Decision #121/11 - Type: Workers Compensation

Preamble

This appeal deals with a decision made by the Assessment Committee of the Workers Compensation Board ("WCB") pertaining to the employer's payroll allocation. A hearing was held on July 13, 2011 to consider the matter.

Issue

Whether or not the firm's payroll allocation has been correctly determined.

Decision

That the firm's payroll allocation has not been correctly determined.

Decision: Unanimous

Background

The employer's account was set up based on a compensation claim for a worker who claimed she was injured while in the employ of the appellant. After a WCB investigation, it was confirmed that the worker was working in a compulsory industry when injured and was entitled to compensation benefits and services.

The WCB contacted the employer for payroll information and to set up an account file. The WCB was unable to obtain a clear picture of the split between payroll associated with the injured worker's activities under Industry Code 302-05 "Manufacturing Food Products" which was always compulsory under the Act and that of the farming operation Industry Code 103-02 "Hog & Poultry Farming", which became compulsory under the Act effective January 1, 2009.

While processing an earlier appeal on this account, the WCB's Assessment Committee ordered an audit of the employer's financial records which took place in October 2010. The results of the audit are contained in a memo dated October 25, 2010. In brief, the employer provided 2005-2009 earning figures of approximately 86 percent for farming activities and 14 percent of the payroll for manufacturing. The WCB's auditor findings between the two operations were 66 percent for farming and 34 percent for manufacturing.

The Assessment Committee met to review the auditor's findings and report. It concluded that the financial statement (Profit and Loss) was the report which the WCB would rely on in establishing the assessable payroll.

On November 15, 2010, the employer's representative wrote to the auditor to appeal the WCB's use of what the appellant considered "arbitrarily" assigned percentages of payroll between farming and production operations. The appellant wrote as follows:

"In the preparation of my clients (sic) Notice to Reader financial statements, a reclassification of total wage costs was arbitrarily assigned for overall statement presentation purposes only - this reclassification was not audited, reviewed or otherwise verified. I believe that both [firm's Director] and I verbally confirmed this with you (the WCB auditor) at the commencement of your assignment.

For the purpose of your WCB audit, we provided backup of specific employees' wages. The arbitrary allocation used for financial statement presentation was not concise enough for the level of detail a WCB audit required. [The Director] informs me that because you are unable to match or reconcile the financial statement [product] wages, you intend to use the higher statement amount.

…It would be inappropriate and unfair to disregard this detailed disclosure of actual wages and assess WCB based on the "arbitrary allocation" given more correct information was provided."

On November 23, 2010, the Assessment Committee advised the appellant that an explanation was needed to understand the difference between the farm/manufacturing division wage split using the T4 earnings record (86/14% split) and the Notice to Readers accompanying the Financial Statement - Profit & Loss (66/34% split), occurring over the period of the audit.

On November 25, 2010, the employer's representative stated:

"As already discussed both during this audit, and again as documented in the attached letter, [the Director] has taken the time and care to specifically identify and quantify the past employees for the purpose of your audit - this accounting of the wages is very precise and accurate and of course must be used for the purpose of your audit as the level of detail is appropriate for your query.

"Notice to Reader" financial statements do not contain the materiality and detail that you require. We prepared those general purpose statements largely for federal income tax purposes, and the wage allocation was unimportant in that context thus the arbitrary allocation was quite satisfactory. The information was not audited or verified. To rely on this information for the purpose of the WCB allocation, when the actual and precise information has been provided is inaccurate and inappropriate."

Following review of the employer's response, the Assessment Committee ultimately determined that "The WCB will use the Financial Statement - Profit & Loss as a basis for establishing the assessable payroll between farming and manufacturing activities. This statement and accompanying notes has represented a degree of accuracy and correctness, and has been submitted by the appellant as the firm's federally reported wage allocation for industry taxation purposes. The allocation, as reported to the Canada Revenue Agency ("CRA"), is equally acceptable and credible to the WCB." The Assessment Committee provided rationale for its decision which stated, in part:

"…the discrepancy between the split in payroll as submitted to the CRA, and the same split reported to the WCB, was significant. In the split reported to the CRA, in which the appellant states is an arbitrary unaudited and unverified formula, the WCB noted approximately 66% of the wages were allocated to the farming activities and 34% to the production operations. The T4 earnings were submitted to the WCB auditor showing approximately 86% of the payroll allocated to the farming operation and 14% to the production operation. These percentages are the aggregate over the years 2005 through 2009.

Given that this approximate split was noted for all five years of the audit report, the Assessment Committee asked the appellant for a rationale explaining the significant difference in formulae, between the figures submitted as Notice to Readers in the Financial Statement - Profit & Loss to the CRA, and the T4 earnings records with industry activity split as reported to the WCB. The appellant responded only that the split of wages submitted to the WCB was "very precise and accurate and of course must be used for the purposes of (the WCB) audit" (verbatim from appellant's letter to the Assessment Committee)."

The appellant subsequently appealed the Assessment Committee's decision to the Appeal Commission and a hearing was arranged.

Reasons

Applicable Legislation

In deciding appeals, the Appeal Commission and its panels are bound by The Workers Compensation Act (the “Act”), regulations and policies of the Board of Directors.

The Act sets out the authority of the WCB to assign an employer in an industry and its departments to the appropriate class, sub-class, group or sub group for assessment purposes (S.79) It also sets out the obligation of an employer to provide the WCB with payroll information for the purpose of assessment and to pay assessment to the WCB (S.80).

The WCB Board of Directors has policies dealing with the reporting and remittance of assessment (WCB Policy 35.00), classification of employers into industry sectors and sub-groups (WCB Policy 35.20.10), estimated assessments (WCB Policy 35.40.40) and audits and investigation of employers (WCB Policy 35.30).

The issue before the panel is whether the firm's payroll has been correctly determined. In addressing this appeal the panel must consider the noted statutory provisions and policies.

Firm's Position

The employer was represented by legal counsel and its president. In addition to representations by legal counsel and the president, the firm called its chartered accountant as a witness.

The president described the farm and manufacturing divisions. He answered questions from the panel regarding the extent of the operation. He advised that the farm operates at three sites seven days a week. He explained the staff allocation and duties at the farm division and the staff allocation and duties at the manufacturing division. He provided a breakdown of the full-time and part-time hours involved in each division.

In answer to questions from the employer's counsel and panel members the accountant provided the following information:

  • There is no tax advantage to the employer in allocating wages between the employer's farm and manufacturing divisions. Wage allocation is completely irrelevant. The allocation is "unscientific".
  • There are different rules regarding accounting for losses for farms and manufacturing.
  • The farm income was reported on a cash basis and the manufacturing income on an accrual basis.
  • The 65/35 split was calculated on the basis of information provided to the accountant by the president in 2002 and was considered a "reasonable allocation ".
  • The 65/35 farm/manufacturing split has remained the same since 2002.
  • The farm and manufacturing divisions both showed losses.
  • The payroll records do not show the time allocation for individual between farm and manufacturing divisions.
  • In concluding that the accounting of wages is very precise and accurate, the accountant relied upon the estimate provided by the president and the calculation of the WCB auditor which were based on the president's estimate.

The president advised that in 2011 the employer started the process in its payroll of reflecting separate lines for farm labour input and manufacturing labour input.

The employer's counsel noted that the employer's financial statement makes "a certain statement which we know now is inaccurate." He submitted that there is information that is far more precise and should be relied upon for WCB purposes.

The employer's counsel acknowledged that the WCB's auditor's calculations are based on information provided by the president but noted that that the information is very close to the calculation prepared by the employer in the WCB Annual Payroll Form - 2010 and 2011 which was based upon records that show an actual split between the hours worked in farming and manufacturing. The latter calculation being 19.65 % of labour costs allocated to the manufacturing division.

In closing the employer's counsel stated:

"You have a solid foundation for the basis upon which the 14 percent was calculated. You have solid 2010 evidence to suggest that that 14 is consistent, given the minor changes that occurred in 2010 with the 2010 reporting. All of the evidence, gentlemen, point to the fact that the 14 percent -- okay, if you have to decide between the 14 and the 35, clearly the 14 is the right number. And that’s what it comes down to.

And as I said at the outset, if you accept all of the evidence before you, and maybe or maybe not that makes credibility an issue, but if you accept the evidence that’s before you, you can only come to the conclusion that it’s 14 percent. You can come to no other conclusion because it’s been indicated to you that the financial statements were prepared the same manner, the same way, with the same percentage for at least nine years. At least eight years, I guess.

So, with that background we’re asking you to allow the appeal and use the assessment of the WCB assessor, auditor I guess, of 86/14, gentlemen."

Analysis

The issue before the panel was whether or not the firms' payroll allocation has been correctly determined. For the firm's appeal to be successful the panel must find that the allocation proposed by the employer is reasonable and accurate. The panel finds that the allocation of labour of 86% to farming division and 14% to manufacturing division is a reasonable allocation of payroll costs for assessment purposes.

There were 2 competing methods for determining the allocation between the divisions. One based upon the financial statements and the other upon a review of T4 income by the employer's president. On a balance of probabilities, we find that the more reasonable and accurate allocation is the allocation resulting from the review of T4 income by the president and WCB auditor. In accepting this allocation we are aware that it is based on the assessment made by the president of the services performed by individual workers in the two divisions and that this assessment took place as much as 5 years after the T4's were completed.

In reaching our decision, the panel relies on the following:

  • Accountant's testimony that allocation between farming and manufacturing reported in the financial statements has been the same since 2002, was arbitrary and unscientific, and was not based on an analysis of actual numbers.
  • Accountant's testimony that the employer gained no advantage under the income tax as a result of the allocation.
  • WCB annual Payroll Form - 2010 and 2011 which shows an allocation of 80.35% to farming operations and 19.65 % to manufacturing operations. The panel accepts the president's evidence that the manufacturing operation's labour allocation increased in 2010 due to the introduction of new products. The panel finds the 19.65% allocation adds credibility to the 14% allocation requested by the employer.
  • The employer's evidence on the size and scope of the operations. The panel is satisfied that farming operation is significantly larger and more labour intensive than the manufacturing operation.
  • Analysis of the president's evidence at the hearing regarding the hours of labour involved in the operations. This analysis demonstrated a labour allocation for manufacturing division of approximately 15%.

The employer's appeal is allowed.

Panel Members

A. Scramstad, Presiding Officer
B. Simoneau, Commissioner
P. Walker, Commissioner

Recording Secretary, B. Kosc

A. Scramstad - Presiding Officer

Signed at Winnipeg this 31st day of August, 2011

Back