SSR 64-24c: SECTION 205(p). -- FEDERAL SERVICE -- EMPLOYMENT DETERMINATION MADE BY FEDERAL AGENCY -- CONSULTANT'S SERVICES

SSR 64-24c

EGELER v. FLEMMING, 184 F. Supp. 321 (N.D. Ohio, 1960)

Where an individual performed services as a consulting engineer for the Department of Defense and the Department of Defense determined that his services were performed as an employee and reported his remuneration as wages for purposes of social security, but individual contended that his services were performed as a self-employed individual and, therefore, that business expenses he incurred in the performance of his service should be deducted from the reported remuneration, held, the Department of Defense certification of its determination that the individual was an employee of that Department is binding on the Department of Health, Education, and Welfare; and accordingly, the remuneration for such employee's services was wages, which may not be reduced by related business expenses.

[While receiving old-age insurance benefit payments, the plaintiff performed services as a consulting engineer for the Department of Defense. It was determined by the Department of Defense that the plaintiff had performed these services as an employee and that he had been paid wages in specified amounts totalling more than $1,200 per year. The plaintiff alleged that he had worked as an independent contractor, and not as an employee, for the Department of Defense; and that he had incurred expenses in connection with this work, as a result of which his net earnings were less than $1,200 per year. For purposes of social security benefits, business expenses are deductible in determining a person's net earnings from self-employment; but an employee's expenses (subject to certain exceptions not applicable in the present case) are not deductible from gross wages in determining the amount of his wages.

[Accordingly, if the work done by the plaintiff for the Department of Defense is self-employment (as he contends), his total earnings for the period in question are net earnings from self-employment of less than $1,200 per taxable year; and in this event he was properly paid benefits for all months. If, however, the plaintiff was an employee of the Department of Defense, his gross annual pay of over $1,200 is wages under section 203(f)(5)(C) of the Social Security Act, regardless of whether the work is covered employment, for purposes of work deductions under section 203(b). The amount of such wages requires deductions and would preclude payment of benefits to the plaintiff for certain months; and thus the benefit payments received by the plaintiff for those months would be erroneous and constitute an overpayment.

[A referee (now called a "hearing examiner") of the Bureau of Hearings and Appeals held that, under section 205(p) of the Social Security Act, the Department of health, Education,a nd Welfare was bound by the Department of Defense's certification of its determination that the plaintiff had been an employee of such Department, and, accordingly, that the gross remuneration for such employee's services was wages. After denial of review by the Appeals Council the plaintiff appealed to the District Court.]

KALBFLEISCH, Judge:

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If, as the Referee^[1] has held, the plaintiff was an employee within the terms of the Social Security Act, then the pay be received for his work with the Department of Defense constituted wages which could not be reduced by his related business expenses. * * * But if, as plaintiff contends, his earnings form the Department of Defense were from self- employment, rather than wages as an employee, then he properly could have charged his Department of Defense business expenses against his earnings (42 U.S.C.A., 411(a)) * * *

The Referee based his decision on: (1) what he considered to have been a determination of plaintiff's employment status by the Department of Defense, and (2) his conclusion that under 42 U.S.C.A., 405(p) [section 205(p) of the Act] the Administration was required to accept as conclusive the findings of the Department of Defense as to such employment status, no discretion being left to the Secretary [of Health, Education, and Welfare].

42 U.S.C.A., 405(p)1) and (2) provides as follows:

"(1) With respect to service included as employment under section 410 of this title which is performed in the employ of the United States or in the employ of any instrumentality which is wholly owned by the United States, * * * the Secretary shall not make determinations as to whether an individual has performed such services, the periods of such service, the amounts of remuneration for such service which constitute wages under the provisions of section 409 of this title, or the periods in which or for which such wages were paid, but shall accept the determinations with respect thereto of the head of the appropriate Federal agency or instrumentality, and of such agents as such head may designate, as evidence by returns filed in accordance with the provisions of section 1420(e) of Title 26 and certifications made pursuant to this subsection. Such determinations shall be final and conclusive.

"(2) The head of any such agency or instrumentality is authorized and directed, upon written request of the Secretary, to make certification to him with respect to any matter determinable for the secretary by such head or his agents under this subsection, which the Secretary finds necessary in administering this subchapter."

While the provisions of section 405(p)(1) may not be as clear as they might be with respect to whether the head of the appropriate Federal agency is to determine the employment status of an individual rendering service therefor, section 1420(e) (now section 3122) of Title 26, referred to therein, removes any ambiguity. It provides that:

"* * * the determination whether an individual has performed service which constitutes employment as defined in section 3121(b), * * * shall be made by the head of the Federal agency or instrumentality having the control of such service * * *."

Section 3121(b) of Title 26 U.S.C.A. defines the term "employment" as being "any service, of whatever nature, performed after 1954 either (A) by an employee for the person employing him, * * * (i) within the United States, * * *." The term "employee is thereafter defined in subsection (d) of section 3121 (to the extent relevant here) as:

"(2) any individual who, under the usual common law rules applicable in determining the employer- employee relationship, has the status of an employee;"

Though the Court is "most prone to liberally construe the Social Security Act in favor of the party seeking its benefits," Lietz v. Flemming, 264 F.2d 311,313 (C.A. 6th, 1959), the statutes clearly provide that the determination of the employment status of plaintiff is to be made by the Secretary of Defense and such agents as he may designate, that such determination shall be final and conclusive, and that the Secretary of Health, Education, and Welfare shall not make such a determination. The Referee's finding that the Department of Defense determined plaintiff to be its employee during the relevant period is supported by substantial evidence.

If plaintiff is afforded an opportunity for judicial review of the determination by the Secretary of Defense, it would appear to be by an action under 5 U.S.C.A., 1009, the Administrative Procedure Act, with the Secretary of Defense as a party.

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The Referee's decision with respect to plaintiff's employee status with the Department of Defense is affirmed * * *.

[The Referee had also decided that recovery of the overpayment of benefits to the plaintiff was not barred by the provisions of section 204(b) of the Act. The court set aside the Referee's decision on this issue, and remanded the case for further proceedings with respect to the overpayment, i.e., for a finding as to whether recovery of the overpayment would either "defeat the purpose" of title II of the Act or "be against equity and good conscience," as provided in section 204(b).]

^[1] Now called Hearing Examiner. [Ed.]