Decision #11/04 - Type: Workers Compensation

Preamble

An Appeal Panel hearing was held on January 7, 2004, at the employer's request. The Panel discussed this appeal on the same day.

Issue

Whether or not the employer's business activities have been correctly classified under industry code 301-03 "Wholesale Meat Products" and;

Whether or not the WCB should transfer the cost experience of the previous owners of the company to the current owners.

Decision

That the employer's business activities have been correctly classified under industry code 301-03 "Wholesale Meat Products" and;

That the WCB should transfer the cost experience of the previous owners of the company to the current owners.

Decision: Unanimous

Background

In February 2003, a representative from the appellant firm advised Employer Services of the Workers Compensation Board (WCB) that they purchased the business activities of 4236891 Manitoba Ltd. on September 1, 2001. On March 13, 2003, the WCB transferred the previous owner's classification, rate of assessment and claims history to the appellant firm in accordance with WCB policy 31.05.20, Transfer of Employer Cost Experience.

Subsequent file information showed that the appellant firm provided the WCB with a description of employment duties for all its employees as well as copies of the employee's T4 slips. In addition, it was confirmed that the employer had two other companies as well as a list of shareholders.

In a letter dated April 24, 2003, the WCB notified the appellant firm that it had been properly classified under industry code 301-03, "Wholesale Meat Products". The WCB determined that the appellant firm's work force had been involved with production activities and activities that the WCB considered incidental to production. This decision was based on section 3.06 of the Research and Classification manual that dealt with whether or not an employer's retail or wholesale operation was incidental to the employer's main activity. A second industry code was not assigned to the appellant firm. On June 9, 2003, the appellant firm disagreed with the WCB's decision to charge them with the predecessor's rate of assessment and for the company to be classified under industry code 301-03, Wholesale Meat Products. The case was then forwarded to the Assessment Committee for consideration.

In a decision dated August 26, 2003, the Assessment Committee determined that the firm was correctly classified under industry code 301-03, Wholesale Meat Products based on the following rationale:
"…firms classified under industry code 301-03 purchase large cuts of meat, such as halves or quarters. The meat may be cut into smaller portions or specially processed. In their appeal letter, the firm indicates that the largest part of their business is in distribution of processed and raw meat and food service products, paper, grocery, etc. Also, information provided by the employer on April 23, 2003, describing the employment duties of employees [firm's name], is consistent with industry code 301-03. Therefore, the firm is properly classified."
The Assessment Committee also determined that the cost experience of the previous owner should be transferred to the new firm. The Assessment Committee made the following comments in this regard:
"The WCB implemented policy 31.05.20 to address the transfer of employer cost experience. This policy ensures that the cost experience of a predecessor employer will be transferred to the successor employer, and will be used to determine the assessment rate of the successor employer. This policy applies when a change in ownership occurs and the business continues to operate in substantially the same form. Information in the employer's June 9, 2003, letter and April 23rd submission lead Assessment Committee to conclude that the present owner is operating the business in substantially the same form as the previous owner. Therefore by board policy, the previous owners experience was transferred to the present owner and was used to determine the firm's 2003 assessment rate."
On October 6, 2003, the appellant firm appealed the August 26, 2003 decision written by the Assessment Committee and an oral hearing was arranged.

Reasons

The employer in this case is appealing a decision made by the Assessment Committee that confirmed the firm's classification under industry code 301-03 "Wholesale Meat Products." The employer is also appealing the WCB's decision to transfer to it the cost experience of the previous owners of the company to the current owners.

For the appeal to be successful on the first issue, we would have to find that there was a different industry code that more appropriately describes the firm's business activities. For the second issue, we would have to find that the firm's business was substantially different from that undertaken by the previous owners. We were unable to make either of these determinations, and would deny the employer's appeals on both issues. Our reasons follow.

The employer's arguments and evidence

The employer was represented by its president and its production manager, who provided considerable evidence as to the specifics of their current operations. The essence of their argument, relevant for both issues, is that their business is now substantially different from that of their competitors (and from the previous owners) for the purpose of determining an appropriate risk category for their business. On that basis, they are seeking to be grouped in a different (lower) rate category and not incur a transfer of cost experience from the previous owners of the company.

In support of their position, they point to the significant changes that have been made in the business since they took over the enterprise from the former owners in 2001. Their evidence is that their plant was redesigned once they took over the operation. They have entirely removed the previous "front end" operations of purchasing, handling, cutting, and deboning of sides and quarters of meat. Instead, they bring in pre-cut meat products which are then used in the production of processed meats and the resale of fresh meats. The end-stage production/processing of their meat products is largely the same as it was previously. They continue to provide these products to the same commercial customers as the previous owners.

The employer argues that their competitors continue to have those "high risk" elements in their businesses associated with the front end handling and preparation of the meats, and that this employer is now improperly grouped with those companies, given their different risk profile. The employer also points to its good injury record as not justifying their currently high assessment rates. The employer also notes their business has also diversified, in that they also resell pre-packaged goods, as well as other miscellaneous products, to their commercial customers.

Analysis

In considering the employer's arguments, we are obligated to apply the provisions of the Workers Compensation Act (the Act), supporting Regulations to the Act, and any policies passed by the WCB's Board of Directors. Section 79 of the Act directs the WCB to assign employers to appropriate groups or subgroups. Section 81 of the Act then empowers the Board to levy and collect assessments from each employer, in order to maintain the Accident Fund. Based on these provisions, the WCB has developed a series of industry codes. In our deliberations, we have considered which industry code best fits this employer's business activities.

The WCB Assessment Committee has assigned this employer to industry code 301-02, Wholesale Meat Products, rather than to the more general 603-02 code, which deals with general wholesalers, or 603-05 which deals with wholesalers of food products. Codes starting with "3" relate to manufacturing, while codes starting with "6" relate to "trade."

Our review of these three codes suggest that there are very clear distinctions in the wording of the three categories, and that overlap between the categories is not anticipated or desired, with the limited exceptions where firms might receive multiple codes for two distinct and separate business activities. Code 603-02 falls into Sector 3 - Trade, and it is targeted at wholesalers who sell to commercial clients, using sales representatives and/or agents. The code sheet for 603-02 states that "The following are types of wholesalers found in this class:….14. Packaging/repackaging items not processed or produced by wholesaler." [emphasis ours]. Code 603-02 does allow for manufacturing/wholesaling operations to have two codes assigned, but it requires that there be two standalone operations with their own locations and no interchange of staff.

In this case, the evidence is that the employer is a wholesaler, in that it sells to commercial clients, using its sales force. However, it is also involved in processing and production, which takes it out of the wording of 603-02, which is highlighted above. The firm also cannot access a separate code for its fresh meats reselling activities, because it operates in a single location, and its staff, particularly the production manager, and supporting staff such as shippers, receivers, and front office staff, are shared between the production and wholesale operations. Accordingly, the employer does not meet the criteria for industry code 603-02. A similar analysis applies to code 603-05.

As to the code where the employer currently resides, industry code 301-02 - Wholesale Meat Products falls under Sector 3 - Manufacturing. It notes that meats may be purchased in larger sizes and cut into smaller portions, and also notes that the meats may be "specially processed, i.e. smoking, pickling, grinding and mixing." This code states that if there is no processing undertaken by the firm, the firm's activities would be classed in the Trade sector, under 603-05 "Wholesale Food Products. Code 301-02 also provides a list of typical equipment that might be found in this code, including chopping blocks, cleavers, knives, grinders, sausage machines, patty machines, and so on.

In reviewing the evidence before us, we have concluded on a balance of probabilities that the employer is appropriately categorized under code 301-02. We base this finding on the following evidence:
  • While the firm does not undertake all of the activities listed in this industry code, it does process meats on its premises, and in fact has up to 11 employees directly involved in the processing operations which range from grinding, cutting and mixing, to stuffing and packaging, and in supporting roles related to the shipping and receiving of the raw materials and final products. These activities are listed as part of the list of typical activities associated with firms in this industry code. The activities list refers to "may include…" and it is not necessary for the firm to do all the activities listed, in order to qualify within this code.

  • From the financial information provided, the processed meats are responsible for over half of the firm's sales. This particular activity also contributes by far the highest margins to the company, in comparison to its reselling activities (in fact, three times the margins of the other business activities).

  • The firm does use many of the types of equipment listed in this code, and also uses other production-type equipment unique to its product requirements.

  • The firm maintains federal registration/licensing of its business in order to produce and sell its processed meat products across Canada and internationally, and has a lab technician on its payroll in order to satisfy its licensing requirements. The lab technician's responsibilities relate to their production activities, not to their wholesale activities.

  • These activities, as a group, are far more consistent with that of a production facility than that of a typical wholesale enterprise.
We appreciate that the employer has removed some of the higher risk elements of the business (handling large sides and quarters of meat, cutting, and deboning), but nonetheless, the firm is still primarily a manufacturer, rather than a wholesaler, and thus appropriately classified under code 301-02. Accordingly, the employer's appeal on this first issue is denied.

While the firm has expressed frustration over this classification, we note that the WCB's rate setting model for employer assessments reflects (and rewards) each firm's actual accident costs. Presumably, over time, the firm's decisions to remove the higher risk operations will result in their having a better-than-average cost experience (and lower assessments) in comparison to their competitors.

We would also note that where there are significant changes in industry activities and practices, it is open for the WCB to re-examine the appropriateness of particular industry groupings, through industry audits, which can lead to the reassignment or reclassification of firms as a result.

As to the second issue, we find that the WCB was correct in its transfer of the cost experience of the previous owners to the current owners. WCB Policy 31.05.20 - Transfer of Employer Cost Experience, states, in part, that:
"As a general principle, the cost experience will follow the business where all or part of a business changes ownership. The cost experience of the predecessor employer will be transferred to the successor employer and will be used to determine the assessment rate and merit or surcharge (if applicable) of the successor employer."
The evidence discloses that while the firm has chosen to outsource its front end operations, compared to the previous owners, the firm is still producing the same type of goods under the same brand names, and continues to sell those goods to the same types of customers as the previous owners. The operation also continues in the same location, and we note the continuity of staff as well. For these reasons, we find that the general principle of this policy is met, and the transfer of cost experience from the previous employer to the current employer was appropriate. Accordingly, the employer's appeal on the second issue is denied.

Panel Members

T. Sargeant, Presiding Officer
A. Finkel, Commissioner
M. Day, Commissioner

Recording Secretary, B. Miller

T. Sargeant - Presiding Officer
(on behalf of the panel)

Signed at Winnipeg this 19th day of January, 2004

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