business are
what remains after deducting expenses. Vitolins, 199 A.2d at 478. Regulation 120,
“by selecting only a few of the numerous [sideline business] expenses to the
exclusion of all others, completely disregard[ed] the common meaning of ‘net
earnings.’” Id. The Superior Court declared this effect of Regulation 120 “absurd.”
Id.
In Springer, a companion case decided the same day as Vitolins, the
claimant had a sideline refrigerator repair business. Because it was a service
business, the claimant had no expense deduction for the cost of goods sold, although
he deducted many other business expenses. Because Regulation 120 allowed
deduction of only the cost of goods from gross income, all of the claimant’s business
expense deductions were initially disallowed in calculating his net income for UC
benefit purposes. On appeal, however, the Board allowed all the deductions.
Referring to its rationale in Vitolins, the Superior Court again affirmed the Board.
2. The Parties’ Positions
Claimant argues this Court should follow the Superior Court’s
decisions in Vitolins and Springer. The former and current versions of the regulation
are identical. Superior Court decisions are persuasive authority for this Court, and
at the time it decided Vitolins and Springer, the Superior Court was the appellate
court with jurisdiction over administrative appeals. Claimant asserts the facts of this
case are closely analogous to those in Vitolins and Springer. Claimant therefore
argues this Court should apply the same reasoning concerning the validity of Section
65.121 as the Superior Court applied concerning Regulation 120.
8
The Board argues it is not bound by the Superior Court’s ruling
concerning Regulation 120 because the court decided Vitolins and Springer before
the current regulation, Section 65.121, was adopted. The Board maintains that
although Superior Court decisions may be persuasive, they are not binding authority
for this Court. The Board asserts the Department was free to define “net earnings”
by regulation because the statute did not define it, and the Board is not free to ignore
the current regulation. The Board posits that the legal analysis in Vitolins and
Springer is outmoded. The Board suggests the Superior Court’s analysis is no longer
persuasive because the Superior Court did not examine Regulation 120 as a
legislative regulation entitled to a presumption of reasonableness, and therefore its
reasoning is not consistent with modern jurisprudence.
3. Analysis
In general, Superior Court decisions are not binding on this Court, but
they offer persuasive precedent where they address analogous issues. Donaldson v.
Workers’ Comp. Appeal Bd. (Pa. Workers’ Comp. Security Fund), 728 A.2d 994
(Pa. Cmwlth. 1999). Here, the Superior Court’s holdings are particularly persuasive
because in deciding Vitolins and Springer, the Superior Court was exercising
jurisdiction that now lies with this Court.
In Vitolins and Springer, the Superior Court concluded that Section
402(h) does not authorize the Department to define “net earnings” by regulation.
Further, the Superior Court determined the ordinary meaning of “net earnings”
required consideration of all business deductions; to do otherwise would frustrate
the intent of Section 402(h).
9
The Board’s argument that Vitolins and Springer lack persuasive value
because they predated the enactment of the current regulation is without merit.
Regulation 120 and Section 65.121 are identical. By logical extension of the Board’s
argument, whenever a court strikes down an administrative regulation, the agency
can defy that judicial ruling simply by re-promulgating and renumbering the same
regulation, without any intervening change in the enabling statute.
The Board’s argument that it cannot ignore its own regulation likewise
lacks merit under the circumstances of this case. The Board is not free to continue
following a regulation that an appellate court has deemed unauthorized. Accord
Comite de Apoyo a los Trabajadores Agricolas v. Solis, 933 F. Supp. 2d 700 (E.D.
Pa. 2013), dismissed on other grounds, 46 F. Supp.3d 550 (E.D. Pa. 2014) (federal
agency could not continue enforcing rule after federal court invalidated it). See
Northwestern Youth Servs., Inc. v. Dep’t of Pub. Welfare, 66 A.3d at 301, 311 (Pa.
2013) (development of Pennsylvania courts’ deference to administrative agency
rules has followed the development of federal administrative law). Similarly,
assuming the Department may define by regulation a term not defined in the UC
Law, it still is not free to do so by applying a definition that has been expressly
rejected by an appellate court. Id.
Notably, the Board itself found in Vitolins and Springer that net
earnings of a sideline business must take into account all business deductions, not
only those few enumerated in Regulation 120. Here, the Board declines to construe
the same language the same way. The Board asserts it is not bound by its prior
10
interpretation of the language of Regulation 120, even though that interpretation
garnered judicial approval.
However, the Board still must acknowledge its own precedents, and if
it does not follow them, it must expressly overturn or distinguish them. Van Ness v.
Bureau of Prof’l & Occupational Affairs, (Pa. Cmwlth., No. 558 C.D. 2014, filed
November 6, 2014), 2014 Pa. Commw. Unpub. LEXIS 655 (unreported).5 Failure
to expressly overturn or distinguish its prior rulings, without explanation, constitutes
a clear error of law by the Board. Id. Moreover, as the Pennsylvania Supreme Court
observed, “the deference owed to an agency interpretation ‘will depend upon the
thoroughness evident in its consideration, the validity of its reasoning, its
consistency with earlier and later pronouncements, and all those factors which give
it power to persuade, if lacking power to control.’” Northwestern Youth Servs., Inc.
v. Dep’t of Pub. Welfare, 66 A.3d 301, 312 (Pa. 2013) (quoting Skidmore v. Swift
& Co., 323 U.S. 134, 140 (1944)).
Here, the Board made no attempt to distinguish or overturn its decisions
concerning identical regulatory language in Vitolins and Springer; nor did the Board
otherwise explain its departure from those decisions. It simply ignored them,
thereby committing legal error.
The Board argues the Superior Court’s decisions in Vitolins and
Springer are not persuasive because courts in more modern cases apply a
5
We view Van Ness v. Bureau of Prof’l & Occupational Affairs, (Pa. Cmwlth., No. 558
C.D. 2014, filed November 6, 2014), 2014 Pa. Commw. Unpub. LEXIS 655 (unreported) to be
persuasive. 210 Pa. Code §69.414(a).
11
presumption of reasonableness to agency regulations that the Superior Court did not
accord Regulation 120. This argument implies the Superior Court would have
decided Vitolins and Springer differently had it analyzed Regulation 120 with a
presumption of reasonableness. This Court is unpersuaded by this implicit assertion.
The Superior Court’s conclusion that the effect of Regulation 120 was “absurd,”
Vitolins, 199 A.2d at 478, evidences its determination that the regulation was not
reasonable. Thus, there is no indication that expressly applying the rebuttable
presumption of reasonableness of a regulation would have changed the Superior
Court’s conclusion in Vitolins and Springer.
Based on the foregoing discussion, this Court concludes the Superior
Court’s decisions in Vitolins and Springer offer persuasive precedent, and the Board
erred as a matter of law by failing to deduct all of Claimant’s business expenses from
her gross revenue in calculating her net earnings from her sideline business.
B. The Department’s Regulatory Authority
Claimant next argues that even without considering the Superior
Court’s decisions in Vitolins and Springer, this Court should find Section 65.121 is
inconsistent with the UC Law and is not reasonable. The Board responds that the
regulation is legislative, not merely interpretive in nature, and therefore is mandatory
and binding on both the Board and this Court. Claimant counters that Section 65.121
is not a valid legislative regulation; rather, it is at most an interpretive regulation that
this Court may disregard.
12
Both parties cite Slippery Rock Area School District v. Unemployment
Compensation Board, 983 A.2d 1231 (Pa. 2009), for its discussion of the contrast
between legislative and interpretive regulations.
A legislative regulation creates a controlling standard of conduct. Id.
at 1239. A legislative regulation is valid if it is adopted pursuant to delegated agency
power, its adoption follows proper administrative procedure, and it is reasonable.
Id. at 1236. A legislative regulation, if valid, is mandatory and binding. Id.
By contrast, an interpretive rule construes, but does not expand, the
terms of a statute. Id. at 1239. An interpretive regulation is valid if it genuinely
tracks the meaning of the statute it construes. Id. at 1236. However, an interpretive
regulation is merely entitled to some deference. Id. A court may disregard an
interpretive regulation it finds unwise or violative of legislative intent.6 Uniontown
Area Sch. Dist. v. Pa. Human Rels. Comm’n, 313 A.2d 156 (Pa. 1973).
1. The Scope of the Enabling Statute
An agency regulation is interpretive, rather than legislative, if the
agency is without lawmaking power or fails to follow the required procedure.
Slippery Rock, 983 A.2d at 1237. Here, Claimant does not allege any procedural
irregularity in the adoption of Section 65.121. Rather, Claimant asserts the
regulation is interpretive because the Superior Court found Regulation 120 was
6
This Court implicitly disregarded Section 65.121 in Lowman v. Unemployment
Compensation Board of Review, ___ A.3d ___ (Pa. Cmwlth. 2018) (en banc), 2018 Pa. Commw.
LEXIS 52, *13 n.10, in which we noted that the calculation of the claimant’s part-time “earnings”
as an Uber driver needed to take into account not only what Uber paid him, but his associated
expenses.
13
beyond the Department’s rulemaking authority, and the Department was without
power to reenact a legislative regulation in order to override an appellate court
decision. This argument has merit.
The Board does not point to any alteration in Section 65.121 that would
distinguish it from Regulation 120. Therefore, once the Superior Court held in
Vitolins and Springer that defining “net earnings” by regulation was beyond the
Department’s authority, the Department was not free to simply re-promulgate the
same regulation without any intervening change in the authorizing statute, Section
402(h).
2. Reasonableness of Section 65.121
To be valid, a legislative regulation must also be reasonable. Slippery
Rock. Here, Claimant argues that in addition to exceeding the Department’s
regulatory power, Section 65.121 is unreasonable. We agree.
As the Superior Court explained, the legislature added Section 402(h)
to the UC Law specifically to correct the “gross inequity” arising from the denial of
all UC benefits because of a part-time sideline business. Vitolins, 199 A.2d at 476-
77. The Department’s regulation so severely limits the deductions from gross
income of a sideline service business as to eliminate any distinction between gross
and net income. However, a claimant with a sideline business selling goods can
deduct the cost of those goods and related expenses. As a result, a claimant with a
sideline service business may lose some or even all UC eligibility, even though the
sideline business operates at a loss, while a similarly situated claimant with a sideline
14
sales business does not. A regulation that creates such a result is unreasonable and
contrary to the remedial equalizing intent of Section 402(h).
Based on the foregoing discussion, the Department lacked legal
authority to re-promulgate the regulation after an appellate court found it was
unauthorized. Moreover, the regulation is not reasonable. Therefore, the Board
erred as a matter of law in refusing to consider Claimant’s business deductions in
calculating her net income from her sideline business.
C. Seasonal Nature of Claimant’s Sideline Business
Claimant contends the Board failed to consider her alternative
argument that her sideline business is seasonal because it generates income mainly
during one month in the spring and one month in the fall. Claimant testified to that
effect at the hearing, but did not specify which periods were the busy ones for her
sideline business. In the event this Court finds the sideline business generated
positive net income, Claimant seeks a remand to the Board for a determination of
whether such income was applicable to any of the weeks for which she sought UC
benefits.
In light of this Court’s disposition of this case, Claimant’s final issue is
moot. However, for completeness, we address it briefly here.
As explained above, the legislature delegated to the Department the
determination of how to allocate seasonal income in calculating weekly UC benefits.
Claimant asserts that 34 Pa. Code §65.122 (Section 65.122) requires income from a
15
seasonal business to be applied to the weeks in which the business normally operates.
Section 65.122, however, specifically applies to earnings calculations made in
accordance with 34 Pa. Code §65.113 (Section 65.113), relating to the computation
of a claimant’s weekly wage. Claimant offers neither an analysis nor a citation of
authority to support the application of Section 65.122 to calculations of net earnings
of a sideline business under Section 65.121. Moreover, Claimant’s argument implies
that a year-round business with busy seasons is equivalent under the UC Law to a
business operating only seasonally. Claimant likewise offers no support for this
argument.
Claimant has not developed her argument sufficiently to allow
meaningful appellate review. Therefore, regardless of mootness, this Court finds
Claimant waived this issue. See Khan v. Bureau of Prof’l & Occupational Affairs,
(Pa. Cmwlth., No. 1047 C.D. 2016, filed November 21, 2017), 2017 Pa. Commw.
Unpub. LEXIS 885 (unreported).
IV. Conclusion
Based on the foregoing discussion, this Court reverses the Board’s
order and remands to the Board for recalculation of Claimant’s UC benefits,
consistent with the holdings of the Superior Court in Vitolins and Springer.
ROBERT SIMPSON, Judge
16
IN THE COMMONWEALTH COURT OF PENNSYLVANIA
Valerie S. Lerch, :
Petitioner :
:
v. : No. 748 C.D. 2017
:
Unemployment Compensation :
Board of Review, :
Respondent :
ORDER
AND NOW, this 12th day of March, 2018, the order of the
Unemployment Compensation Board of Review is REVERSED. This case is
REMANDED to the Board for recalculation of Claimant’s unemployment
compensation benefits, consistent with this opinion.
Jurisdiction is relinquished.
ROBERT SIMPSON, Judge