IN THE COURT OF APPEALS OF IOWA
No. 23-0494 Filed May 22, 2024
SOUTH CONSTRUCTION AND INSULATION, LLC, Plaintiff-Appellant,
vs.
IOWA WORKFORCE DEVELOPMENT, Defendant-Appellee. ________________________________________________________________
Appeal from the Iowa District Court for Bremer County, Rustin Davenport,
Judge.
A limited liability company challenges the dismissal of its petition for judicial
review. AFFIRMED.
Luke C. Jenson of Jenson Law Firm, PLC, Waterloo, for appellant.
Brenna Bird, Attorney General, and John R. Lundquist, Assistant Attorney
General, for appellee.
Heard by Tabor, P.J., and Greer and Schumacher, JJ. 2
GREER, Judge.
With little direction from our caselaw, when the only two members of a
limited liability company (LLC) have equal shares of membership units but receive
unequal shares of remuneration, is Iowa Workforce Development (IWD) able to
consider the extra amount received by the one member wages? And is the amount
of those wages equal to the excess that one member received above and beyond
the remuneration of the other? Because we find that the answer to both of these
questions is yes, we affirm.
I. Background Facts and Prior Proceedings.
Justin and Randa South are married and the only two members of South
Construction and Insulation, LLC (South Construction), which performs
construction, insulation, and weatherization services. Justin and Randa each own
fifty percent of South Construction’s membership units. In 2016 through 2020,
Justin and Randa each received the following remuneration from the LLC:
Year Justin Randa 2016 $30,700.00 $0.00 2017 $38,550.00 $7,647.00 2018 $50,000.00 $17,500.00 2019 $51,195.65 $18,200.00 2020 $103,195.65 $38,850.00
Phrased differently, Justin received between 5.04 times (in 2017) and 2.66 times
as much remuneration (in 2020) as Randa, despite their equal division of
membership units.
In January 2022, IWD completed an unemployment insurance tax audit of
South Construction focused on the status of three persons working for the
company. Along with questions involving whether some persons working for the 3
company were employees or independent contractors, IWD requested information
about remuneration payments made to the members of South Construction and
the ownership interests of those members. South Construction reported “draws”
made to Justin and Randa but did not report any wages paid. Based on the
information provided by South Construction, IWD calculated what it considered
reportable out-of-proportion remuneration for a period of the previous five years.1
Year Justin Randa Reportable Out-of-Proportion Remuneration 2016 $30,700.00 $0.00 $30,700.00 2017 $38,550.00 $7,647.00 $30,903.00 2018 $50,000.00 $17,500.00 $32,500.00 2019 $51,195.65 $18,200.00 $32,995.65 2020 $103,195.65 $38,850.00 $64,345.65
To arrive at the remuneration it then characterized as wages, IWD subtracted
Randa’s remuneration from Justin’s; determining the difference was not in
proportion to his interest, thus making it reportable out-of-proportion remuneration
or wages under the statute. Specifically, IWD found South Construction liable for
unemployment insurance contributions beginning January 1, 2016, because it
“paid sufficient wages in employment to qualify as a construction employer under
Iowa law.” It calculated the total amount of back unemployment taxes South
Construction owed to be approximately $27,146.96 without consideration of
interest and penalties because “LLC member wages were not reported to [IWD].”
South Construction challenged this characterization and the calculation. A
contested case hearing was held before an administrative law judge (ALJ) in
1 The court found that “[b]oth parties agree on the amounts of remuneration the
Souths received,” but we note in one place the record shows different numbers for Randa in the years 2016 and 2017. As the amounts are not contested on appeal, we ignore the differences. 4
June 2022. At the hearing, Justin agreed that IWD’s numbers for his and Randa’s
remuneration each year were accurate and that he and Randa held equal
membership interests in South Construction. However, he insisted that he was not
an employee of the company,2 but that he was paid because he was “seeking
compensation from the earnings of [his] business.” Noting he took “enough to live
on to pay bills,” he determined the amount of remuneration paid each year based
on “the work, myself, day-to-day operations.” He added that there was a
“difference in what each of us [he and Randa] do, and they’ll be a different draw
for each of us then.” At the same time, he explained that there was no agreement
between him and Randa regarding the amount of remuneration. Randa stated that
the remuneration paid was intended to be a “draw” and agreed that she and Justin
do not have any agreement as to how much they each receive as remuneration.
The ALJ affirmed the IWD audit finding that the payments to Justin in excess of
those to Randa were wages, writing, “every year, Justin South has income in
excess of the remuneration Randa South receives. That means South
Construction remunerated Justin South in excess of that which would have been
paid to him based solely on his membership interest.” The ALJ then concluded
that “[t]hat excess remuneration was for services performed by a member of an
LLC. . . . [I]t must be treated as wages.”
South Construction petitioned for judicial review in July. The district court
dismissed the petition in February 2023, writing first that “[a] person can receive
money from an LLC as a member, which is not compensation for services, and
2 In Justin’s testimony, he referred to the company as a partnership, but we do not
carry forward his improper reference to the company’s legal organizational status. 5
also receive money from an LLC as an employee, which is compensation for
services.” Then, the court found that “because [Justin] was always paid more than
[Randa], the largest amount of remuneration to [Justin] that can be considered
draws in any given year is 100% of the remuneration [Randa] received.” In
addition, it noted that the burden to prove that the money paid was for membership
interest was placed on South Construction and South Construction did not meet
that burden. Thus, it affirmed IWD’s determination that the out-of-proportion
remuneration was wages. Lastly, it accepted IWD’s calculation of wages, rejecting
South Construction’s proposed alternative calculation as “divorced from the
meaning of remuneration and . . . unworkable.” South Construction appeals,
alerting us there are no published appellate opinions to answer its questions.
II. Standard of Review.
Judicial review of an agency decision is governed by Iowa Code
section 17A.19 (2022). See Hagen v. Serta/Nat’l Bedding Co., LLC, 1 N.W.3d 1,
5 (Iowa 2024). We apply the standards in section 17A.19 and determine whether
our application of them produces the same result as that reached by the district
court. Chavez v. MS Tech. LLC, 972 N.W.2d 662, 666 (Iowa 2022). If we reach
the same result, we affirm the judgment of the district court. Mike Brooks, Inc. v.
House, 843 N.W.2d 885, 889 (Iowa 2014). However, “[we] must reverse agency
action when any one of several enumerated circumstances [in section 17A.19(10)]
exists and ‘substantial rights of the person seeking judicial relief have been
prejudiced’ as a result.” Mosher v. Dep’t of Inspections & Appeals, 671 N.W.2d
501, 508 (Iowa 2003) (quoting Iowa Code § 17A.19(10)). “The burden of 6
demonstrating the required prejudice and the invalidity of agency action is on the
party asserting invalidity.” Iowa Code § 17A.19(8)(a).
III. Analysis.
As a limited liability company,3 South Construction challenges both IWD’s
(1) determination that the out-of-proportion remuneration was characterized as
wages and (2) the method of calculation of the out-of-proportion amount.4 It claims
that IWD’s decision regarding the classification as wages was based on an
erroneously broad interpretation of section 96.1A(40)(b)(5) and is inconsistent with
IWD’s prior practice of applying the statute, so it is without justification for its
application as employed here. See id. § 17A.19(10)(c), (h). South Construction
also contends IWD took a position not required by law that will have a negative
impact on the private rights affected that is “grossly disproportionate to the benefits
accruing to the public interest from that action that it must necessarily be deemed
to lack any foundation in rational agency policy.” See id. § 17A.19(10)(k). As a
final point, it claims that the decision and the method of calculation are “otherwise
unreasonable, arbitrary, capricious, or an abuse of discretion.” See id.
§ 17A.19(10)(n).
A. Definition of Wages.
What are wages? South Construction contends that the out-of-proportion
remuneration Justin received was not for services performed but instead was a
membership draw, so it cannot be considered wages. Preliminarily we note that
3 Neither party disputed South Construction’s legal company structure. 4 South Construction also makes an argument referencing sole proprietorship and
partnership rules but these code sections have no bearing on the question at hand. 7
we do not have the benefit of South Construction’s operating agreement (if one
exists). See id. § 489.102(15) (providing that an operating agreement may be
“oral, in a record, implied, or in any combination thereof”). But at oral argument
before this court, South Construction confirmed it is a member-managed LLC. See
id. § 489.407 (describing management differences involving an LLC). And under
section 489.407(6)5 where remuneration is mentioned, “[a] member [is not entitled]
to remuneration for services performed for a member-managed limited liability
company, except for reasonable compensation for services rendered in winding
up the activities of the company.” There is no record of “winding up” activity over
the years LLC funds were distributed here. So, it might seem that Justin was not
entitled to remuneration for services performed, or in other words a wage, but this
code section applies only to payments for management services, which are not
allowed in a member-managed LLC. See also 5 Matthew G. Doré, Iowa Practice
Series: Business Organizations § 13:18 (West Nov. 2023 Update) (“Members are
not entitled to remuneration for management services in a member-managed
company except for ‘reasonable compensation for services rendered in winding up
the activities of the company.’” (quoting Iowa Code § 489.407(8), formerly
§ 489.407(6)).
Going deeper, Iowa Code chapter 489 governs other operations of an LLC.
The word “draw” does not appear in that chapter, but the word “distribution” does.
At the time this case was heard by the ALJ, “[d]istribution . . . mean[t] a transfer of
5 Effective January 1, 2024, several sections of chapter 489 were changed, but we
rely on the 2022 Code, which was in effect at the time of the agency proceedings. Section 489.407(6) was renumbered to 489.407(8). The language remains substantially the same. 8
money or other property from a limited liability company to another person on
account of a transferable interest.”6 Iowa Code §489.102(5). Still, chapter 489
limits what constitutes a distribution. “Any distributions made by a limited liability
company before its dissolution and winding up must be in equal shares among
members . . . .” Iowa Code § 489.404(1) (emphasis added). As Professor
Matthew Doré confirms that the Revised Uniform Limited Liability Company Act’s
“default rule is that any distributions made to members prior to dissolution shall be
in equal shares.” Doré, § 13:26. With these rules in mind, we turn to how
chapter 96 applies.
Focusing only on the Iowa Employment Security Law (Iowa Code chapter
96), IWD responds that all of the remuneration Justin received could have qualified
as wages, but it calculated only the amount of excess he received in its
determination. This wage question is a matter of statutory interpretation. In
interpreting a statute, we first look to the plain language of the statute to determine
its meaning. Morrison-Knudsen Const. Co. v. Dir., Off. of Workers’ Comp.
Programs, 461 U.S. 624, 630 (1983); Borst Brothers Constr., Inc. v. Fin. of Am.
Com., LLC, 975 N.W.2d 690, 699 (Iowa 2022) (“We begin with the statute’s text.”).
“If the legislature chooses to define the term in a statute, that definition ordinarily
binds us.” State v. Mathias, 936 N.W2d 222, 227 (Iowa 2019). “If the statutory
6 Section 489.102(5) is now also different under our current code. Likewise, the definition of transferable interest is different but the version in effect at the time of the hearing was: “‘Transferable interest’ means the right, as initially owned by a person in the person’s capacity as a member, to receive distributions from a limited liability company, whether or not the person remains a member or continues to own any part of the right.” 9
language is plain and the meaning clear, we do not search for legislative intent
beyond the express terms of the statute.” United Elec., Radio & Mach. Workers of
Am. v. Iowa Pub. Emp. Rels. Bd., 928 N.W.2d 101, 109 (Iowa 2019) (citation
committed).
So to start, we must define the term under dispute: “wages.” And our
legislature must have had some reason to define wages for an LLC under the
statute involving Iowa’s Employment Security Law. Under Iowa Code
section 96.1A(40)(a), generally, “‘[w]ages’ means all remuneration for personal
services, including commissions and bonuses and the cash value of all
remuneration in any medium other than cash. The reasonable cash value of
remuneration in any medium other than cash shall be estimated and determined
in accordance with rules prescribed by the department.” And specific to an LLC,
“wages” do not include:
[a]ny portion of the remuneration to a member of a limited liability company based on a membership interest in the company provided that the remuneration is allocated among members, and among classes of members, in proportion to their respective investments in the company. If the amount of remuneration attributable to a membership interest cannot be determined, the entire amount of remuneration shall be deemed to be based on services performed.
Iowa Code § 96.1A(40)(b)(5) (emphasis added); see also Iowa Admin. Code
r. 871-23.3(2)(j) (defining what wages does not include). Under paragraph (40),
IWD argues the clear meaning is that all of the remuneration received by a member
of an LLC for personal services or services performed must be considered wages
unless the amount of remuneration that is based on membership interest can be
determined. 10
We agree with IWD, as we read this statutory language to mean that the
legislature intended to allow an exception to the treatment of remuneration as
wages only based upon the proportional membership interest of the LLC member
but that if remuneration attributable to a membership interest cannot be
determined, the payment will be deemed to be based on services performed or, in
other words, be considered “wages.” Here, the members each have a fifty percent
interest in the LLC so Justin’s remuneration should be calculated as equal to
Randa’s and with no legally acceptable explanation as to how the payments were
different, there is no basis to do anything other than what IWD determined.
It was South Construction’s burden to show the rationale for the payments.
See Iowa Admin. Code r. 871-23.55(2) (“The burden of proof shall rest with an
employing unit which employs any individual during any calendar year but which
considers itself not an employer subject to the Act, to establish that it is not an
employer subject to the Act . . . .”). And in the testimony before the ALJ, Justin’s
explanation for the difference between his and Randa’s distribution depended on
the work performed for the LLC and the amount of time spent doing the work, which
sounded more like a payment for services performed rather than a distribution for
a membership-based interest in the LLC. If Justin is going to be paid on the basis
of services performed, it is not unfair to treat him as an employee of the LLC who
is paid a wage.
We recognize the result may seem harsh to Jason and Randa and agree
with the statement of IWD at oral argument that “we may question the fairness of
the situation . . . for reasons that [Jason and Randa] may not have known” about
the rule, but we do not find any ambiguity in this language as applied by the court. 11
A term in a statute is ambiguous “if reasonable minds could differ or be uncertain
as to the meaning.” City of Waterloo v. Bainbridge, 749 N.W.2d 245, 248 (Iowa
2008). However, “[w]hen the language of a statute is plain and its meaning is clear,
the rules of statutory construction do not permit us to search for a meaning beyond
the statute’s express terms.” Id. The definition in the statute is that wages shall
include “the entire amount of remuneration” if not able to be determined. See Iowa
Code § 96.1A(40)(b)(5). Reasonable minds cannot differ as to the meaning of “the
entire amount”—the entire amount means all. We do not search for a different
meaning outside of the statute.
Because we find that Iowa Code section 96.1A(40) is plain, unambiguous,
and its meaning clear, we do not look any farther than its text for the meaning of
wages. See Mathias, 936 N.W.2d at 227 (“When the language is ‘plain, clear, and
susceptible to only one meaning,’ we do not search for meaning beyond the
particular terms.” (citation omitted)). Under the statute, all remuneration is wages
unless proportional to a membership interest. Proportional means proportional to
membership interest: “in proportion to their respective investments in the
company.” Iowa Code § 96.1A(40)(b)(5). Thus, Justin’s remuneration based on
his fifty-percent membership interest must be the same amount as Randa received
and because her distribution was less; any additional paid would be out of
proportion to the membership interest. Any excess “shall be deemed to be based
on services performed,” in other words, wages, and subject to unemployment
insurance tax withholding.
If we were to accept South Construction’s requested interpretation, then a
company with equal membership interests could pay those members 12
disproportionately without paying unemployment insurance tax withholding for
wages, in contradiction of the unambiguous statute. Because we find that IWD’s
classification of the out-of-proportion payments is not an erroneous interpretation
of a provision of law, is not inconsistent with its prior practice or precedents 7, and
is required by law, we affirm IWD’s determination that the out-of-proportion
remuneration is to be treated as wages.
B. Calculation of Wages.
In the alternative, South Construction asks that we change the calculation
of wages from how much Justin received beyond what Randa received to how
much he received over the average between the two of them (calculated by adding
up the total remuneration, dividing that number by two, and then subtracting that
number from Justin’s remuneration). With this method, South Construction
maintains the calculation more appropriately considers the proportionality of the
distribution of payments—take the total distribution and break it into the ownership
interests and then do the calculation. It urges that the calculation method used by
IWD is “arbitrary, unreasonable and unsupported by statutory authority.” South
Construction proposes, specifically, this method of calculation:
Year Justin Randa Total Reportable Out-of- Remuneration Proportion Remuneration for Justin 2016 $30,700.00 $0.00 $30,700.00 $15,350.00 2017 $38,550.00 $7,647.00 $46,197.00 $15,451.50 2018 $50,000.00 $17,500.00 $67,500.00 $16,250.00 2019 $51,195.65 $18,200.00 $69,395.65 $16,497.83 2020 $103,195.65 $38,850.00 $142,045.65 $32,172.83
7 South Construction submitted IWD decisions in other cases, but we find none of
them instructive on this issue with an LLC. 13
South Construction argues that the same calculation would apply to LLCs with
more than two members. As an example, South Construction urges that the
calculation involving an LLC with three members holding equal ownership who
each receive $25,000, $50,000, and $75,000, respectively, should start by totaling
the payments ($150,000), then divide by three and each non-wage remuneration
should be $50,000 per member. In that calculation only the member receiving
$75,000 would be required to report the overage of $25,000 as wages. But this
calculation requires an upfront assumption that the total membership payout is
excluded from the wage status, which conflicts with the statutory language that
assumes the payments are wages at the onset. And where members are paid
different amounts than the others, the payments are not in proportion to the
membership interest, thus the statute comes into play. IWD responds, again, that
all of the remuneration received could have qualified as wages, but it calculated
only the amount Justin received over the sum received by Randa and such a
calculation was reasonable and correct given that the remuneration must be
proportional to each member’s membership interest.
This second challenge is to IWD’s exercise of its discretion. “We defer to
the agency’s views on those ‘particular matters that have been vested by a
provision of law in the discretion of the agency.’” Dornath v. Emp. Appeal Bd., 988
N.W.2d 687, 689 (Iowa 2023) (quoting Iowa Code § 17A.19(11)(c)). “We . . .
presume that the legislature intended a ‘reasonable result.’” Porter v. Harden, 891
N.W.2d 420, 426 (Iowa 2017) (quoting Iowa Code § 4.4(3)). It only makes sense
to look at the distributions on a year-by-year basis as that is exactly how wages
are considered, rather than re-assigning the distributions to other members 14
retroactively as South Construction would have us do. IWD’s calculation was not
otherwise unreasonable, arbitrary, capricious, or an abuse of discretion, and we
affirm.
IV. Conclusion.
Because the statute at issue here—Iowa Code section 96.1A—defines
wages, we are bound by its definition. Its definition includes all remuneration
received by a member of an LLC unless proportional to membership interest.
Thus, IWD’s determination that only the amount of remuneration Justin received
beyond that of Randa was wages is a correct interpretation of a provision of law,
not inconsistent with other precedent, and required by law. The calculation that
IWD used to determine the amount of that remuneration that is wages was
reasonable. We affirm the court’s dismissal of South Construction’s petition for
judicial review.
AFFIRMED.