Blue Lake Rancheria is Common-Law Employer Under FUTA

Mainstay Business Solutions won its case in the Ninth Circuit Court of Appeals under the Federal Unemployment Tax Act this week, but the victory is too little, too late. The company was forced to close in April as a result of an ongoing dispute with the California Economic Development Department (EDD).

Blue Lake Rancheria, a 53-member, federally recognized Indian tribe located in Humboldt County established Mainstay Business Solutions, a staffing firm, in May 2003 as a for-profit business owned by, and operated for the benefit of, the Tribe.

Mainstay provided employee leasing and temporary staffing for small- and medium-sized businesses located in California, Hawaii, and Nevada. Mainstay contracted with each of its clients to hire the client's employees as its own and then "lease" those employees back to the client. The client supervised the leased employees on a day-to-day basis, but Mainstay paid their wages, provided benefits, and performed other human resources functions.

During 2003 and 2004, Mainstay Business Solutions paid wages for approximately 39,000 workers. It reported and paid $722,047.77 in Federal Unemployment Tax Act (FUTA) taxes for 2003 and $1,283,892.86 for 2004. The company later filed claims for refunds with respect to these tax payments, asserting that, as a tribally owned business entity, it was exempt from FUTA tax liability.

The IRS was conspicuously silent regarding Mainstay's claim, so the Tribe filed suit in the Northern District of California. The complaint sought a full refund of the FUTA taxes paid by Mainstay for 2003 and 2004, totaling $2,005,939 plus statutory interest.

While Mainstay pursued its refund in litigation, the EDD pursued Mainstay, demanding payment of a $16.4 million bill. Litigation, unfortunately, was not resolved until after Mainstay shut its doors to 7,000 leased workers and 150 corporate administration employees.

The Ninth Circuit Court of Appeals held this week that FUTA's tax exception unambiguously applies only where an Indian tribe acts as a common-law employer. The court determined that Mainstay Business Solutions was a common-law employer of its leased employees during the years in question, therefore it was not required to pay FUTA taxes with respect to those employees.

We understand why cash-strapped California will not give up easily in revenue collection actions, but the state's incorrect stance in this case resulted in lost jobs, which is never good for a state or tribal economy. If you represent an Indian tribe in a FUTA claim, take a look at this case for guidance on whether your client, like the Blue Lake Rancheria, is common-law employer.

Related Resources:

• Federal Unemployment Tax Act (IRS)
• FindLaw's Ninth Circuit blog (FindLaw)
• Rancheria v. US, 10-15519 (FindLaw's Summaries)
• US Code - Chapter 23: Federal unemployment tax act (FindLaw)
• Appeals Involving Attorney Ethics and Cigarette Taxes on Indian Reservations (FindLaw's Second Circuit blog)