Gulick Trucking, Inc. v. State

2 Wn.App.2d 1016

GULICK TRUCKING, INC., a Washington corporation, Appellant, v. STATE OF WASHINGTON, EMPLOYMENT SECURITY DEPARTMENT, Respondent.

No. 49646-1-II

Court of Appeals of Washington, Division 2

January 23, 2018

UNPUBLISHED OPINION

JOHANSON, J.

Gulick Trucking Inc. seeks review of the Employment Security Department's (ESD) assessment of delinquent unemployment insurance taxes on the basis that Gulick's truck drivers were covered employees, rather than independent contractors under Washington's Employment Security Act (ESA), Title 50 RCW. Gulick argues that federal law preempts the ESD from reclassifying Gulick's owner-operator drivers as covered employees and, alternatively, that Gulick established all three prongs of the ESA's independent contractor exemption. We follow the decision of Division Three of this court in Swanson Hay Co. v. Employment Security Department, 1 Wn.App. 2d 174, 404 P.3d 517 (2017), and affirm the ESD commissioner's decision.

FACTS

I. Background

Gulick is an interstate motor carrier based in Vancouver, Washington that provides refrigerated carrier services. Gulick employs both company drivers, who drive equipment leased by Gulick and owner-operators, who drive equipment that they either own or lease from third parties. The majority of Gulick's drivers are owner-operators, and by relying on owner-operators, Gulick ensures that it has the flexibility to meet fluctuating demand without having to purchase trucks and trailers or terminate employees when demand lags.

II. ESD Audit and Assessment Order

In 2012, the ESD audited Gulick and reclassified 120 owner-operators as Gulick's "employees" for unemployment insurance tax purposes under the ESA. The ESD issued an order and notice of assessment for delinquent contributions, penalties, and interest. Stipulations between the parties subsequently reduced the total amount owed.

III. Office of Administrative Hearings Proceedings

Gulick appealed the ESD's order and assessment notice to the Office of Administrative Hearings (OAH). Before Gulick's hearing, it moved for summary judgment, arguing that the Federal Aviation Administration Authorization Act of 1994 (FAAAA), 49 U.S.C. § 14501, preempted reclassification of its owner-operators under the ESA.^[1]

An administrative law judge (ALJ) denied Gulick's summary judgment motion regarding federal preemption as a matter of law, and the parties stipulated that Gulick's supporting declarations would be included in the record for purposes of appeal. Regarding the reclassification of Gulick's owner-operators as covered "employees, " after an evidentiary hearing, the ALJ also entered an initial order that Gulick's owner-operators were in Gulick's employment and that they were not exempt independent contractors.

IV. ESD Commissioner Proceedings

Gulick then petitioned the commissioner for review of the OAH's summary ruling and initial order. The commissioner affirmed the OAH's decision.^[2]

First, the commissioner addressed Gulick's federal preemption argument. The commissioner summarized Gulick's declarations submitted in support of its OAH summary judgment motion, in which various industry authorities described the reclassification's impact. The commissioner then adopted the OAH's analysis that the FAAAA did not preempt the ESA, as applied to motor carriers in the trucking industry.

Second, the commissioner concluded that the owner-operators were in Gulick's "employment, " as defined by the ESA.

Third, the commissioner examined whether the ESA's independent contractor exemption applied and analyzed each of the exemption's three prongs. In doing so, the commissioner relied extensively upon the owner-operators' contracts with Gulick.^[3]

Under the first prong, "freedom from control or direction, " the commissioner noted "some autonomy" of owner-operators. Administrative Record (AR) at 1128. Namely, owner-operators could reject loads offered by Gulick; could arrange for loads with other brokers; selected their own routes; were responsible for proper and secure loading and providing labor to load, transport, and unload commodities; paid equipment operation, maintenance, and repair costs; maintained various insurances; and had the right to employ drivers and had sole responsibility over their employees.

However, the commissioner concluded that Gulick failed to show that its owner-operators were free from Gulick's control or direction. Gulick "exert[ed] extensive controls over the methods and details of how the driving services are to be performed" that were "generally incompatible with freeing the owner-operators from [Gulick's] control and direction." AR at 1129, 1130. That is, Gulick exclusively possessed, controlled, and used trucking equipment during the agreement's term, and owner-operators could not transport unauthorized passengers or property and had to display identification showing that Gulick was operating the equipment and immediately remove the identification from the equipment when the agreement terminated. Gulick could fine owner-operators for failure to meet appointments or follow temperature requirements and could retake possession of equipment and complete a failed delivery.

Further, Gulick required owner-operators to conduct daily equipment inspections and deliver vehicle inspection reports. Gulick required that owner-operators furnish accessories to load and transport freight, contact Gulick immediately in event of incidents, check that cargo conformed to the loading manifest, and notify Gulick of discrepancies or be fined. Gulick also required owner-operators to pay usage fees and furnish accessories to install a telecommunication device in their trucks and to cooperate fully with dispatch and transport commodities in a manner that promoted Gulick's goodwill and reputation. Finally, Gulick could terminate the agreement upon a number of conditions, including failure to maintain equipment as defined by Gulick's maintenance guidelines.

Under the second prong, the commissioner concluded that Gulick failed to meet either alternative: that the services be performed outside Gulick's usual course of business or all places of business of Gulick for which such service was performed.

Under the third prong, whether owner-operators were independently established businesses, the commissioner noted that "some of the traditional factors" weighed in favor of finding independently established businesses. AR at 1138. For instance, some owner-operators had registered sole proprietorships. And owner-operators provided their own trucks and other supplies, made substantial investments in their businesses by purchasing trucks or trailers, and operated their businesses in their trucks. Other traditional factors weighed against such a finding- Gulick provided protection from customers' nonpayment, owner-operators could not haul third-party loads without Gulick's permission, owner-operators had to display Gulick's identification on their equipment, and Gulick prohibited owner-operators from competing or soliciting customers for the term of an agreement plus five years.

Ultimately, the commissioner concluded that the evidence weighed against owner-operators being independent contractors based on an additional, industry-specific consideration: "whether an owner-operator has his or her own [federal] operating authority so as to be able to independently engage in interstate transportation of goods." AR at 1139. Because owner-operators did not have operating authority to independently engage in interstate transportation of goods, this "paramount" factor weighed against them being independent contractors. Having concluded that the reclassification was not preempted and that Gulick failed to meet any of the three prongs for the independent contractor exemption under the ESA, the commissioner affirmed the OAH.

V. Judicial Review

Gulick sought review of the commissioner's decision in the superior court. After the superior court affirmed the commissioner's decision, Gulick appealed.

ANALYSIS

I. ES A Background and Standards of Review

The ESA requires "employers" to pay unemployment insurance taxes for persons engaged in "employment." Wash. Trucking Ass'ns v. Emp't Sec Dep't, 188 Wn.2d 198, 203, 393 P.3d 761, cert denied, 138 S.Ct. 261 (2017). Under RCW 50.04.100, "employment" includes "personal service, of whatever nature" performed under a contract.

The ESA definition of employment is "exceedingly broad" and includes even those who are "independent contractors" at common law, W. Ports Transp., Inc. v. Emp't Sec. Dep't, 110 Wn.App. 440, 458, 41 P.3d 510 (2002), "so long as they perform 'personal services' under a contract and an exemption does not apply." Wash. Trucking Ass'ns, 188 Wn.2d at 203. In the employment security context, the relationship between two parties "is more likely ... to be viewed as employment [than in any other context]." Swanson Hay, 1 Wn.App. 2d at 181.

An aggrieved employer may appeal an ESD assessment to an ALJ. RCW 50.32.010, .030. Review of the ALJ's decision is by the commissioner, and the commissioner's ruling is subject to judicial review under the Administrative Procedures Act (APA), ch. 34.05 RCW. RCW 50.32.070, .120. Under the APA, we review the commissioner's ruling, not the ALJ's or superior court's ruling. Campbell v. Emp't Sec. Dep't, 180 Wn.2d 566, 571, 326 P.3d 713 (2014). "[W]e apply the appropriate standards of review from [the APA, ] RCW 34.05.570[, ] directly to the agency record." Affordable Cabs, Inc. v. Dep't of Emp't Sec, 124 Wn.App. 361, 366, 101 P.3d 440 (2004).

The party challenging the agency's action bears the burden of demonstrating its invalidity. RCW 34.05.570(1)(a). Our review is de novo, and we grant relief if "[t]he agency has...