common law, the Washington legislature, and the United States
Congress have defined whether two parties stand in an
employment as opposed to an independent contractor
relationship in different ways, depending on the context.
This case illustrates that it can be clearer to ask not
whether someone is an independent contractor, but to ask
instead whether the contractor is independent for a given
purpose: e.g., for the purpose of the doctrine of respondeat
superior, for federal payroll tax purposes, for state
worker's compensation, or for other state law purposes.
At issue here is employment security-the context in which, in
Washington, the relationship is more likely than any other to
be viewed as employment.
three motor carriers in this consolidated appeal challenge
assessments of unemployment insurance taxes on amounts they
paid for services provided by "owner-operators, "
meaning individuals who own trucking equipment, lease it to a
carrier, and then use that equipment under contract to haul
freight for that carrier. The carriers did not meet their
burden of demonstrating that the owner-operators'
services qualify for the narrow exemption from unemployment
insurance tax liability for payments to sufficiently
independent enterprises. We find no federal preemption of the
tax's application to the owner-operators' services
and no basis on which the agency's final order was
arbitrary or capricious. We affirm.
Washington's Employment Security Act
IX of the Social Security Act of 1935 for the first time
imposed a federal excise tax on employers on wages paid, for
the purpose of creating an unemployment benefit fund.
Steward Machine Co. v. Davis, 301 U.S. 548, 574, 57
S.Ct. 883, 81 L.Ed. 1279 (1937). The tax began with the year
1936 and was payable for the first time on January 31, 1937.
Id. An employer could claim a 90 percent credit
against the tax for contributions paid to an unemployment
fund under a state law, provided the state law had been
certified to the United States Secretary of the Treasury as
meeting criteria designed in part "to give assurance
that the state unemployment compensation law [is] one in
substance as well as name." Id. at 575. The tax
and largely offsetting credit were described by supporters as
"the states and the nation joining in a cooperative
endeavor to avert a common evil": the problem of
unemployment that the nation had suffered at unprecedented
levels during the years 1929 to 1936. Id. at 587,
Congress considered adoption of the act, most states held
back from adopting state unemployment compensation laws
despite the ravages of the Great Depression. Id. at
588. This was not for "lack of sympathetic interest,
" but "through alarm lest in laying such a toll
upon their industries, they would place themselves in a
position of economic disadvantage as compared with neighbors
or competitors." Id. "The federal Act,
from the nature of its ninety per cent credit device, [was]
obviously an invitation to the states to enter the field of
unemployment insurance." Standard Dredging Corp. v.
Murphy, 319 U.S. 306, 310, 63 S.Ct. 1067, 87 L.Ed. 1416
(1943) (citing Buckstaff Bath House Co. v. McKinley,
308 U.S. 358, 363, 60 S.Ct. 279, 84 L.Ed. 322 (1939)). Most
states accepted the invitation and adopted state unemployment
compensation laws. See Benjamin S. Asia,
Employment Relation: Common-Law Concept and Legislative
Definition, 55 YALE L. J. 76, 83-85, nn.24-34 (1945)
(discussing laws adopted by 31 states and the District of
by which the Social Security Board would certify state laws
were limited to what was "basic and essential" to
provide reasonable protection to the unemployed, with
"[a] wide range of judgment... given to the several
states as to the particular type of statute to be spread upon
their books." Steward, 301 U.S. at 593. But to
assist state legislatures, the Social Security Board
published draft laws in 1936 and 1937 as examples meeting the
federal requirements. Following a recommendation by the
Committee on Legal Affairs of the Interstate Conference of
Unemployment Compensation Agencies that
"employment" for purposes of the state laws should
be broadly defined, using a pioneering 1935 Wisconsin law as
a model, a draft bill published by the Social Security Board
in January 1937 tracked Wisconsin's expansive definition
of employment. Asia, supra at 83, n.21. It broadly
defined employment to mean "service, including service
in interstate commerce, performed for wages or under any
contract of hire, written or oral, express or implied .
..." Draft Bill, 1937 ed., § 2(i)(1) at 7.
To narrowly exempt payments to individuals engaged in an
independent enterprise, it employed a three-part measure of
independence, often referred to as the "ABC"
definition, that included a freedom from control
("A") requirement, an independent business
character or location ("B") requirement, and an
independently established enterprise ("C")
requirement. The "C" requirement was described as
"at once the most radical departure from common-law
criteria and the most relevant of the three tests to the
purposes of the unemployment compensation program."
Asia, supra at 87.
March 1937, the Washington Legislature enacted an
unemployment compensation act substantially based on the
Social Security Board's draft bills, to take effect
immediately. Laws OF 1937, ch. 162 § 24, at 617.
Tracking language in the draft bills, its preamble described
"economic insecurity due to unemployment" as the
"greatest hazard of our economic life."
Id., § 2, at 574, presently codified at RCW
50.01.010. It authorized taxation to create resources from
which to provide benefits for persons "unemployed
through no fault of their own" by applying "the
insurance principle of sharing the risks, and by the
systematic accumulation of funds during periods of employment
to provide benefits for periods of unemployment."
Id. at 575.
19(g)(1) of the 1937 Washington legislation tracked
Wisconsin's and the Social Security Board's
definition of employment. Its "ABC" definition of
exempt independent enterprises, which was virtually identical
to the Social Security Board's 1937 draft bill,
Services performed by an individual for remuneration shall be
deemed to be employment subject to this act unless and until
it is shown to the satisfaction of the director that:
(i) Such individual has been and will continue to be free
from control or direction over the performance of such
service, both under his contract of service and in fact; and
(ii) Such service is either outside the usual course of the
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
(iii) Such individual is customarily engaged in an
independently established trade, occupation, profession or
business, of the same nature as that involved in the contract
Laws OF 1937, ch. 162, § 19(g)(5). As later observed by
our Supreme Court, because the requirements were stated in
the conjunctive, a failure to satisfy any one of them
rendered the exemption unavailable. Penick v. Emp't
Sec. Dep't, 82 Wn.App. 30, 42, 917 P.2d 136(1996).
1945, the Washington legislature repealed all acts relating
to unemployment compensation and enacted a new unemployment
compensation act, presently codified as amended in Title 50
RCW. LAWS OF 1945, ch. 35 §§ 1-192, at 76-151. The
breadth of "employment" covered by the act was made
even clearer by the addition of language describing
"personal service, of whatever nature, " etc., as
"unlimited by the relationship of master and servant as
known to the common law or any other legal
relationship." Id. at § 11.
and the assessments
proceedings below, the appellant-carriers, Swanson Hay, Co.
(Swanson), System-TWT Transport (System), and Hatfield
Enterprizes, Inc. (Hatfield), appealed unemployment taxes
assessed by the Employment Security Department (Department)
on the carriers' payments for services to
owner-operators. They participated in evidentiary or summary
judgment proceedings before an administrative law judge (ALJ)
and filed petitions for review of the ALJ's adverse
determinations by the Department's commissioner
(Commissioner). The Commissioner entered modified findings
and conclusions but affirmed determinations adverse to the
are some differences in the three carriers' operations
and audit history. System was identified for audit through
the work of an "underground economy unit" of the
Department and was originally assessed $264, 057.40 in taxes
for the period beginning in the second quarter of 2007 and
including years 2008 and 2009. 1 AR(ST) at 4,  ¶ 7; 3
AR(ST) at 185-86, 183, 222-23; 2 AR(ST) at 350. During that
time frame, System treated roughly 380 company drivers as
employees, reporting and paying unemployment insurance taxes.
2 AR(ST) at 320, ¶ 5; Br. of Appellant System at 5. But
it contracted with more than 250 owner-operators that it
treated as exempt from operation of the tax. Id. It
engaged in several appeals of its assessment, contesting both
the amount and liability for the tax, but ultimately
stipulated to an assessment value of $58, 300.99 should its
challenge to liability fail. 1 AR(ST) at 5, ¶ 11; 2
AR(ST) at 350-51.
and Hatfield are smaller operators. Swanson was originally
found by the Department to have misclassified 12 contractors
as not in employment and was assessed $36, 070.32 for the
period 2009, 2010, and the first two quarters of 2011. 2
AR(SH) at 235, ¶¶ 4.1, 4.5. On appeal, the
Department agreed to modify the assessment to treat only 11
of the contractors as misclassified. 2 AR(SH) at 235, ¶
4.7. The order and notice of assessment was later remanded to
reduce the assessment to account for the contractor treated
as exempt. Id. at 280.
was found by the Department to have misclassified 15
contractors as not in employment and was assessed taxes and
penalties of $13, 616.53 for eight calendar quarters falling
within the period January 2009 through June 2011. 4 AR(H) at
1140, ¶ 4.1. On appeal, the ALJ ordered that the
assessment be reduced to 30 percent of that amount to account
for the fact that the Department relied on payment amounts
approximately 70 percent of which were for equipment rather
than driving services. Id. at 1144, ¶ 5.8. The
reduction was affirmed by the Commissioner. Id. at
in the carriers and their procedural histories are mostly
inconsequential on appeal. They are discussed where relevant.
GROUNDS RELIED ON FOR JUDICIAL REVIEW AND STANDARDS OF REVIEW
review of agency action is governed by the Administrative
Procedure Act (APA), Title 34 RCW. Tapper v. Emp't
Sec. Dep't, 122 Wn.2d 397, 402, 858 P.2d 494 (1993).
We apply the standards of the APA directly to the record
before the agency and in employment security appeals we
review the decision of the Commissioner, not the underlying
decision of the ALJ or the decision of the superior court.
Id.; Verizon Nw., Inc., v. Emp't Sec. Dep't,
164 Wn.2d 909, 915, 194 P.3d 255 (2008). The
Commissioner's decision is deemed prima facie correct and
the burden of demonstrating otherwise is on the party
attacking it. RCW 50.32.150.
authorizes courts to grant relief from an agency order in an
adjudicative proceeding in nine instances, five of which were
relied on in petitions for judicial review filed by one or
more of the carriers:
■ The order or the statute on which it is based is in
violation of constitutional provisions;
■ The agency engaged in unlawful procedure or
decision-making process, or failed to follow a prescribed
■ The agency erroneously interpreted or applied the
■ The agency did not decide all issues requiring
resolution by the agency; and
■ The order is arbitrary or capricious.
RCW 34.05.570(3)(a), (c), (d), (f), and (i). Clerk's
Papers (CP) at 4, 24, 98, 318.
of law are reviewed de novo. Inland Empire Distrib. Sys.,
Inc. v. Utils. & Transp. Comm 'n, 112 Wn.2d 278,
282, 770 P.2d 624 (1989). An agency's decision is
arbitrary and capricious if it is "willfully
unreasonable, without consideration and in disregard of facts
or circumstances." W. Ports Transp., Inc. v.
Emp't Sec. Dep't, 110 Wn.App. 440, 450, 41 P.3d
One: Federal Preemption
makes a threshold argument that even if the Employment
Security Act (ESA), would otherwise apply to its payments for
the services of owner-operators, the Department's
assessments are preempted by federal law. Hatfield joins in
all of System's arguments. Br. of Appellant Hatfield at
9. The Department responds that Division One of this court
already held that the ESA is not federally preempted in
Western Ports, 110 Wn.App. at 457.
final decisions in the System and Hatfield appeals, the
Commissioner, "mindful of [his] limited authority as a
quasi-judicial body" discussed case law from other
jurisdictions dealing with the federal preemption issue but
ultimately concluded that his was not the appropriate forum
to decide the constitutional issue, except insofar as he
would apply Western Ports. E.g., 4 AR(H) at 1191. He
correctly observed that the Commissioner's Review Office,
being an office within the executive branch, lacks the
authority or jurisdiction to determine whether the laws it
administers are constitutional; only the courts have that
power. Id. (citing RCW 50.12.010 and .020; Bare
v. Gorton, 84 Wn.2d 380, 383, 526 P.2d 379 (1974)). At
the same time, he recognized that on judicial review, the
superior and appellate courts may consider and rule on the
constitutionality of an agency order. Id. (citing
RCW 34.05.570(3)(a)). He found that the record had been
adequately developed at the administrative level to enable
judicial review. Id. at 1192.
assess the relevance of Western Ports, we begin by
identifying the preemption arguments that System advances. It
first relies on an express preemption provision that System
argues was not considered in Western Ports. Its
second argument relies on language from federal leasing
regulations that were considered in Western Ports
and found not to preempt state law, but System argues we
should reject Western Ports' conclusion in light
of later, persuasive authority.
1994, seeking to preempt state trucking regulation, Congress
adopted the Federal Aviation Administration Authorization Act
of 1994 (FAAAA), Pub. L. No. 103-305, § 601, 108 Stat.
1605-06; see also ICC Termination Act of 1995, Pub.
L. No. 104-88, § 14501, 109 Stat. 899. Its express rule
of preemption, which is subject to exceptions and exclusions
not relevant here, provides:
[A] State, political subdivision of a State, or political
authority of 2 or more States may not enact or enforce a law,
regulation, or other provision having the force and effect of
law related to a price, route, or service of any motor
carrier ... or any motor private carrier, broker, or freight
forwarder with respect to the transportation of property.
49 U.S.C. § 14501(c)(1).
adopting the preemptive language "related to a price,
route, or service, " Congress copied language of the
preemptive clause of the Airline Deregulation Act of 1978
(ADA), Pub. L. No 95-504, 92 Stat. 1705, in order to ensure
application of the broad interpretation of that preemption
provision adopted by the United States Supreme Court in
Morales v. Trans World Airlines, Inc., 504 U.S. 374,
112 S.Ct. 2031, 119 L.Ed.2d 157 (1992). The Supreme Court
held in Morales that the "related to"
preemption provided by the ADA preempted all "[s]tate
enforcement actions having a connection with, or reference to
airline 'rates, routes, or services.'"
Id. at 384 (alteration in original) (quoting 49
U.S.C. App. § 1305(a)(1)). It rejected states'
arguments that their laws of general applicability were
immune from preemption. Pointing to its earlier holding in an
ERISA case (ERISA also employs the same
preemptive language), the Court held that "' [a]
state law may "relate to" a benefit plan, and
thereby be pre-empted, even if the law is not specifically
designed to affect such plans, or the effect is only
indirect.'" Id. at 386 (alteration in
original) (quoting Ingersoil-Rand Co. v. McClendon,
498 U.S. 133, 139, HI S.Ct. 478, 112 L.Ed.2d 474 (1990)). In
a critical limitation on its holding, the Court recognized
that'" [s]ome state actions may affect [airline
fares] in too tenuous, remote, or peripheral a manner' to
have pre-emptive effect." Id. at 390
(alterations in original) (quoting Shaw v. Delta Air
Lines, Inc., 463 U.S. 85, 100 n.21, 103 S.Ct. 2890, 77
L.Ed.2d 490 (1983)).
carriers in this case argue that imposing unemployment
insurance taxation on their use of owner-operators has a
significant impact rather than a tenuous, remote, or
peripheral impact on their prices, routes, and services. They
contend that it "effective[ly] eliminat[es]... the
owner/operator business model" that has been long relied
upon for "a flexible supply of equipment in an industry
with erratic demand." Br. of Appellant System at 1-2.
Western Ports did not address express
System's first challenge in mind, we turn to Western
Ports. It arose not from a Department audit, but from an
application for unemployment benefits by Rick Marshall, an
owner-operator whose independent contractor agreement with
Western Ports, a trucking firm, had been terminated by the
firm. The Department denied Mr. Marshall's application
for benefits based on Western Port's contention that he
was an independent contractor exempt from coverage under RCW
50.04.140. The principal focus of this court's decision
on appeal was whether Western Ports proved the first,
"freedom from control" requirement for the
exemption. W. Ports, 110 Wn.App. at 452-59.
Western Ports also argued that federal transportation law
preempted state employment security law because it both
permitted and heavily regulated owner-operator lease
arrangements like Mr. Marshall's. Id. at 454.
This court analyzed that argument as an issue of implied
"field" preemption-one of three ways federal law
can be found to preempt state law, the other two being
express preemption or where state law would conflict with
federal law. Estate of Becker v. Avco Corp., 187
Wn.2d 615, 622, 387 P.3d 1066 (2017). Field preemption can be
found from federal regulation so pervasive it supports the
inference that Congress left no room for state
supplementation, where the federal interest is so dominant it
can be assumed to be exclusive, or where the federal
objective and regulation reveals the same purpose as the
state purpose. Pac. Gas & Elec. Co. v. State Energy
Res. Conservation & Dev. Comm 'n, 461 U.S. 190,
204, 103 S.Ct. 1713, 75 L.Ed.2d 752 (1983).
analyzing the field preemption argument, Western
Ports considered 49 U.S.C. § 14102, which
authorizes the Secretary of the federal Department of
Transportation to regulate the leasing of motor vehicles used
in interstate commerce, and the detailed federal leasing
regulations adopted thereunder. 110 Wn.App. at 454-57, 455
n.2. It "decline[d] to infer" from them that
Congress intended to supplant state law, given that
"[n]owhere ... has Congress even mentioned state
employment law" and federal transportation law and state
unemployment insurance law "have very different policy
objectives." Id. at 457. Only once in
Western Ports did the court mention the FAAAA's
express preemption provision, and that was to point out that
when Congress wanted to preempt state law, it did so
"expressly, clearly, and understandably."
Ports contains no analysis of whether imposing state
unemployment insurance taxes on Western Port's payment
for owner-operator services related to its prices, routes, or
services. While the decision is relevant and persuasive as to
other issues presented in this appeal, it simply did not
address the first, express preemption issue that is raised by
The carriers' express preemption argument proceeds on
a theory that Title 50's broad
definition of "employment" will be applied in other
contexts, a legal premise we reject
carriers largely rely on a series of state and federal court
decisions that have found a portion of Massachusetts's
independent contractor statute to be preempted by the FAAAA
as applied to motor carriers' payment for owner-operator
services. The carriers' briefs even echo language from
one of those decisions, Sanchez v. Lasership, Inc.,
937 F.Supp.2d 730, 736 (E.D. Va. 2013), which characterized
the Massachusetts law as "an unprecedented change in
independent contractor law that dictates an end to
independent contractor carriers in Massachusetts and imposes
an anticompetitive, government-driven mandate that motor
carriers change their business models to avoid liability
under the statute."
Massachusetts law-chapter 149, section 148B of the
Massachusetts General Laws-is different from Washington law
in important respects. It mandates "employee"
classification for purposes of multiple state laws, more
significantly affecting motor carriers. The mandated
classification applies at a minimum to chapters 149 and 151
of the Massachusetts General Laws, which deal with
workmen's compensation and minimum fair wages.
Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d
429, 433 (1st Cir. 2016). Under those laws, an
"employer" must provide benefits to employees that
include days off, parental leave, work-break benefits, a
minimum wage, and reimbursement of all out-of-pocket expenses
incurred for the benefit of the employer regardless of what
the parties' agreement would otherwise provide.
contrast, chapter 50.04 RCW defines employment and identifies
its exemptions solely for unemployment insurance tax
purposes. As observed in Western Ports, "an
individual may be both an independent contractor for some
purposes, and engaged in 'employment' for purposes of
Washington's exceedingly broad definition of covered
employment." 110 Wn.App. at 458.
asks us to reject that conclusion of Western Ports
and the Department's position that Title 50's
definitions and exemptions apply only to unemployment
insurance taxes, calling them "unrealistic." Br. of
Appellant System at 25. It cites to evidence that the
Department participated in an underground economy task force
"whose thrust was to subject carriers to state
regulation for a variety of other agency purposes, " and
to an Obama administration employee misclassification
initiative. Br. of Appellant System at 25 n.35. Our own
reading supports the carriers' contention that there is
advocacy from some quarters for extending the narrow
"ABC" criteria for independent contractor status in
the unemployment compensation context to other worker
protections. See, e.g., Jennifer Pinsof, A New
Take on an Old Problem: Employee Misclassification in the
Modern Gig-Economy, 22 MICH. TELECOMM. & TECH. L.
REV. 341 (2016); Anna Deknatel & Lauren Hoff-Downing,
ABC on the Books and in the Courts: An Analysis of Recent
Independent Contractor and Misclassification Statutes,
18 U. Pa. J.L. & Soc. Change 53 (2015). But there is
opposition advocacy as well, as evidenced by the
participation in this appeal of American Trucking
Associations, Inc. as amicus curiae in support of System.
scope of Title 50's broad definition of
"employment" presents an issue of law for this
court, not an issue for political speculation. Under the law
as it presently stands, the definition and exemptions apply
only to the imposition of unemployment insurance
taxes. We reject as legally unsupported the
argument that assessment of the tax on carriers' payments
for owner-operator services will dictate the end to an
historic business model and force carriers to begin
purchasing all of their trucking equipment.
3. Federal law does not expressly preempt the
federal law preempts state law fundamentally is a question of
congressional intent. English v. Gen. Elec. Co., 496
U.S. 72, 78-79, 110 S.Ct. 2270, 110 L.Ed.2d 65 (1990). When
"federal law is said to bar state action in fields of
traditional state regulation ... [courts] have worked on the
'assumption that the historic police powers of the States
were not to be superseded by the Federal Act unless that was
the clear and manifest purpose of Congress.'" NY
State Conference of Blue Cross & Blue Shield Plans v.
Travelers Ins. Co., 514 U.S. 645, 655, 115 S.Ct. 1671,
131 L.Ed.2d 695 (1995) (quoting Rice v. Santa Fe Elevator
Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 91 L.Ed.
general applicability are usually not preempted merely
because they increase a carrier's overall costs.
Dilts v. Penske Logistics, LLC, 769 F.3d 637, 646
(9th Cir. 2014). "[G]enerally applicable background
regulations that are several steps removed from prices,
routes, or services, such as prevailing wage laws or safety
regulations, are not preempted, even if employers must factor
those provisions into their decisions about the prices that
they set, the routes that they use, or the services that they
provide." Id. Such laws are not preempted
"even if they raise the overall cost of doing business
or require a carrier to re-direct or reroute some
equipment." Id. (citing Californians for
Safe & Competitive Dump Truck Transp. v. Mendonca,
152 F.3d 1184, 1189 (9th Cir. 1998)). Laws of general
applicability may be preempted where they have such
"acute, albeit indirect, economic effects" that
states essentially dictate the prices, routes, or services
that the federal law intended the market to control. See
Travelers Ins., 514 U.S. at 668.
relevant evidence presented and found by the ALJ is that the
ongoing cost of doing business to which the Hatfield will be
subjected by the application of Title 50 is a quarterly tax
rate that has so far not exceeded 1.14 percent. 1 AR(H) at
79. The record does not reveal the agreed tax rate that led
to System's stipulated liability of $58, 300.99 for
owner-operators over an almost three-year period. But the
highest unemployment tax rate presently imposed in ...