An opinion has been requested as to whether an employee of the Department of Health and Mental Hygiene may accept hourly outside employment with an entity that generates its income on a contingent fee basis.
This request is presented by an individual (the Employee) who is presently a Fiscal Specialist I with the Medical Care Programs Division of the Department of Health and Mental Hygiene (DHMH). Previously he was employed as a Revenue Examiner I in the Retail Sales Tax Division (the Division) of the Office of the Comptroller of the Treasury. The Employee's present duties and job responsibilities with the DHMH consist of serving as liaison between the Medical Assistance Program (Medicaid) and the Health Services Cost Review Commission (HSCRC), analyzing rate requests made to the HSCRC by hospitals, monitoring HSCRC proceedings regarding hospital rate charges payable by Medicaid, assisting in the preparation of positions taken by Medicaid in proceedings before HSCRC, and generally providing fiscal analyses relating to Medicaid payments.
The Employee has requested advice regarding his recent and past involvement with a sales and use tax consulting business (the Tax Business) as a partner and his present interest in accepting part-time employment with it. In August, 1981, the Employee had entered into a partnership agreement with a former State employee of the Comptroller's Office for the purpose of providing sales and use tax refund consulting services to Maryland businesses. The partnership proposed to review the financial records of businesses and submit an application for sales or use tax refunds if there had been an overpayment of the tax. 1. If a refund of taxes was obtained for the client, the partnership would receive a percentage of the refund secured (a contingent fee arrangement). In November 1981, after the partnership had submitted some claims for refunds to the Retail Sales Tax Division of the Comptroller's Office, but prior to any decision by the Division relating to any of the claims, the Employee became aware of §3-103(c) of the Public Ethics Law (Article 40A, §3-103(c), Annotated Code of Maryland, the Ethics Law) relating to State employees' assisting or representing a party for contingent compensation. The Employee negotiated a dissolution of the partnership with his partner in late November, 1981. By the terms of the dissolution, the Employee was to receive a fixed sum as a liquidated sales price for his interest in the partnership. The sum represented compensation on an hourly basis for the services provided by the Employee for the initial refund claims submitted on behalf of its business clients.
The Employee's former partner has continued the business and assumed all liabilities and now wishes to hire the Employee on a part-time basis. At the present time, it is anticipated that the Tax Business will continue to rely on contingent fee arrangements with clients in the future for all or substantially all of its income. The Tax Business, however, proposes to pay the Employee a fixed hourly wage for his services irrespective of the contingent nature of its own income. The Employee has not accepted the agreed on sum from his former partner for liquidation of the partnership, nor has he performed any additional services for the firm pending issuance of this opinion.
This request involves application of the outside employment provisions of §3-103 of the Ethics Law. 2 This section sets forth various employment restrictions on present and past officials and employees. Subsection (c) imposes limitations on present officials and employees representing or assisting individuals before agencies of the State. Specifically, subsection (c) reads as follows:
(c) Assisting or representing party for contingent compensation. An official or employee may not assist or represent a party for contingent compensation in any matter before or involving any agency of the State or a political subdivision other than in a judicial or quasi-judicial proceeding; provided, however, that nothing herein shall preclude an official or employee from assisting or representing a party for contingent compensation in any matter before or involving the Workmen's Compensation Commission, the Maryland Automobile Insurance Fund, or the Criminal Injuries Compensation Board.
The Tax Business receives its compensation only if the client-business receives a sales tax refund. The Business is thus involved in assisting and representing another before a State agency for a contingent fee, as contemplated in §3-103(c). It is also clear to us that the Sales Tax Refund application does not fall within the quasi-judicial or judicial proceedings exception of §3-103(c). The Comptroller's Office reviews the application for refund, may or may not audit the business, and determines the business' entitlement to a refund. This process does not include the formal requirements and procedural safeguards of a quasi-judicial hearing or proceeding that we believe are part of the basis for excluding such proceedings from the prohibition.
Thus the remaining question before us is whether the fact that the Tax Business represents parties for contingent compensation in matters involving the Comptroller's Office is an absolute bar to employment of the Employee by the Tax Business even as a part-time hourly employee. We find, under the present circumstances, and given certain limitations herein stated, that it is not an absolute bar provided the Employee does not directly represent or assist in the matters before the State involving the State; and provided the Employee/Tax Business relationship remains in fact a true employee-employer relationship. We believe that given the limitations set forth below, the Employee's service would not constitute assistance or representation of another before a State agency.
The Employee must limit his activities as a part-time employee of the Tax Business to ministerial and administrative accounting and bookkeeping duties. He may have such duties as review of journals, accounts, and purchase books of clients. He may review and analyze manufacturing costs, purchases, tax payments and other business records necessary to prepare the sales tax refund applications. He may also develop working papers to be used in the preparation of the client's refund application. However, he may not have any direct relationship with either the client or officials and employees of the Comptroller's Office. Nor may he solicit clients for the Tax Business, participate in prospecting for clients, or exercise any decision-making or advisory capacity with the client directly. The employee also may not participate on behalf of the client in any State audit of the client's refund application or contact or communicate with any official or employee of the Comptroller's Office regarding any refund application filed by the Tax Business.
We believe that application of these limitations avoids the type of assistance, representation and involvement that is prohibited by §3-103(c). Additionally, an appearance of improper influence where clients of the Tax Business believe that they may receive some special benefit or service from the assistance of a State employee in their claim is avoided. Recognizing that the Employee was originally a partner in the Tax Business, we emphasize that our opinion specifically limits his activities. He may become a bona fide hourly employee of the business, but may not assume or exercise any responsibilities of a partner. He may not participate in the management or administration of the business and may not furnish capital, contribute personal assets other than service, or assume legal obligations of the Tax Business. He may not share in the profits of the business other than to receive reasonable fixed hourly compensation for his services. His status as a State employee should not be included in any solicitation of business by the Tax Business.
We therefore advise the Employee that he may accept part-time employment with the Tax Business subject to the limitations set forth above and may accept hourly compensation for his services prior to the dissolution of the partnership. He and his employer should also be aware of the provisions of §3-103(b) of the Ethics Law. This section prohibits their involvement in any matter if they significantly participated in it as an official or employee of the State.
Herbert J. Belgrad, Chairman
Reverend John Wesley Holland
Betty B. Nelson
Barbara M. Steckel
Date: May 26, 1982
1 The Retail Sales Tax Act (Article 81, §§324 to 401, Annotated Code of Maryland) imposes a tax on the privilege of selling certain tangible personal property at retail. The Act specifies various sales which are exempt from the tax. The exemptions include sales of certain items to printers; sales of films or videotapes for use in television broadcasting; sales of aircraft, vessels, rolling stock and motor vehicles used in interstate commerce; and sales of manufacturing machinery and equipment. The Employee has indicated that the Tax Business was concentrating on categories of Maryland businesses where there may have been an overpayment of the tax because the business did not properly utilize an exemption to the tax.
2 The facts here do not appear to raise a §3-101 participation issue because of the nature of the Employee's current position with the DHMH. The Employee has also indicated that he will not perform work on any matter in which he significantly participated while employed by the Retail Sales Tax Division of the Comptroller's Office, thus avoiding a problem under the post-employment provisions of §3-103(b) of the Ethics Law.