Session February 25, 2015
Appeal from the Chancery Court for Davidson County No. 110034II Carol L. McCoy, Chancellor.
Robert E. Boston, Mark W. Peters, and Michael T. Harmon, Nashville, Tennessee and Arthur M. Fowler, Jr., Johnson City, Tennessee, for the appellant, Administrative Management Resources, LLC.
Herbert H. Slatery, III, Attorney General and Reporter; Andrée S. Blumstein, Solicitor General; and Jason I. Coleman, Assistant Attorney General, for the appellee, Tennessee Department of Labor and Workforce Development.
Andy D. Bennett, J., delivered the opinion of the court, in which Frank G. Clement, P.J., M.S., and W. Neal McBrayer, J., joined.
MEMORANDUM OPINION 
ANDY D. BENNETT, JUDGE
Factual and Procedural Background
Administrative Management Resources, LLC ("AMR") was a staff leasing company owned by Rick and Sharon Thomason. Staff leasing companies place employees of a client company onto the leasing company's payroll and then lease the employee back to the client company. The Thomasons also owned other companies that offered services similar to those offered by AMR; one of those companies was ARI. As will be discussed below, a prior case against ARI by the Department is relevant to the Department's claims against AMR in this case.
The Tennessee Employment Security Law requires all non-governmental covered employers to pay their share of state unemployment tax act ("SUTA") premiums to the Department. Tenn. Code Ann. §§ 50-7-402, 50-7-403 (2006). Employers can pay their premiums in one of two ways: a flat sum equal to 5.5% of wages, or according to a formula based upon their individual reserve experience. Tenn. Code Ann. §§ 50-7-402(a), 50-7-403(b) (2006). The premium for an employer that pays based upon its individual reserve experience is determined as follows: the total benefits charged to the employer's account are subtracted from the amount of premiums paid by the employer. Tenn. Code Ann. § 50-7-403(b)(1)(A) (2006). The difference is divided by the average taxable payroll for the most recent three-year period, yielding a reserve ratio, which is the employer's premium rate. Id.
Tennessee Code Annotated section 50-7-403(b) (2006) contains provisions aimed at prohibiting companies from and penalizing companies for engaging in the practice of "SUTA dumping, " which occurs when an employer manipulates the experience rating system to obtain a more favorable premium rate. The employer typically accomplishes the goal of SUTA dumping by transferring payroll, benefits, and premium experience to a company with a lower rate in order to pay lower SUTA premiums. The Department is responsible for making sure that employers pay their SUTA taxes in full. See Tenn. Code Ann. §§ 50-7-403, 50-7-452.
Prior to January 1, 2006, the relevant provisions of the Employment Security Law provided as follows:
Notwithstanding any of the foregoing provisions of this section, if the administrator finds in any case that the acquisition of any business or a distinct, severable, identifiable and segregable part thereof is made solely or primarily for the purpose of obtaining a more favorable rate of premiums, the transfer of accounts shall not be approved. The acquisition shall be deemed to have been made solely or primarily for such purpose if the administrator finds an absence of any reasonable business purpose of the acquisition other than a more favorable premium rate.
Tenn. Code Ann. § 50-7-403(b)(5)(A) (2005). The 2005 law also stated:
No total or partial transfer of taxable payroll, benefit and premium experience may be made without the written consent of all employers or employing units involved and filed with the division of employment security during the calendar quarter in which the acquisition occurs or during the calendar quarter immediately following such quarter.
Tenn. Code Ann. § 50-7-403(b)(4) (2005).
A major revision to the SUTA provisions occurred during the 2005 General Assembly and took effect on January 1, 2006. See 2005 Tenn. Pub. Acts ch. 357, §§ 2-9. The relevant provisions include the following:
(C) Notwithstanding any other law, this subdivision (b)(2)(C) shall apply regarding assignment of premium rates and transfer of benefit and premium experience of an employer's trade or business, or a portion of an employer's trade or business, to another employer, if, at the time of the transfer, there is any common ownership, management or control of the two (2) employers. In such cases, the benefit and premium experience attributable to the transferred trade or business shall be transferred to the employer to whom the trade or business is so transferred. The reserve ratios and premium rates of both employers shall be recalculated and made effective immediately upon the date of the transfer of the trade or business.
(D) If, following a transfer of experience under subdivision (b)(2)(C), the administrator, pursuant to the factors in subdivision (b)(2)(F), determines that a substantial purpose of the transfer of trade or business was to obtain a reduced liability for premiums, the experience rating factors of the employers involved shall be combined into a single account and a single premium rate assigned to the account as of the date of the transfer. . . .
(F) In determining whether a business was acquired, or a transfer of a trade or business, or a portion of a trade or business, was made solely or primarily or substantially for the purpose of obtaining a lower rate of premiums, the administrator shall use objective factors, which may include the cost of acquiring the business, whether the person or employing unit continued the business enterprise of the acquired business, how long the business enterprise was continued, or whether a substantial number of new employees were hired for performance of duties unrelated to the business activity conducted prior to acquisition.
Tenn. Code Ann. § 50-7-403(b)(2)(C)(D) & (F) (2006).
In 2004, the Department performed an audit of ARI, Inc., d/b/a Southgate Styling Salon, another company owned by the Thomasons, for the period from January 2002 through the end of March 2004. ARI, Inc. v. Neeley, No. M2011-02272-COA-R3-CV, 2012 WL 3157120, at *1 (Tenn. Ct. App. Aug. 3, 2012). Based upon the audit, the Department determined that ARI had engaged in "a practice of reporting wages for unemployment insurance premium purposes that violate[d] the experience rating principles of the Tennessee Employment Security Law." Id. The Department found that ARI owed a total of over half a million dollars in unpaid unemployment insurance premiums and interest. Id. ARI appealed through the administrative process. Id. at *1-2. The Department issued a 102-page redetermination decision including detailed findings of fact and affirming its initial ...