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I.

FACTUAL AND PROCEDURAL BACKGROUND

A. Happy Nails' Business

Happy Nails of Fashion Valley and Happy Nails of Mira Mesa are limited

partnerships that own salons in which cosmetologists provide manicures, pedicures, and

face and skin treatments to clients. H & N Group is the general partner of Happy Nails of

Fashion Valley, Happy Nails of Mira Mesa, and other limited partnerships doing business

under the Happy Nails name. H & N Group also provides management services to

incorporated salons doing business under the Happy Nails name.

In 2001, Happy Nails hired a consultant to help restructure its business operations

in such a way that the cosmetologists would be independent contractors rather than

employees. By early 2003, Happy Nails implemented the changes recommended by the

consultant at all of its salons.

2 B. The Proceedings Before the Employment Development Department and the Board

In 2004, the Employment Development Department (the Department), an entity

within the Labor and Workforce Development Agency (Unemp. Ins. Code, § 301), issued

assessments against H & N Group, Happy Nails of Fashion Valley, Happy Nails of Mira

Mesa, and 35 other salons…