Rev. Rul. 66-162

Advice has been requested as to whether commissions paid by a concessionaire of a leased department in a department store to certain employees of the store are wages for purposes of the taxes imposed under the Federal Insurance Contributions Act (chapter 21, subtitle C, Internal Revenue Code of 1954).

Under a written agreement renewed annually, a concessionaire, in consideration of his payment of a specified fee, operates a department in a department store as an independent contractor. The concessionaire directly hires, supervises, pays, and discharges all executive personnel in the department and such personnel are considered by the concessionaire and the store to be employees of the concessionaire.

The store considers the sales clerks in the leased department to be its employees. It retains the right to hire and discharge the sales clerks, and it requires them to comply with its regular procedures. The store initially pays the wages to the sales clerks, provides them with employee benefits, and reports and pays the Federal taxes with respect to these wages. The costs of all of these items are charged as expenses to the concessionaire.

In implementing the agreement, the store obtains the concessionaire's approval before engaging any individual to work in the department. Also, departmental reductions in force are within the discretion of the concessionaire and are effectuated by the store at his request.

At all times the concessionaire exercises full control in operating the department, including day-to-day direction and supervision of all employees in the department, subject to general store rules. The concessionaire instructs the sales clerks as to the qualities of the product and as to the selling methods. He pays directly to each sales clerk in the department a percentage of the clerk's total sales.

In general under the Federal Insurance Contributions Act, all remuneration for services performed by an employee for his employer is wages for employment, with exceptions not here pertinent. Since the name by which the remuneration for employment is designated is immaterial, salaries and commissions on sales are wages if paid as compensation for employment.

Thus, whether the commissions paid by the concessionaire to the sales clerks in the department are wages for employment depends upon whether the sales clerks are employees of the concessionaire.

Section 3121(d) of the Federal Insurance Contributions Act Provides, among other things, that the term `employee' means any individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee. The guides for determining whether, under such rules, an employer-employee relationship exists are found in section 31.3121(d)-1(c) of the Employment Tax Regulations.

A person may be the servant of two masters, not joint employers, at one time and as to one act, if the service to one does not involve abandonment of the service to the other (Restatement of the Law of Agency, 2d Ed., section 226, which has been cited with approval in court cases deciding common law employer liability in the area of tort law).

The sales clerks in the leased department, whether they are employees of the store or the concessionaire, or both, are clerly employees. The store directs and controls them as to its general rules and procedures. At the same time, the concessionaire exercises the right to control and direct the activities of the sales clerks with respect to matters peculiarly pertinent to the sale of the product in order to insure the operation of the department in a manner profitable to the concessionaire. Thus, the sales clerks' services to one employer do not involve abandonment of services to the other. The store and the concessionaire act in conjunction in exercising the right of discharge.

Accordingly, the sales clerks in the leased department are employees of both the store and the concessionaire.

The commissions paid by the concessionaire to the sales clerks are directly related to the performance of services for him by his employees and are wages for employment. The concessionaire is liable for the taxes imposed by the Federal Insurance Contributions Act with respect to these `wages.'

These conclusions are equally applicable for purposes of the tax imposed under the Federal Unemployment Tax Act, and for the Collection of Income Tax at Source on Wages (chapters 23 and 24, respectively, subtitle C of the Code).

The facts in this case are distinguishable from the facts and circumstances in both S.S.T. 154, C.B. 1937-1, 391, and S.S.T. 206, C.B. 1937-2, 451. In each of the two groups described (other than the executive officers) in S.S.T. 154, direction and control over the individuals involved were exercised solely by one company, the subsidiary in the first group, the parent corporation in the second group. In S.S.T. 206, bonuses paid by a manufacturer to the salesmen-employees of a retail dealer were not wages for employment since the usual attributes of direction and control found in an employer-employee relationship did not exist between the manufacturer and the dealer's salesmen-employees.

S.S.T. 154, C.B. 1937-1, 391, and S.S.T. 206, C.B. 1937-2, 451, distinguished.