Macmillan-Piper Inc. v. State

MACMILLAN-PIPER INC., a Washington corporation, Appellant, v. STATE OF WASHINGTON, EMPLOYMENT SECURITY DEPARTMENT, Respondent.

No. 75534-0-I

COURT OF APPEALS OF THE STATE OF WASHINGTON DIVISION ONE

December 26, 2017

UNPUBLISHED OPINION

VERELLEN, C.J. — This appeal includes the question whether trucking owner-operators who contracted with MacMillan-Piper, Inc. (MacMillan) qualified for the statutory independent contractor exemption from unemployment taxes. Consistent with a recent decision by Division III of this court in Swanson Hay Co. v. State Employment Security Department,¹ we conclude MacMillan exerted extensive control over the method and detail of how the driving services were to be performed and therefore did not establish it was entitled to an exemption under RCW 50.04.140(1)(a).

The Federal Aviation Administration Authorization Act (FAAAA) preempts state laws that significantly impact motor carriers' prices, routes, or services.² Because the Employment Security Act (ESA), Title 50 RCW, applies generally to state employers and has a tenuous relationship with the carrier's prices, routes, or services, the ESA is not federally preempted in this setting.

The Employment Security Department (Department) calculated the original audit assessment amount based on the records MacMillan provided. MacMillan does not establish the assessment was arbitrary and capricious or that its due process rights were violated.

Therefore, we affirm.

FACTS

MacMillan is involved in drayage, the moving of freight containers and cargo a short distance from point to point, often from the port to a rail yard or other designated place. To provide those services, MacMillan contracts with "owner-operators" who own tractors or tractor-trailers. The owner-operators provide the trucking equipment with drivers to perform drayage services for Macmillan. MacMillan operates under authority from the Federal Motor Carrier Safety Administration and the Department of Transportation. The owner-operators haul freight using MacMillan's operating authority.

The owner-operator contracts include provisions addressing the obligations of the owner-operators, such as (i) MacMillan has the "right to full possession andcontrol" of the equipment during the lease term, (ii) owner-operators must report for duty at 7:30 a.m. with adequate fuel for a full day's work, must notify MacMillan by 7:00 a.m. if they will not be available that day, and must give two weeks' notice if they will not be available for two or more consecutive days, (iii) an owner-operator's refusal to perform a dispatch is considered a material breach of the agreement, (iv) owner-operators shall haul no freight for other carriers during the lease term without MacMillan's written permission, (v) drivers must meet federal and state safety requirements and may be rejected by MacMillan "for any reason," (vi) owner-operators must submit to MacMillan records of hours on duty, daily inspections, vehicle tonnage, log sheets and other documents, (vii) owner-operators must "immediately" report collisions or citations to MacMillan, maintain the equipment consistent with regulations, perform daily re-trip inspections, consent to installation of communication equipment "at the sole discretion and for the sole benefit of MacMillan-Piper," and display decals or placards on the equipment indicating it is leased to MacMillan.³

Other than requiring owner-operators to report for duty daily at 7:30 a.m., MacMillan does not set or control the hours owner-operators work, choose the routes they drive, or dictate the order in which they make deliveries. The owner-operators are responsible for all operating expenses, including maintenance, licensing, fuel, tolls, permits, insurance, and costs for any laborers or drivers they hire.

In 2011, the Department audited MacMillan. The audit determined that 69 owner-operators should be reclassified as "in employment" instead of independent contractors under the ESA. The Department issued MacMillan a tax assessment covering the first quarter of 2009 through the third quarter of 2011 in the amount of $130,440.81. MacMillan filed an administrative appeal. The administrative law judge (ALJ) denied MacMillan's motion for summary judgment. The ALJ granted the Department's cross-motion for summary judgment, ruling the owner-operators were in MacMillan's employment under RCW 50.04.100 and not exempt under RCW 50.04.140(1) because they performed personal services for wages, which benefited MacMillan, and they were not free from MacMillan's control or direction.

The ALJ denied MacMillan's motion to dismiss the assessments and held an evidentiary hearing to determine the accuracy of the assessed amount. The ALJ entered an initial order finding that 30 percent of the payments MacMillan made to owner-operators were for driving services and were thus taxable. The ALJ found that two of the drivers should have been excluded because the only instruction they received was where to pick up and transport the freight, and they each had their own motor carrier authority.

On review, the commissioner's review office issued the commissioner's final decision affirming the ALJ's ruling. The commissioner confirmed that MacMillan exerted "extensive controls over the methods and details of how the driving services are to be performed by the owner-operators"⁴ and failed to satisfy therequirements of RCW 50.04.140(1)(a). The commissioner did not address the remaining elements of the independent contractor exemption test. MacMillan appealed, and the King County Superior Court upheld the order.

MacMillan appeals.

ANALYSIS

Although there are minor differences in facts and arguments, we agree with Division Ill's conclusion in Swanson Hay that owner-operators with similar contracts are not exempt from unemployment taxes.⁵

Judicial review of the commissioner's decision is governed by the Administrative Procedure Act (APA), ch. 34.05 RCW.⁶ We sit in the same position as the superior court and apply the standards of the APA directly to the record before the agency.⁷ On review of a decision by the commissioner, we give great deference to the commissioner's factual findings and substantial weight to the agency's interpretation of law.⁸

I. RCW 50.04.140(1) Exemption

Under Washington's ESA, employers must contribute to the unemployment compensation fund for the benefit of their employees.⁹ The ESA is intended tomitigate the effects of involuntary unemployment by applying the "'insurance principle of sharing the risks, and by the systematic accumulation of funds during periods of employment.'"¹⁰ Courts liberally construe the statute to accomplish this goal, viewing "with caution any construction that would narrow" coverage.¹¹ "[E]xemptions from taxation statutes are strictly construed in favor of applying the tax, with the burden of proof on the party who seeks the exemption."¹² An individual may be both an independent contractor for some purposes and engaged in "employment" for purposes of the state's broad definition of covered employment.¹³

"Employment" is defined under RCW 50.04.100. Unless an exemption applies, "employment" exists if the worker performs personal services for the alleged employer and if the employer pays wages for those services.¹⁴ RCW 50.04.140 includes an exemption to unemployment taxes.¹⁵ The inquiry under the statute is not whether owner-operators are independent contractors for other purposes but whether they meet all of the prongs of the exemption testcontained in the ESA, "regardless of common law definitions."¹⁶ The term "employment" under the ESA is "unlimited by the relationship of master and servant as known to the common law or any other legal relationship."¹⁷ The ESA offers two methods to establish the exemption under RCW 50.04.140. MacMillan focuses its argument on the "control" subsection of the first method.

Under RCW 50.04.140(1), the employer must prove:

(1)(a) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his or her contract of service and in fact; and

(b) Such service is either outside the usual course of business for which such service is performed, or that such service is performed outside of all the places of business of the enterprises for which such service is performed; and

(c) Such individual is customarily engaged in an independently established trade, occupation, profession, or business, of the same nature as that involved in the contract of service.¹⁸

MacMillan argues that federally mandated lease terms do not preclude an independent contractor relationship and that in Western Ports Transportation, Inc. v. Employment Security Department, this court wrongly decided that such owner-operator lease provisions establish control for purposes of unemployment taxes.¹⁹ Specifically, MacMillan contends that Western Ports conflicts with 49 C.F.R. § 376.12, which requires carriers to "assume complete responsibility" for theoperation of the leased equipment and to have "exclusive possession, control, and use of the equipment."²⁰

49 C.F.R. § 376.12(c)(4) provides:

Nothing in the [required exclusive possession, control and use provision] is intended to affect whether the lessor . . . is an independent contractor or an employee of the authorized carrier lessee. An independent contractor relationship may exist when a carrier lessee complies with 49 U.S.C. 14102 and attendant administrative requirements.²¹

This qualifying provision is silent about the other federal lease requirements and safety regulations governing the relationship between motor carriers and owner-operators, which are included in MacMillan's contract.²²

MacMillan asserts "[i]t is contrary to extensive authority that makes it clear that when the government controls the contract provisions, it is the government, not the contracting parties, exercising control."²³

Thus, the critical inquiry is whether it is improper to consider the federally...