Supreme Court Adds Another Risk to the World of Self-Employment

Can you fire yourself and still collect unemployment benefits? That was the question at the core of a recent decision issued by the South Dakota Supreme Court. The answer: “it depends.”
The case is entitled Michael Manuel v. Toner Plus, Inc., and South Dakota Department of Labor, Unemployment Division, (2012 S.D. 47).

Small business owners are a special breed: unlike the rest of us, they are willing to leave the safety of a steady job and trust their fortunes to their own talents. In a sense, all of those who take that plunge are announcing to the world that they think they’ll be better bosses than their current bosses.

This gutsiness is an attribute to be commended and nurtured, because some of them are absolutely right. And, even though a large percentage of those people are wrong, nobody has yet been able to figure out which small percentage is actually going to succeed. The commonly cited statistics are that half will outlast the first year, and only one in twenty new businesses will survive into their sixth year.

Michael Manuel was in that select group of winners: he found a way to keep Toner Plus running for eleven years.

Toner Plus sold toner and ink cartridges for printers, fax machines, and copiers. Based out of Sioux Falls, Michael’s business grew and succeeded.

However, after several years in business, advances in technology began to cut into the profits of Toner Plus. The internet made it cheaper and easier to re-order cartridges from on-line retailers.

In addition, its larger, national competitors began installing sensor systems that would automatically send a replacement cartridge when the toner ran low. Toner Plus had difficulty competing.

In response, Michael attempted an aggressive marketing campaign and put $35,000 of his own money into the company in 2007 to shore up the losses. He also looked into adding new revenue streams, such hiring new technicians to run a service center. But the costs made this unfeasible.

Facing three straight years of losses, Michael realized that the only sensible option was to close the business.

As the sole shareholder of Toner Plus, Inc., and also as its key employee, Michael had the unlucky distinction of having to lay himself off. He pulled the plug, began looking for other work, and filed for unemployment benefits to carry him in the meantime.

Two months later, the Department of Labor denied and dismissed his claim for unemployment benefits. The reason? Rather than being “fired,” the Department treated the situation as one where Michael had “voluntarily” left his job without a good reason. Michael appealed.

With some minor exceptions here and there, unemployment benefits are available to any South Dakota worker who is let go from their employment. Benefits are also available for those who quit for “good cause,” which includes a list of reasons that involve some sort of involuntary component (such as your salary being cut in half; a job that is hazardous to your health; sexual harassment by a supervisor or co-worker; etc.).

The idea is that we’ve created a safety net for an unexpected and unplanned loss of income. Deliberately “gaming” the system in order to obtain benefits is not allowed.

Here, nobody accused Michael of gamesmanship. Even the Department of Labor agreed that he closed his business because of legitimate, downward trends in the toner industry.

However, the Department argued that those trends were not enough to make his unemployment “involuntary.” Instead, the Department held Michael to a higher standard. It argued that the decision was “voluntary” as long as Michael still had the option of staying in business.

In other words, in order to collect unemployment benefits in this situation, Michael would have needed to be “compelled” to close his business (such as by running his business so far into the ground that bankruptcy was the only way out).

No sensible businessperson would do that. Yet, for better or worse, our Supreme Court agreed with that argument. The Court defined Michael’s decision as “voluntary” because he “carefully considered market conditions and industry trends” and then made the decision to close out of “his own volition.”

The Court agreed that his decision was the most reasonable option. But it refused to cut him any slack to recover unemployment benefits because it couldn’t find any statute that specifically defined this situation as “good cause.” Moreover, the Court came to this conclusion even though Michael himself, as the owner, was the one who had paid Toner Plus’s unemployment insurance premiums into the state system for eleven years.

Our Court did point out that other states allow employees like Michael to receive unemployment benefits. For example, both Alabama and California consider economic forces to be “good cause” for voluntarily closing down your own business.

South Dakota does not yet have such a statute, so the solution would be for our Legislature to adopt a new law. Given the value that these entrepreneurs create for our state, it would be the right thing for our lawmakers to do.

About the author

I'm a South Dakota trial lawyer, raised on a hog farm near Lennox. My cases tend to involve corporate wrongdoing (such as insurance companies that lie or deny claims, or both). science (such as whether someone had the mental capacity to execute a Will or Trust), or technical aspects (like construction litigation). I also regularly sue public entities that refuse to pay their fair share. I studied international relations as an undergrad at Georgetown University in Washington, D.C., and then graduated second in my law school class at the University of South Dakota. I'm an avid runner and a "family-taught" carpenter (i.e., I learned most of what I know from Grandpa, Dad, and my brother Steve). And I'm a kid at heart, with a love for model trains and my children's Legos. Beyond the practice of law, my most passionate endeavor is The Finish Line Fund. We founded this non-profit in 2017 in order to raise funds and expand research for rare diseases, including Friedreich’s Ataxia, which affects my 17-year-old daughter. You can learn more (and give) at