CUB 39976

IN THE MATTER of an appeal to an Umpire by the
Commission from a decision by the Board of Referees given
on March 4, 1997 in Quebec City, Quebec

DECISION

The following is an appeal of a Board of Referees' decision rendered on March 4, 1997 in Quebec City.

On August 26, 1994, the Commission rendered two decisions. In the first decision, the Commission determined that the claimant could not receive benefits effective March 7, 1993, because he was self-employed and director of "Technologies Directes P.G. Inc." and that, consequently, he was working full working weeks and hence not unemployed.

The Commission rendered another decision to the effect that the claimant had knowingly made 26 false or misleading statements, after discovering that the claimant was self-employed and working as the director of the aforementioned company since March 7, 1993. The Commission levied a penalty for $11, 076, in accordance with section 33(1) of the Unemployment Insurance Act.

I feel it is important to quote textually from the decision rendered on November 24, 1994 to return the case to the Commission for more evidence. The decision reads as follows:

Decision of 26-08-94 (exhibit 6)

Did the claimant prove that he had been really unemployed since 07-03-93 and therefore that he was eligible for unemployment insurance?

Decision of 25-08-94 (exhibit 7)

Did the claimant knowingly make 26 false or misleading statements by not reporting that he was self-employed since 07-03-93, in which case he must pay a penalty?

INVESTIGATION

After considering the evidence gathered at the hearing today, the Board of Referees discussed this matter amongst themselves and has concluded by a majority to adjourn this hearing to obtain more evidence which will be provided by the Commission regarding the documents in reference and mentioned in exhibit 9.2.

The volume of information on file such as billings, contracts, expense accounts and travel show the path the business has taken since the beginning of the claimant's benefit period.

The Commission shall establish as precisely as possible the exact income the claimant earned during this period each week and how much time he spent earning this money. The exhibits mentioned in exhibit 9.2 shall be accessible during the next hearing.

P.S.: Exhibit 12 was submitted during the course of the investigation.

[ TRANSLATION ]

This was a majority decision, and one dissenting member had the following comments to make:

Though the decision to adjourn ultimately lies in the hands of the Chairman of the Board of Referees, I believe that following a one-hour and fifteen-minute hearing during which the claimant and his representative provided explanations regarding his unemployment status and his statements as a claimant starting on March 7, 1993, the Board of Referees would have been able to render a decision on the questions it was asked, i.e.,

Decision of 26-08-94 (exhibit 6)

Did the claimant prove that he had been really unemployed since 07-03-93 and therefore that he was eligible for unemployment insurance?

Decision of 25-08-94 (exhibit 7)

Did the claimant knowingly make 26 false or misleading statements by not reporting that he had been self-employed since 07-03-93, in which case he must pay a penalty of $11, 076?

We learned at the hearing that:

The company was founded by the claimant, a trained engineer, with colleagues before the claimant submitted a claim for benefit; at the time, his earnings had not been interrupted because of the amounts received upon the termination of his employment.
Because the company required a $1, 000, 000 to $1, 500, 000 investment and "money lenders" had responded negatively in late October 1992, this business was still in the "project" stage. This appears in the evidence submitted by the claimant at the hearing.
The claimant said he had never invested in the company, save for the $100 he had to spend to obtain a company charter.
The claimant also said that, as a researcher, he obtained several patents outside his regular working hours when he was receiving a salary.
It emerged from the claimant's testimony that he is a "forestry inventor", that "he likes doing research and development", that he has always "invented" in his free time and on weekends. In short, it's his hobby.
The claimant's leisure activity resulted in patents which, in turn, benefited his employers while he was a salaried employee. The last three points were corroborated by a letter from the employer (exhibit 12) filed during the hearing.
This potential the claimant was developing during his leisure time produced a few requests while he was unemployed.

According to the claimant's testimony which was not contested at the hearing, these contracts required a total of 30 hours over six months, since it involved adapting something which existed before, and the amounts paid by the applicants covered 90% of the materials and the sub-contractors, i.e., those which manufactured the parts required.

To that point, neither the time devoted to the business nor the money invested in the business enabled us to conclude that this business project could have been considered his principal means of livelihood.
In the spring of 1994, the claimant accepted a job with North America Hydraulics for which he received a salary. It represented his principal means of livelihood, since he devoted 40 hours a week to it and was paid.

As he mentioned previously, the claimant continued to devote his leisure time to research, even though he was a salaried employee of North America Hydraulics and that research was his hobby.

We finally learned at the hearing that the claimant never wanted to mislead the Commission and that he never reported his activities, because it was nothing more than a hobby for him, which he indulged in at his former employer's place of business.

In view of the foregoing, I have noted that the documents referred to by the Commission in exhibit 9.2 are missing, but I believe this constitutes in itself an item which must be dealt with on its own merits. [ TRANSLATION ]

The same Board of Referees met once again on January 18, 1995 and reviewed new evidence and documents which the Commission managed to obtain. Once again, it is important to take into account the decision rendered on January 18, 1995.

Decision of 26-08-94 (exhibit 6)

Did the claimant prove that he had been really unemployed since 07-03-93 and therefore that he was eligible for unemployment insurance?

Decision of 25-08-94 (exhibit 7)

Did the claimant knowingly make 26 false or misleading statements by not reporting that he was self-employed since 07-03-93, in which case he must pay a penalty?

INVESTIGATION

The first hearing in this case was held on November 24, 1994. The lack of evidence on file during this hearing could not result in a majority decision. The case was returned to the Commission so that it could provide the documents which appear as exhibits 13.1 to 13.37 inclusive.

The dissenter of the employee representative at the November 24, 1994 hearing clearly summarized the contents of the evidence produced at that time.

The claimant's benefit period extended from March 7, 1993 to March 7, 1994. In the claimant's claim for benefits dated February 24, 1993, it was specified in questions 21 and 25 that he had lost his employment due to a lack of work on July 17, 1992 and that he had received a severance allowance covering seven months' salary before he was entitled to benefits. When asked whether he was self-employed and whether he is working for another employer (questions 51 and 52), he answered no.

He made the following statements during the investigation conducted by the Commission on August 8, 1994:

I have owned a business (company) known as "Technologies Directes P.G. Inc." since April 1992

During my benefit period from February 1993 to February 1994, my company was a going concern. I am the sole shareholder and own 100% of the shares.

I never reported to the unemployment (people) that I had taken steps and invested time in launching "Technologies Directes P.G. Inc.", because I never paid myself a salary and that there was no revenue to do so. However, I did invest money for the purpose of launching the business.

He never received a salary from his own company, even though it had been in operation since early 1992. There were no other employees, and he never believed he would be able to pay himself a salary. If the company had made dividends, he would have paid himself some.

Summary of exhibits 13.1 to 13.37 incl.

Exhibits 13.21 to 13.37 incl. are within the benefit period and show that the claimant recorded sales of $62, 050 in professional fees and that the time devoted to performing (the work pertaining to) the contracts came to 31 weeks and 3 days.

The claimant insisted that the amounts received constituted royalties arising from his patented inventions which he obtained and still are his property.

Members of the Board of Referees, however, must go by the claims he made to his clients, which are of two types: professional fees for studies of machinery prototypes and the design of machinery prototypes (exhibits 13.21, 22, 23, 24, 25, 26, 27, 28, 29, 31, 32, 33 and 36).

Analysis of the evidence

The majority of the Board of Referees believe without a doubt that the claimant worked regularly on the development of his business, contrary to his statements to the investigator (exhibits 3.3 and 3.4).

DECISIONS

Decision of August 25, 1994 (exhibit 6)

A majority of the Board of Referees feel that the decision to make the claimant ineligible for benefits under section 8, 10(1) and 40(1) of the Act and section 43(1) of the Regulations was fully justified; and consequently uphold the Commission's decision and deny the appeal.

Decision of August 25, 1994 (exhibit 7)

A majority of the Board of Referees believe that the answers the claimant provided in response to the following three questions:

Did you work during the period covered by this statement? (Answer: no)
Did you start working full time during the period covered by this statement (Answer: no)
Did you receive or will you be receiving amounts other than those indicated in parts C, D and E on side 2? (Answer: no)

are inconsistent with the activities the company, of which he is the sole owner, performed in 1993. Technologies Directes P.G. Inc. could not perform the work mentioned in the various exhibits added to the file, but Pierre Gaudreault, president and lone shareholder of the company, did so, which made him a self-employed worker. He should have informed the Commission on his statements or come into the office to describe his situation. He mentioned at the hearing that he often wondered about his situation.

A majority of the Board of Referees uphold the Commission's decision regarding the penalty imposed and deny the appeal.

N.B.: Exhibits submitted at the hearing. Four letters from clients of Techologies Directes P.G. Inc. (bundle as exhibit 14).

The dissenting member expressed the following view:

Decision of 26-08-94 (exhibit 6)

Did the claimant prove that he had been really unemployed since 07-03-93 and therefore that he was eligible for unemployment insurance?

Decision of 25-08-94 (exhibit 7)

Did the claimant knowingly make 26 false or misleading statements by not reporting that he had been self-employed since 07-03-93, in which case he must pay a penalty of $11, 076?

I am a dissenting member in this case for the following reasons:

- First, I find it rather unusual that a majority of the Board are making an assumption "unilaterally", i.e., without the consent of or notification to the parties, regarding an adjournment for "additional evidence" AFTER THE HEARING and after the claimant and his representative had left.

This approach seems to me to be contrary to the rules of evidence established by practice and jurisprudence, which maintain that the burden of proof in the matter of a penalty for false statements rests on the party making the allegation. Since no evidence appeared on file at the hearing of November 24, 1994, it seems to me that the claimant should have received the benefit of the doubt. The same applies to the claimant's unemployment status which was not contradicted in any way by the material on file as constituted at the time of the hearing.

- Moreover, at the second hearing called for by the majority of the Board which was held on January 18, 1995, it seems to me that this decision was rendered and that the elements, evidence and explanations provided by the claimant at this second hearing were not taken into account.

The majority decision makes no mention of the explanation provided by the claimant and the letter from his former employer submitted at the hearing, which said that this was a hobby he was indulging in before he was unemployed and that he will continue to indulge in now that he has found other employment. That is why the claimant did not want to mislead the Commission by not reporting this hobby. Disregarding this plausible explanation given by the claimant seems to run counter to the findings of the Federal Court of Appeal judgments in these cases.

- Finally, the judgment appearing in CUB 20148 describes the questions we must ask ourselves when determining a claimant's status of unemployment. The claimant alleges that he only devoted a total of thirty (30) to forty (40) hours spread over six (6) months on his activities, which was not refuted. It seems that this uncontested statement passes the "so-little-time" test.

The claimant stated that this was a hobby of his. To conclude that a leisure activity constitutes a full-time job, when this activity was being performed before and will continue to be performed after a benefit period, appears to me to be arbitrary and unjust.

In conclusion, although the "proceeds" of this hobby are substantial - when they are the source of patents and royalties obtained BEFORE a claim for benefit, I do not believe they can be used to determine the claimant's status of unemployment. He clearly showed that, throughout his benefit period, he was looking for work, which he obtained in March 1994. In short, the claimant behaved like any regular claimant would throughout this benefit period, and, in my view, we cannot conclude that he was not unemployed based solely on the earnings he obtained from his previous inventions.

For these reasons, I would quash both decisions by the Commission and uphold the claimant's appeal. [ TRANSLATION ]

This decision by the Board of Referees was the subject of an appeal to the Umpire. It is fitting to cite a few excerpts from page 2 of the decision of Umpire Dubé who heard the appeal:

The majority of the Board of Referees pointed out that the claimant recorded sakes of $62, 050 in professional fees and that he devoted 31 weeks and 3 days to perform the work called for in the contracts. Moreover, the majority decision also contained the comment that the claimant insisted that the amounts he received were royalties arising from the invention patents he obtained and are still owned by him.

The dissenting member, on the other hand, said that this was a hobby the claimant was indulging in before he was unemployed and the proceeds of this hobby were substantial but that they were the source of patents and royalties obtained BEFORE the claim for benefits.

According to the Commission, the facts on file clearly show that the claimant has been operating a business since April 22, 1992, since he was devoting all his time to it and since he was the one who decided on his working hours. Moreover, all the evidence on file (bills, contracts, expense accounts and travelling) show the path the business has taken since the claimant first made his claim for benefit. The Commission maintains that the claimant's prime objective was the profitability of his business.

At the hearing of this appeal before the Umpire, counsel for the claimant argued that the Board should have asked itself whether the claimant devoted so little time to his business that he could not normally have relied on it as a principal means of livelihood, as per section 43(2) of the Unemployment Insurance Regulations. He also pointed out that the claimant was indulging in his hobby before collecting benefits. As for the penalties, the Board should have asked itself whether the claimant knowingly made the 26 false or misleading statements in question. According to his counsel, the claimant was in engineering and was a forestry "inventor" in his free time, in that he created new concepts outside his working hours when he was a salaried employee in engineering.

In view of the specific circumstances of this case, I believe it is fair and equitable to return this case to a Board made up of new members so that it can apply with diligence the six well-known criteria in Schwenk, CUB 5454, to determine whether or not the exception in section 43(2) of the Regulations applies to the claimant.

In The Attorney General of Canada vs. Jouan, A-365-94, F.C.A., January 23, 1995, Justice Marceau determined that the most important factor with respect to section 43(2) of the Regulations is the time devoted to the business.

The new Board must determine as well whether the large amounts referred to previously came from royalties arising from a previous invention or from Technologies Directes P.G. Inc. Finally, the new Board must establish whether the claimant knowingly made false or misleading statements and respond clearly and distinctly.

The case shall be returned to a Board made up of new members. [ TRANSLATION ]

The newly constituted Board of Referees met on March 4, 1997. I believe it is important to quote the following throughout this decision along with the dissenting opinion:

1. Did the claimant prove that he had been really unemployed since 07-03-93 and therefore that he was eligible for unemployment insurance?

2. Did the claimant knowingly make 26 false or misleading statements by not reporting that he had been self-employed since 07-03-93, in which case he must pay a penalty of $11, 076?

At the hearing, the claimant reported that he has been a mechanical engineer by training since 1977. He has always been a do-it-yourselfer and an inventor, which was his hobby, and even as a student, he always devoted a minimum of about 15 hours a week to his hobby.

In March 1992, he created his own company, "Technologies Directes P.G. Inc.", the main objectives of which were to obtain information (catalogues) from various sources and easier access to the patent house.

In July 1992, he lost his job, which was totally unexpected. Although he had a signed 5-year contract with his employer, he agreed to take 7 months' severance pay to avoid going down to Wisconsin, as requested by the employer.

After he lost his job, he conducted job searches by first offering his professional services. He did receive offers of employment from various companies, all of which were outside Quebec. He turned them down because of his family situation, but he did offer these employers the opportunity to work with him if he remained in Quebec. The claimant wanted to maintain an employer-employee relationship in his offers of service.

In exhibit 3.3, the agent for the Commission noted a comment the claimant made in or around December 1992, when he decided not to invest either time or money in his business, because the capital investment would have been too large and he did not have the financial wherewithal to do so.

The claimant's representative submitted exhibit 22, showing that an agreement had been reached between Pierre Gaudreault and Denharco Inc., whereby $32, 000 would be paid for a concept the claimant had already developed sometime back in 1986.

At the request of Umpire J.E. Dubé, the Board of Referees replied, and a majority compared the case with the following five criteria to determine whether section 43(2) of the Regulations applied here:

The time the claimant devoted to his business

It was introduced into evidence that the claimant did not substantially increase the amount of time he devoted to his hobby in 1993. The fact that he has been devoting from 15 to 20 hours a week, what he has been doing for more than 20 years, enabled the Board to conclude that he has been devoting so little time that they cannot be construed as full working weeks as per section 43(2) of the Regulations.

The capital and resources invested:

As the agent of the Commission summarized in exhibit 3.3 and as the claimant confirmed in his testimony, he decided back in 1992 not to invest time and money in his business, because the capital needed for this firm to give him the hope of one day earning his living is very high and in the neighborhood of several hundred thousand dollars. This was impossible.

According to the documentary evidence on file and the claimant's testimony, it is clear to the Board that the income earned in 1993-1994 on a project designed in 1986 cannot be considered a financial success for the company.

Continuous operation of the business

In this particular case, we are really dealing with a claimant who has a hobby and not a commercial enterprise. Therefore, the continued interest in his hobby cannot be comparable to a continuous operation of a business.

Nature of employment

As was the case in point 4, the Board of Referees really appreciated the special nature of the job of inventor. But since this is a hobby, we cannot conclude that the claimant's activities are comparable to those of a conventional position of engineer.

Efforts made by the claimant to find employment

As the claimant revealed during his testimony, he conducted several job searches which could have materialized, but he had to turn down these offers for specific reasons. He was continually and actively seeking employment.

Consequently, a majority of the Board concluded that the claimant was devoting so little time (to his undertaking) that he could not be deemed as working a complete working week.

The Board of Referees also considered the matter of whether the substantial amounts he received during his benefit period are to be construed as earnings or royalties.

After analyzing all the evidence and after exhibit 22 was filed, the Board of Referees ruled that the $32, 300 paid by Denharco Inc. is a lump-sum amount for the entire concept which was designed by Pierre Gaudreault in 1986 or thereabouts and that this money is considered as royalties. Moreover, this same piece of evidence indicates that the compensation was paid out, at the request of Denharco Inc. in weekly installments in the form of professional fees. In view of this and according to the claimant's explanations, the money was paid out in a lump-sum which covered the entire concept. Point 4 in exhibit 22 was a condition requested by Denharco Inc. and the same holds for all of the billing.

As for the issue of false or misleading statements, the set of answers the claimant provided in response to the questions put to him by his counsel showed that he (the claimant) was not familiar with the workings of unemployment insurance, that it was the first time he had submitted a claim for benefit and that he did not intend at any time to cheat the Commission knowingly.

As the claimant even admitted himself, the field he worked in never allowed him to distort things to derive benefit, and this was fully understood by the members of the Board of Referees.

Consequently, the Board of Referees unanimously denies the Commission's decision and grants the appeal with respect to the penalty.

Members of the Board agreed that the decisions were at issue in this case.

Decision with respect to the time devoted to his business.
Are royalties to be considered earnings?
Did he make false or misleading statements?

I agree with my colleagues on 2 and 3 but disagree on no. 1.

DISSENTING OPINION

As I understand it, the exhibits on file and the evidence provided at the hearing showed that the claimant devoted more time to his business and therefore contravened section 43.3.

All of the work and travelling done during the period when he was collecting benefits must be evaluated, and the amounts determined will be considered earnings.

It is up to the Commission to determine how much time was spent on this, taking into account that the claimant managed to indulge in his hobby and work at his profession at the same time in the past. [ TRANSLATION ]

It must be noted that the first part of the decision dealing with the status of unemployment was the work of two members of the Board of Referees, including the chairman. As we have just seen in the excerpts from the decision, a majority of the Board concluded that the claimant could not be deemed as having worked full working weeks. The second part of the decision was to determine whether the amounts received by the claimant are considered earnings or royalties; and whether the false or misleading statements were made knowingly. As we saw, the Board ruled in favour of the claimant on the matter of the penalty, in the portion of the decision which was signed by the three members.

The dissenting member, Guy Racine, said he disagreed on the first part, but agreed with his colleagues on the other two matters. Consequently, his position is that the amounts received were royalties and were not considered earnings and that the claimant did not make any false or misleading statements knowingly.

Based on the observations or the arguments of the Commission in the appeal to the Umpire, it must be borne in mind that the Commission agrees with the Board's decision regarding the status of unemployment. On the other hand, the Commission disagrees with the earnings and penalty issues.

The Commission concluded its argument by conceding a portion of the penalty, in that the claimant, in its view, made 19 false or misleading statements instead of 26.

In sum, I am only being asked to rule on two issues. The first being whether the money received by the claimant during his period of unemployment are considered earnings or whether they are royalties. The second is the matter of false or misleading statements made knowingly and the penalty resulting therefrom.

A review of the file and the various decisions rendered shows that the word "hobby" did not come up in the Board of Referees' decision which is being appealed before me today. This has been an issue since November 1994 and it results from the testimony the claimant gave before the first Board of Referees, which returned the case to the Commission for additional evidence.

The matter of a "hobby" also came up in the Board of Referees' decision of January 18, 1995. Once again, the dissenting member raised this issue. The majority had talked about invention patents which remained the property of the claimant.

In his decision, Umpire Dubé referred to royalties in the same way as he did to a "hobby". He decided to return the case to the Board of Referees to determine whether the amounts received by the claimant come from royalties and he must determine whether false or misleading statements had been made knowingly.

It is no surprise that the Board of Referees which met in March 1997 considered this matter. That is exactly what it had to do.

Generally speaking, the Board of Referees is master of the facts, and it determines which facts will constitute grounds for its decision. I do not see how the Board of Referees could have exceeded its jurisdiction by considering and then ruling on this matter. That is what it was supposed to do.

The evidence the Board of Referees had before it - the file itself and the testimony it heard - is sufficient to justify the decision made. The amounts received are not considered earnings, but they are gratuities resulting from the royalties the claimant earned as a result of his expertise and his inventions which preceded the facts mentioned in the evidence.

The claimant was therefore justified in saying that he had not worked and had not received an income. Consequently, he should not be penalized as per section 33.1 of the Act, because he did not make any false or misleading statements.

In short, I have concluded that the Board of Referees was right in deciding as it did by considering the amounts the claimant received as royalties and refusing to uphold the penalty.

The Commission's appeal is therefore denied and it will have to review the case to give effect to the Board of Referees' decision of March 4, 1997 and this decision.

Quebec City, Quebec
October 2, 1997

Decisions Consulted
Robert Tremblay and Robert Larouche Federal Court of Appeal, A-674-85;