Disclosure of Settlements

Fax 919/716-6709

March 26, 2004

Mr. Harry E. Payne, Jr., Chairman Employment Security Commission of North Carolina

P.O. Box 25604 Raleigh, North Carolina 27611

Re: Advisory Opinion on Disclosure of Settlements; N.C. Gen. Stat. § 96-4(t)(1)(i) and N.C. Gen. Stat. § 96-4(t)(5)

Dear Chairman Payne:

On February 19, 2004 you wrote asking for an opinion about whether settlement documents related to certain Employment Security Commission (ESC) proceedings may, or must be, publicly disclosed. Specifically, you said that the ESC conducts investigations of employers to determine if they have unlawfully avoided unemployment taxes by transferring employees to shell companies controlled by the employers, a practice referred to as “SUTA (state unemployment tax act) dumping.” You noted that the ESC has entered into settlements with employers who, due to ESC investigations, have agreed in writing to dismantle certain SUTA tax shelter arrangements and pay additional unemployment taxes to the State. You said that these settlement agreements were executed after the employers had filed written protests over ESC tax assessments, but before the ESC Chairman ordered the matters referred to hearing officers to conduct hearings. You asked whether the information contained in the settlement documents is confidential or subject to public disclosure.

Your letter notes that North Carolina’s Employment Security Law (“ESL”) contains two provisions addressing the confidentiality and disclosability of ESC information and records: Mr. Harry E. Payne, Jr. March 26, 2004 Page Two

Reading these two provisions together, it appears that information obtained in the administration of the ESL should generally be kept confidential, unless: 1) that information is in a record of an ESL proceeding before an appeals referee, deputy commissioner, or other hearing officer; and, 2) the information is compiled for the purpose of resolving ESL issues. The information in a SUTA dumping settlement agreement appears to fall into the category of information “compiled for the purpose of resolving issues raised pursuant to the Employment Security Law.” The ultimate question is whether the information in these settlement agreements is information in the records of a “proceeding before an appeals referee, deputy commissioner, or other hearing officer.” If so, it is disclosable.

The ESL does not define a “proceeding,” as that word is used in N.C. Gen. Stat. § 964(t)(5). Nor does the ESL specify when a proceeding before an appeals referee, deputy commissioner or other ESC hearing officer officially commences. However, N.C. Gen. Stat.§ 96-4(m) does describe generally the process by which the issue of an employer’s liability for additional unemployment taxes comes before a deputy commissioner and/or a hearing officer. This statute authorizes the ESC to hold hearings to determine the rights and liabilities of employers and to have evidence taken in front of a hearing officer. Testimony is recorded, and the testimony and records from the hearing officer’s hearing are transmitted to the Commission. A hearing is then held before the Commission, or a designated Deputy Commissioner, for a review of the evidence and a determination of the disputed issues. Notably, N.C. Gen. Stat. § 964(m) provides that hearings are open to the public. These hearing officer and Deputy Commissioner hearings provided for in Section 96-4(m) are the kinds of “proceeding[s] before an appeals referee, deputy commissioner or other hearing officer by whatever name called” that appear to be contemplated by the information disclosure provisions of N.C. Gen. Stat. § 964(t)(5).

Although the employment security statute does not specify when such Section 96-4(m) hearings officially begin, the ESC has adopted regulations¹ describing the procedure for starting the hearing process. ESC Regulation 18.13 provides that the hearing procedure is invoked when an employer makes a timely appeal (also referred to informally as a “protest”) of an adverse final administrative determination. Once the appeal is made, the ESC’s Tax Department assembles the hearing “file,” which consists of the employer’s master file and relevant quarterly tax and wage reports. The file is forwarded to the ESC Commissioner, who in turn assigns the matter to a hearing officer for the initial Section 96-4(m) evidentiary hearing. ESC Regulation 18.15.

From these statutory and regulatory provisions, it appears that a “proceeding” before a hearing officer to determine an employer’s additional tax liability in a case of alleged SUTA

1

The ESC is given the authority to adopt such procedural rules for its hearings by N.C. Gen. Stat. § 96-4(p), which states that “The conduct of hearings shall be governed by suitable rules and regulations established by the Commission.”

Mr. Harry E. Payne, Jr. March 26, 2004 Page Three

dumping commences when the employer appeals an adverse administrative determination that additional taxes are due and/or changes in employer tax reporting are required. From that point on, all documents and information compiled by the ESC relating to the dispute are “records of a proceeding before . . . [a] hearing officer . . . compiled for the purpose of resolving issues raised pursuant to the Employment Security Law.” If an employer and the ESC reach a settlement and sign an agreement after the employer appeals a final administrative determination that additional taxes are due, the settlement agreement is also a document compiled in the proceeding, and as such, it appears to be subject to the disclosure provisions of N.C. Gen. Stat. § 96-4(t)(5).

Conceivably, it might be argued that the settlement agreements you described were never actually introduced in hearings because they were entered into before hearing officers held evidentiary hearings. Using this rationale, it might be suggested that such agreements are not part of the “records” of the proceedings. While this interpretation is arguable, the wording of the statute more strongly suggests that a settlement agreement is part of the records of the proceeding, even if it is entered into before the hearing is held. N.C. Gen. Stat. § 96-4(t)(5) does not provide that only records introduced into evidence in a hearing are disclosable. Rather, this statute says information from records “compiled” in the “proceeding” for the purpose of resolving the disputed ESL issues are disclosable. This phrasing suggests that once the proceeding has been commenced, all records and information compiled by the ESC for the purpose of resolving the disputed issues are disclosable. The words of N.C. Gen. Stat. § 964(t)(5) seem to apply particularly to settlement agreements, since their very purpose is to resolve issues raised pursuant to the ESL.

We also note that N.C. Gen. Stat. § 132-1.3 provides that settlement documents in proceedings against the State are public documents. Since the settlement agreements you described are the end result of proceedings instituted against the ESC to protest its official agency action (i.e., assessing additional unemployment taxes), it appears that SUTA dumping settlement agreements are the kinds of settlement documents the General Assembly intended to be subject to public disclosure, pursuant to N.C. Gen. Stat. § 132-1.3.

To summarize, it is our conclusion that information in a SUTA dumping settlement agreement that is entered into after the employer appeals a tax assessment is “information from records of a proceeding before . . . a hearing officer . . . compiled for the purpose of resolving issues raised pursuant to the Employment Security Law.” As such, it is publicly disclosable, pursuant to N.C. Gen. Stat. § 96-4(t)(5).

Mr. Harry E. Payne, Jr. March 26, 2004 Page Four

Thank you for your inquiry. Please feel free to contact us if you have further questions regarding this matter.

Sincerely,

Reginald L. Watkins Senior Deputy Attorney General

Daniel D. Addison Assistant Attorney General