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Delivery Express, Inc. v. Washington State Department of Labor and Industries

Court of Appeals of Washington, Division 1

June 10, 2019

DELIVERY EXPRESS, INC., a Washington corporation, Appellant,
v.
WASHINGTON STATE DEPARTMENT OF LABOR AND INDUSTRIES, Respondent.

          Andrus, J.

         Delivery Express, Inc. (DEI) challenges the Board of Industrial Insurance Appeals' (Board) decision that DEI is obligated to pay Industrial Insurance Act[1] (IIA) premiums for some of its drivers. Because substantial evidence supports the Board's finding that the essence of the drivers' independent contracts with DEI was their personal labor, DEI failed to establish the drivers were exempt under the leased-truck exemption of RCW 51.08.180, and the drivers' status as sole proprietors does not exclude them from coverage under RCW 51.12.020, we affirm.

         FACTS

         DEI provides same-day, next-day, and next-week Seattle delivery service, including courier, freight, logistics and freight forwarding. It advertises 24-hour on-call courier services anywhere in Western Washington. When initially founded in November 1996, DEI obtained a Washington Utilities & Transportation Commission (WUTC) intrastate common carrier permit, purchased vehicles, and hired drivers for whom it paid workers' compensation premiums. In 2000, its founder, David Hamilton, decided to expand DEI's business by contracting with drivers who provided their own vehicles. DEI started using an independent contractor agreement, under which it "leased" the vehicle and driver and, in return, paid the driver a commission for each completed delivery. DEI contracted with drivers of 24-foot box trucks, passenger cars, and "everything in between."

         Under the terms of the agreements, the drivers were deemed independent contractors providing transportation services to DEI customers. Each driver was required to furnish and operate a vehicle, pay the cost of operating and maintaining the vehicle, and refrain from competing with DEI for any customer whose freight the driver transported under a bill of lading issued by DEI. The agreements identified the vehicle the driver intended to use but did not mandate any size, make, or model.

         DEI uses a dispatcher "app" to notify drivers of available work. Some drivers have specific routes they drive on a daily basis. Most, however, are "on demand," meaning once they download DEI's app onto their handheld device, they can log in and wait for a delivery assignment. The on-demand drivers can accept or reject any specific delivery, although there is scant evidence they ever rejected a job. The cargo delivered ranged from small items-such as escrow documents and other paperwork, blood samples or medical specimens, T-shirts, and computer hardware-to larger items-such as lumber, raw materials, and non-inventory stock for grocery and department stores.

         In February 2010, the Department of Labor & Industries notified DEI it intended to conduct an audit for the calendar year 2009 to determine DEI's compliance with workers' compensation laws. By October of that year, the Department notified DEI that the firm's independent contractor drivers were covered workers under the HA. The Department concluded the drivers did not meet any exemption under either RCW 51.08.180[2] or 51.08.195.[3] It notified DEI that effective July 1, 2010, [4] DEI needed to report all driver hours under a risk classification for "parcel delivery."

         Hamilton spoke with the Department auditor, Gina Bautista, by phone and disagreed with her conclusions. One finding in particular seemed to stick out to Hamilton-namely, that the drivers rendered the same services as DEI did. Rather than appeal the decision, DEI decided to change its business model and become a "freight broker," rather than a common carrier. On April 20, 2011, DEI ceased operating as a common carrier when it obtained a freight broker license from the WUTC and the United States Department of Transportation.

         When DEI changed its business model, it asked its drivers to obtain a motor carrier license from the WUTC and required them to execute new agreements, called broker-carrier agreements. This agreement made no mention of "leasing" any vehicles. Instead, it identified DEI as the "broker" and the independent contractor as the "motor carrier." Under the broker-carrier agreement, the drivers agreed to "provide motor vehicle equipment with drivers to provide small package/parcel pick up and delivery service to [DEI's] shippers and consignees." As under the former contractor agreement, the drivers were paid a commission of each invoice DEI issued to its customers. The covenant not to compete with DEI also remained the same.

         Hamilton believed that by converting DEI's business model from common carrier to freight broker, he was bringing the company into compliance with the Department's audit because DEI and the drivers would no longer be in the same line of business. DEI did not pay any IIA premiums for the drivers after it was notified of the 2009 audit results.

         In February 2011, the Department notified DEI it would conduct a second audit for the calendar year 2010. The Department later modified the audit period to include only the last two quarters of 2010 and all of 2011. Once again, the Department determined the drivers were covered workers.

         On September 19, 2012, the Department notified DEI that, as a result of the audit, it was assessing $841, 639 in workers' compensation premiums, penalties, and interest. The Department imposed a penalty of $127, 500 for failing to maintain adequate records under RCW 51.48.030 and a penalty of $50, 000 for "knowingly and intentionally evad[ing] paying workmen's compensation insurance."

         DEI sought reconsideration of the Department's order of assessment. After receiving and reviewing additional documents from DEI, the Department denied reconsideration on January 17, 2014. DEI then appealed the Department's assessment order to the Board. The Board granted the appeal and referred the matter to an Industrial Appeals Judge (IAJ) for an evidentiary hearing.

         The IAJ conducted the hearing beginning in the autumn of 2014 and concluding in the summer of 2015, and, in June 2016, issued a proposed decision and order affirming in part and reversing in part the Department's assessment order. The IAJ found that the majority of drivers were not exempt under RCW 51.08.180 or 51.08.195 but found three drivers qualified for an exemption. It reversed the misrepresentation penalty and affirmed the penalty for failing to maintain adequate records. Because the Department's premium calculation included three drivers whom the IAJ determined should be excluded, the IAJ remanded the matter to the Department for a recalculation of the premiums DEI owed.

         In September 2016, both parties asked the Board to review the IAJ's proposed decision and order. On November 3, 2016, the Board adopted the IAJ's decision and order as its own.

         DEI filed a petition for judicial review in King County Superior Court, which affirmed in substantial part the Board's decision. DEI appeals, arguing that the drivers are exempt from IIA coverage for all or a portion of the audit period under two separate provisions of RCW 51.08.180, or alternatively, as sole proprietors under RCW51.12.020.[5]

         ANALYSIS

         The Administrative Procedure Act, chapter 34.05 RCW, governs this court's review of the Board's MA premium assessments.[6] RCW 34.05.570(3) provides that this court may grant relief from an agency order if the agency has erroneously interpreted or applied the law, or the order is not supported by substantial evidence. We thus review the Board's factual findings for substantial evidence[7]and view the evidence in the light most favorable to the Department, the party who prevailed before the Board.[8] The Board's conclusions of law are reviewed de novo, giving substantial weight to the agency's interpretation.[9]

         A. RCW 51.08.180

         DEI contends the Board erred in finding that the drivers are "workers" under two separate provisions of RCW 51.08.180. This statute extends MA coverage to:

every person in this state who is engaged in the employment of or who is working under an independent contract, the essence of which is his or her personal labor for an employer under this title, . . . PROVIDED, That a person is not a worker for the purpose of this title, with respect to his or her activities attendant to operating a truck which he or she owns, and which is leased to a common or contract carrier.

         The Board found that personal labor for delivering items was the essence of the contract between DEI and most of its drivers, and that these drivers were "workers" covered by the IIA. The Board also found the drivers did not lease their vehicles to DEI, making the leased-truck exemption inapplicable.

         DEI challenges the factual basis for the Board's "essence of the contract" finding and the Board's failure to define the word "truck" under the leased-truck exemption.

         1. "Essence of the Contract"-the White Test

         To determine whether the essence of a contract is personal labor, this court looks "to the contract, the work to be done, the situation of the parties, and other attendant circumstances."[10] The court focuses on the realities of the situation.[11]Whether a particular individual is a "worker" under this provision of RCW 51.08.180 is a mixed question of law and fact.[12]

         In White v. Department of Labor & Industries.[13] the Supreme Court held that personal labor is not the essence of a contract with an independent contractor (1) when the independent contractor owns or supplies machinery or equipment (as distinguished from the usual hand tools) to perform the contract; (2) when the independent contractor cannot perform the contract without assistance; and (3) when the independent contractor either chooses to or must employ others to do all or part of the work he or she has contracted to perform.[14]

         This court held in Henry Industries. Inc. v. Department of Labor & Industries, [15] a factually analogous case, that a courier service company's independent contracting drivers were workers under RCW 51.08.180 because vehicles they used to deliver packages were not specialized equipment needed to perform the contracted work.[16] As in Henry, there is substantial evidence supporting the Board's finding that the drivers' personal labor is the essence of the agreements between DEI and the drivers. The primary object is not the machinery the drivers own; it is the service of driving packages from point A to point B.

         First, paragraph 1 of the contractor agreement and paragraph 4 of the broker-carrier agreement identify the purpose of the agreements as providing delivery or transportation services. The drivers testified that their full time "job" was delivering packages for DEI, that DEI required them to log in on a regular basis, that they logged in early in the morning and remained available the entire day, that they drove eight hours a day, Monday through Friday, for DEI, and that they never hired anyone or asked anyone to help with the deliveries, or asked anyone to log in on their behalf when they were not available. This evidence supports a finding that the work DEI needed was the labor of driving from one location to another to pick up and drop off packages.

         Second, neither the contractor agreements nor the broker-carrier agreements specified that the drivers had to provide any particular type of vehicle. The majority of drivers used small passenger cars, such as Toyota Yaris, Corolla, Scion and Prius, Subaru Legacy, Honda Fit, Ford Focus, Chevrolet Cavalier, Kia Rio, Nissan Maxima, Hyundai Elantra, and Nissan Versa. As the court in Henry noted, these types of vehicles are not the "'necessary machinery or equipment' which, under White, would take this agreement outside the operation of the IIA."[17]

         Third, the contractor agreements imposed appearance and conduct requirements on the drivers. For example, the agreement required the drivers to "conduct themselves courteously (both on the road and while with customers) and in a professional manner." They were required to be "neatly attired" and to wear "clean and wrinkle free" uniforms. Hair had to be "clean, neat and conservatively styled," and any mustaches or beards had to be "neatly trimmed." These appearance and behavior provisions are evidence that DEI placed more emphasis on how the drivers interacted with its customers than it did on the equipment the drivers used.

         Finally, both the contractor agreements and the broker-carrier agreements contain non-compete clauses that limit the drivers' ability to solicit business from DEI customers, both during the term of the agreement and for 6 to 12 months thereafter. Such a clause is another strong indication that DEI entered into a contract with the driver for his or her personal skills at delivering packages in an efficient manner, rather than simply leasing a vehicle to effectuate deliveries.

         This evidence provides substantial support for the Board's finding that the drivers' personal labor was the essence of their contracts with DEI.

         2. Leased-T ...


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