Aura Spa & Boutique v. Department of Workforce Services

2017 UT App 152
THE UTAH COURT OF APPEALS
A URA S PA & BOUTIQUE,
Petitioner,
v.
DEPARTMENT OF WORKFORCE S ERVICES,
WORKFORCE A PPEALS B OARD,
Respondent.
Opinion
No. 20160341-CA
Filed August 17, 2017
Original Proceeding in this Court
David E. Ross II, Attorney for Petitioner
Suzan Pixton and Nathan R. White, Attorneys
for Respondent
JUDGE GREGORY K. O RME authored this Opinion, in which JUDGES
J. F REDERIC VOROS JR . and M ICHELE M. C HRISTIANSEN concurred.1
ORME, Judge:
¶1 	Aura Spa & Boutique (the Spa) petitions for judicial
review 	of 	the 	Workforce 	Appeals 	Board’s 	decision 	that
concluded 	the 	Spa’s 	workers 	were 	employees 	rather 	than
independent contractors for purposes of Utah’s employment
security 	regime. 	We 	decline 	to 	disturb 	the 	board’s
determination.
1. Judge J. Frederic Voros Jr. participated in this case as a
member of the Utah Court of Appeals. He retired from the court
before this decision issued.

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¶2 	The Spa offered massages and various esthetic services to
its customers. In providing these services, the Spa contracted
with 	individual 	massage 	therapists and 	estheticians, 	paying
them a commission for the services they rendered. The Spa set
the prices for the services, and it provided advertising, clientele,
equipment, supplies, clerical support, and business premises
where the workers performed their services for customers who
wished to come to the Spa. Additionally, the Spa required its
workers 	to 	carry 	liability 	insurance 	and 	maintain 	their
professional licenses, both at their own expense.
¶3 	In 2014, the Department of Workforce Services (DWS)
randomly selected the Spa for an audit. During its investigation,
DWS 	distributed 	questionnaires 	to 	the 	Spa’s 	workers 	to
determine whether the workers were the Spa’s employees for
purposes of unemployment compensation. After reviewing the
pertinent 	information, 	the 	DWS 	auditor 	concluded 	that 	the
workers were not independent contractors but were instead
employees of the Spa. The Spa appealed, and a DWS hearing
officer affirmed the decision.
¶4 	The Spa appealed the hearing officer’s decision, and an
administrative law judge (the ALJ) conducted a hearing. The
owner of the Spa testified, but none of the Spa’s workers did.
After the hearing, the ALJ issued a written decision, holding that
the workers received wages subject to the Employment Security
Act (the Act), see Utah Code Ann. § 35A-4-204(3) (LexisNexis
2015); that the workers were employees rather than independent
contractors for purposes of the Act; that the Spa directed and
controlled its workers; and that the Spa was responsible for
providing its employees with unemployment benefits through
the 	payment 	of 	appropriate 	premiums 	for 	unemployment
insurance. The ALJ concluded that the Spa failed to provide any
legally competent evidence to support its claims to the contrary,
noting 	that 	it 	“provided 	only 	hearsay 	testimony 	about 	the
services provided by the [workers].” The Spa appealed the ALJ’s

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decision, and the Workforce Appeals Board affirmed. The Spa
now seeks our review of the board’s disposition.
¶5 	“The determination whether a claimant is an independent
contractor involves a fact-sensitive inquiry into the unique facts
of 	a 	particular 	employment 	relationship.” 	Evolocity, 	Inc. 	v.
Department of Workforce Services, 2015 UT App 61, ¶ 6, 347 P.3d
406. Due to the “individuality of fact patterns and the vagaries of
various vocations,” BMS Ltd. 1999, Inc. v. Department of Workforce
Services, 2014 UT App 111, ¶ 13, 327 P.3d 578, we will not disturb
the board’s decision unless the challenging party shows “that a
finding is not supported by legally sufficient evidence even
when the evidence is viewed in a light most favorable to the
finding,” Evolocity, 2015 UT App 61, ¶ 6 (citation and internal
quotation marks omitted).
¶6 	The Spa contends that the board erred in determining that
its 	workers 	were 	employees 	rather 	than 	independent
contractors. 	To 	establish 	that 	a 	worker 	is 	an 	independent
contractor, the business owner has the burden to show that
(a) the individual is customarily engaged in an
independently 	established 	trade, 	occupation,
profession, or business of the same nature as that
involved in the contract of hire for services; and
(b) the individual has been and will continue to be
free from control or direction over the means of
performance 	of 	those 	services, 	both 	under 	the
individual’s contract of hire and in fact.
Utah Code Ann. § 35A-4-204(3)(a)–(b).
¶7 	The 	Spa 	asserts that its workers were 	independently
established. It relies on a copy of a worker’s advertisement for
massage services unrelated to the Spa; its workers’ responses to
the 	DWS 	questionnaire, 	which 	consistently 	suggested

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circumstances 	consistent 	with 	independence;2 	and 	the 	Spa
owner’s hearing testimony.
¶8 	DWS’s regulations identify seven factors to consider in
determining whether a worker is independently established. See
Utah Admin. Code R994-204-303(1)(b). Specifically, the factors
require the reviewing entity to examine whether the worker has
a separate place of business; has substantially invested in his or
her own equipment; has independent clients; can realize a profit
or loss; advertises his or her own services; has obtained the
required and customary professional licenses; and maintains
records 	that 	validate 	business 	expenses. 	Id. 	R994-204-
303(1)(b)(i)–(vii). Significantly, the burden is not on DWS to
establish that the workers are covered employees under the Act;
the burden is on the employer to establish that the workers are
independent contractors not subject to the Act. See Utah Code
Ann. § 35A-4-204(3).
¶9 	The board found that all seven factors tended to show the
workers were not independently established. In reaching its
conclusion, the board noted that there was no legally competent
evidence demonstrating that any of the workers maintained a
separate place of business, rendered services to independent
clients, advertised their services, or filed taxes as independent
business entities. Additionally, while the board noted that the
workers were free to use their own massage beds and lotions if
they preferred, it concluded that the Spa “provided all the tools
and equipment necessary for the workers to perform their jobs.”
2. Most of the questionnaires included answers indicating the
workers had their own separate places of business from which
they often worked, frequently provided their own supplies and
equipment (and invariably did so when making house calls),
paid for their own liability insurance, and conducted advertising
for massage and similar services unrelated to the Spa.

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The board further determined that the workers faced “no risk of
a loss,” noting that the workers were paid “[i]f they provided the
service,” but otherwise stood to gain or lose nothing by reason of
their affiliation with the Spa. Finally, the board noted that all
massage 	therapists 	and 	estheticians, 	whether 	employees 	or
independent contractors, are required to maintain professional
licenses. In the board’s view, this fact, especially coupled with
the 	fact 	that 	none 	of 	the 	Spa’s 	workers 	obtained 	separate
business licenses,3 also 	favored 	a 	conclusion 	that 	the 	Spa’s
workers were employees.
¶10 	In this judicial review proceeding, the Spa challenges the
board’s decision by relying on the evidence it presented at the
administrative hearing. But the Spa fails to show that the board’s
decision was not supported by sufficient evidence, much less
that the decision was outside “the realm of reasonableness and
rationality.” See Prosper Team, Inc. v. Department of Workforce
Services, 2011 UT App 142, ¶ 6, 256 P.3d 246 (citation and internal
quotation marks omitted).
¶11 	While the Spa argues that the board’s decision was not
supported by sufficient evidence, its primary argument is that
the board erroneously refused to consider legally competent
evidence that, according to the Spa, would have tipped the
decision in its favor. This argument implicates the so-called
residuum 	rule. 	The 	residuum 	rule 	requires 	that 	an
administrative 	board’s findings of 	fact 	“be 	supported 	by 	a
residuum of legal evidence competent in a court of law” even if
3. We note that two workers, in their responses to the DWS
questionnaire, 	indicated 	that 	they 	had 	business 	licenses 	in
addition to their professional licenses. But as we explain below,
this evidence alone is insufficient to support a finding that the
Spa’s 	workers 	obtained 	separate 	business 	licenses. 	See 	infra
¶¶ 12–13.

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the board has received and considered evidence of a lesser
quality. See InnoSys, Inc. v. Department of Workforce Services, 2011
UT App 169, ¶ 9, 257 P.3d 489 (citation and internal quotation
marks 	omitted). 	While 	hearsay 	“is 	clearly 	admissible 	in
administrative proceedings,” id. (citation and internal quotation
marks 	omitted), 	the 	ensuing 	findings 	of 	fact 	may 	not 	rely
exclusively on inadmissible hearsay evidence, see Prosper, Inc. v.
Department of Workforce Services, 2007 UT App 281, ¶ 11, 168 P.3d
344; Utah Admin. Code R994-508-111(4).
¶12 	Hearsay consists of “a statement that: (1) the declarant
does not make while testifying at the current trial or hearing;
and (2) a party offers in evidence to prove the truth of the matter
asserted in the statement.” Utah R. Evid. 801(c). Much of what
was traditionally considered to be hearsay is, by rule, now
characterized as “not hearsay.” See id. R. 801(d). And much
hearsay is legally competent evidence, given the multitude of
exceptions to the presumptive bar on the admission of hearsay.
See id. R. 803 (listing twenty-three exceptions); id. R. 804(b)
(listing four exceptions); id. R. 807(a) (permitting the admission
of hearsay statements, not qualifying for admission under an
express 	exception, 	if 	“the 	statement 	has 	equivalent
circumstantial guarantees of trustworthiness” and satisfies three
other 	requirements). 	Hearsay 	statements 	covered 	by 	the
foregoing exceptions are legally competent for purposes of the
residuum rule; conversely, hearsay that does not come within
one or more of these exceptions does not pass muster under the
residuum rule. See Prosper Inc., 2007 UT App 281, ¶ 11.
¶13 	During 	the 	administrative 	hearing, 	the 	Spa’s 	owner
provided a copy of one massage therapist’s advertisement for
services wholly independent of the Spa. Alas, the advertisement
is hearsay. It contained a statement that was not made at the
hearing, and it was offered to prove the truth of the matter
asserted—that one of the Spa’s workers offered her massage
services independently of her work for the Spa. The Spa made

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no effort to establish the applicability of one of the foregoing
exceptions. Therefore, the board correctly refused to find, based
on this flyer alone, that the Spa’s workers had independently
advertised their services.
¶14 	The workers’ responses to the DWS questionnaire are also
hearsay, 	but 	the 	Spa 	argues 	that 	the 	responses 	to 	the
questionnaire would nonetheless be admissible in court under
the public record exception to the hearsay rule, and thus are
legally competent for purposes of the residuum rule. See Utah R.
Evid. 803(8). We disagree. Interpreting the identically worded
federal rule of evidence, the United States Court of Appeals for
the Seventh Circuit stated that “the presumption of reliability
that serves as the premise for the public-records exception does
not attach to third parties who themselves have no public duty
to report.” Jordan v. Binns, 712 F.3d 1123, 1133 (7th Cir. 2013)
(refusing to admit “third-party statements contained in a police
report”). See also United States v. Morales, 720 F.3d 1194, 1202 (9th
Cir. 2013) (“In general, statements by third parties who are not
government employees . . . may not be admitted pursuant to the
public records exception but must satisfy some other exception
in 	order 	to 	be 	admitted.”). 	Thus, 	the 	responses 	to 	the
questionnaires must themselves fall within one of the exceptions
to the hearsay rule. Cf. In re G.Y., 962 P.2d 78, 85 (Utah Ct. App.
1998) (holding that third-party statements contained in DCFS
caseworker reports constituted hearsay).4 Because the Spa does
4. At the administrative hearing, the Spa also provided what
appears to be a copy of an email attachment containing the
business license of one of its workers. While the Spa refers to this
license in its brief, it does not argue that the copy is admissible
under 	the 	public 	records 	exception. 	We 	therefore 	have 	no
occasion to consider it, but we do note that there was no
foundation established for its authenticity, nor was it a certified
copy.

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not 	contend 	that 	the 	responses 	to 	the 	questionnaire 	are
admissible under any other exception to the hearsay rule, the
Spa has not established that the statements are legally competent
for purposes of the residuum rule.
¶15 	The Spa has not demonstrated, with the support of at
least a residuum of legally competent evidence, that its workers
were 	independently 	established. 	It 	has 	likewise 	failed 	to
demonstrate that the board’s decision was not supported by
legally 	sufficient 	evidence 	or 	was 	beyond 	the 	limits 	of
rationality. 	Further, 	because 	independent 	contractor 	status
requires 	a 	showing 	of 	both 	independent 	establishment 	and
freedom from direct control, the lack of the former obviates the
need to discuss the latter. See Evolocity, Inc. v. Department of
Workforce Services, 2015 UT App 61, ¶ 22, 347 P.3d 406.
¶16 	For the foregoing 	reasons, 	we 	decline 	to disturb 	the
board’s decision.