Henry Industries, Inc. v. Department Of Labor & Industries

IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
HENRY INDUSTRIES, INC., No. 73234-0-1
Appellant, DIVISION ONE
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DEPARTMENT OF LABOR and PUBLISHED
INDUSTRIES OF THE STATE OF
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WASHINGTON, FILED: August 29. 2016 ro
Respondent.
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Cox, J. — At issue in this appeal is whether 33 drivers who contracted
with Henry Industries Inc. (HII) to perform courier services for third parties are
"workers" under the Industrial Insurance Act (IIA). The Department of Labor and
Industries decided that these drivers are "workers" under the act. The
Department then assessed penalties against HII for its failure to pay the
premiums due for them for 2010, the year audited. The Board of Industrial
Insurance Appeals (BIIA) agreed. We hold that substantial evidence supports
the BIIA's findings of fact and that these findings support the BIIA's conclusions
of law. We affirm.
HII provides warehouse, logistic, and courier services to PharMerica, a
pharmacy selling pharmaceutical products and packages to long-term healthcare
No. 73234-0-1/2
facilities in Washington. HII contracts with independent contractors who actually
drive on various routes to deliver pharmaceutical products for PharMerica.
HII uses "route drivers" and "stat drivers" to fulfill PharMerica's delivery
needs. Route drivers make repeated deliveries, generally at the same time six
days per week, and are paid a flat fee. Stat drivers make deliveries on an on call
basis.
HII requires all drivers to sign a standard form cartage agreement that
primarily sets forth the terms and conditions of the parties' relationship. For
example, the agreement states that the driver is an independent contractor. It
also requires the driver to provide a vehicle for the performance of the required
services. It requires the driver to adhere to a "Manner of Performance of
Service" that specifies detailed requirements. Among them is a requirement to
"successfully complete all background screening requirements as set forth in this
Agreement."1 The driver must also "successfully complete all alcohol and drug
screening requirements."2 The driver also agrees to deliver route schedules to
HII and its customers and further agrees to modify the schedules to meet the
customers' requirements. There are additional requirements that we discuss
later in this opinion.
Route drivers arrive at the pharmacy at designated times, ensure that
serial numbers match the tags on the packages, load their vehicles, and drive
their routes to deliver the packages. Stat drivers are called by HII dispatch when
1Trial Exhibit 20 § 3.
2 ]d § 3c.
No. 73234-0-1/3
an order is ready for delivery. The driver picks up the item, confirms the pickup
with dispatch, makes the delivery, and then confirms the delivery with dispatch.
The Department of Labor and Industries audited HII for calendar year
2010, determining that HII did not report 33 drivers as "workers" covered by the
IIA. In October 2011, the Department assessed penalties against HII for its
failure to pay workers' compensation premiums for these 33 drivers for calendar
year 2010, the year audited. In January 2013, the Department modified its
assessment of penalties.
HII appealed the Department's modified assessments order to the BIIA.
An administrative law judge conducted a hearing and issued a proposed decision
and order in HII's favor. The Department petitioned for review. The BIIA
disagreed with its administrative law judge and issued its own decision and order,
affirming the Department's modified assessment order.
HII timely sought judicial review in the superior court, which affirmed the
BIIA's decision and order.
HII appeals from the superior court's judgment.
STANDARD OF REVIEW
The Administrative Procedure Act governs judicial review of BIIA decisions
on industrial insurance premium assessments.3 On appeal from the superior
court, this court "sit[s] in the same position as the superior court and review[s] the
agency's order based on the administrative record rather than the superior
3 RCW 51.48.131: B & R Sales. Inc. v. Dep't of Labor & Indus., 186 Wn.
App. 367, 374, 344 P.3d 741 (2015).
No. 73234-0-1/4
court's decision."4 "An employer challenging the validity of the agency action
assessing industrial insurance premiums bears the burden of showing that the
premiums were assessed incorrectly."5
We review the BIIA's findings of fact under the substantial evidence
standard, which is evidence sufficient to persuade a fair-minded, rational person
of the finding's truth.6 We also "view the evidence in the light most favorable to
the party who prevailed in the highest forum that exercised fact-finding
authority."7
The BIIA's conclusions of law must also flow from its findings.8 We review
de novo the BIIA's legal conclusions, but give "'substantial weight to the agency's
interpretation when the subject area falls within the agency's area of expertise.'"9
Washington courts have expressed differing views on how to review
whether an individual is a "worker" under RCW 51.08.180. In deciding the
question of the proper standard of review to apply, we are guided by the supreme
court's decision in Tapper v. Employment Security Department.10
4 B & R Sales. Inc., 186 Wash. App. at 374.
5 id at 375.
6]d
7 Brown v. Dep't of Soc. & Health Servs.. 190 Wash. App. 572, 593, 360
P.3d 875 (2015).
8 Gorre v. City of Tacoma. 184 Wash. 2d 30, 36, 357 P.3d 625 (2015).
9 B & R Sales, Inc.. 186 Wash. App. at 375 (quoting Dep't of Labor & Indus,
v. Mitchell Bros. Truck Line, Inc., 113 Wash. App. 700, 704, 54 P.3d 711 (2002)).
10 122 Wash. 2d 397, 858 P.2d 494 (1993).
4
No. 73234-0-1/5
That case involved judicial review of an administrative agency decision.
Review in such cases is governed by the Administrative Procedure Act (APA),
which specifies the standards of review of both factual findings and legal
conclusions of such an agency.
The supreme court had to review whether the agency's Commissioner had
correctly decided that a worker was discharged due to "misconduct connected
with his or her work."11 That is the statutory standard for determining whether a
claimant is disqualified from receiving unemployment benefits.
The supreme court concluded that whether a particular employee met this
statutory standard is a mixed question of law and fact.12 That is so, according to
the court, because it requires an application of legal precepts—the definition of
"misconduct connected with his or her work"—to factual circumstances—the
details of the employee's discharge.13
According to the court, reviewing such a mixed question requires, first,
establishing the relevant facts.14 Second, the court determines the relevant
law.15 Third, the court applies the law to the established relevant facts.16
11 RCW 50.20.060.
12 Tapper, 122 Wash. 2d at 402-03.
13 Id at 402.
14 \± at 403.
15 jd
16 Id.
No. 73234-0-1/6
Similar reasoning applies here to our review of the BIIA's decision and
order. As in Tapper, we review this administrative agency's decision and order
on the basis of the review standards specified in the APA. Specifically, we
review the BIIA's factual findings for substantial evidence and its legal
conclusions de novo.
Here, the question is whether the 33 drivers meet the statutory standard of
"worker" under RCW 51.08.180. If so, that triggers HII's obligation to pay
workers' compensation premiums for these drivers.
Specifically, this statutory definition requires that each driver is "working
under an independent contract, the essence of which is his or her personal
labor."17 We conclude that whether a particular driver meets these requirements
is a mixed question of law and fact. As in Tapper, this requires the application of
legal precepts—the statutory definition of "worker"—to the factual circumstances
of a case. These factual circumstances include the factual details underlying
whether the drivers are "working under an independent contract."18 Likewise,
these factual circumstances include the factual details underlying whether "the
essence [of the work] is his or her personal labor."19
Accordingly, we first determine whether substantial evidence supports the
BIIA's findings on these two related factual inquiries. We then apply the relevant
law to the findings that are supported by substantial evidence.
17 RCW 51.08.180.
18 Id.
19
Id.
No. 73234-0-1/7
In their briefing to this court, the parties agree that a mixed question of law
and fact is before us. But they differ on what falls into each category. In doing
so, they either rely on or challenge three court of appeals decisions, each of
which originates from a different division of this court.20
We disagree with these court of appeals decisions to the extent they differ
from Tapper. First, none mentions the analysis in Tapper, which we conclude
controls for the reasons we just discussed. Second, each of the court of appeals
decisions focuses on parts of the statutory definition of "worker." In our view, that
focus is too narrow. That is because such focus does not include the full scope
of the definition of "worker." For these reasons, we apply the Tapper analysis to
our review in this case.
"WORKER"
HII primarily argues that the drivers' personal labor was not the essence of
their contracts with HII. Rather, it claims that the drivers are not "workers" under
the IIA because "the use of vehicles is critical to completing the delivery services"
they provide. This argument is unpersuasive.
20 B & R Sales. Inc., 186 Wash. App. at 376 ("The nature of the contracts,
what services the independent contractors provided, and other related issues are
questions of fact that we review for substantial evidence. But whether based on
these facts the contractors are 'workers' involves the interpretation of RCW
51.08.180. Statutory interpretation is a question of law that we review de novo.");
Silliman v. Argus Servs., Inc.. 105 Wash. App. 232, 236, 19 P.3d 428 (2001) ("What
services [the contracting firm] provided is a question of fact; whether these
services constitute "personal labor" within the meaning of the statute is a
question of law."); Dana's Housekeeping. Inc. v. Dep't of Labor & Indus.. 76 Wn.
App. 600, 608, 886 P.2d 1147 (1995) ("Whether the essence of the work is
personal labor is a factual determination.").
No. 73234-0-1/8
RCW 51.08.180 defines "worker" as follows:
"Worker" means every person in this state who is engaged in the
employment of an employer under this title, whether by way of
manual labor or otherwise in the course of his or her employment;
also every person in this state . .. who is working under an
independent contract, the essence of which is his or her
personal labor... J21 J
Our first inquiry is whether substantial evidence supports the BIIA's
findings of fact. We focus on Finding of Fact 5, to which HII assigns error:
During the first, second, third and fourth quarters of 2010 the
individuals were working under independent contracts, the essence
of which was their personal labor.[22l
In this case, the parties agree that all 33 drivers work under independent
contracts. So, we need not further review the underlying facts of this
relationship. Substantial evidence supports this aspect of the BIIA's decision and
order.
Whether there is substantial evidence to support the remainder of the
definition of "worker" is the issue.
In its decision and order, the BIIA identified evidence in the record about
the individual drivers' labor. For example, the cartage agreement that each
driver signed lists specific requirements that drivers must comply with, but it is
not specific with respect to the vehicles that the drivers must supply to perform
the courier services.
The drivers must also be fluent in English.
21 RCW 51.08.180 (emphasis added).
22 Administrative Record at 8.
8
No. 73234-0-1/9
They must also complete drug, alcohol, and background screening. The
drug screening is random. The initial background screening is followed by
periodic screening thereafter. A negative report in any background check is a
ground for immediate termination.
The drivers are also required to promote HII's best interests.
We conclude from this evidence that there is substantial evidence to
support the BIIA's Finding of Fact 5.
We next review de novo the BIIA's application of the law to its supported
finding.
RCW 51.08.180 provides in relevant part:
"Worker" means every person in this state who is engaged in the
employment of an employer under this title, whether by way of
manual labor or otherwise in the course of his or her employment;
also every person in this state . . . who is working under an
independent contract, the essence of which is his or her
personal labor.. . .[23]
The plain words of this statute define "worker" in two ways. The first is the
typical way—the common employer and employee relationship. The second
extends "worker" status to certain independent contractors: those "working under
an independent contract, the essence of which is his or her personal labor."24
The supreme court recently reiterated long-standing law on how to
determine the "essence" of a contract. In Department of Labor & Industries v.
Lyons Enterprises, Inc., the court held that:
23 RCW 51.08.180 (emphasis added).
24 ]d (emphasis added).
No. 73234-0-1/10
To establish whether the essence of a contract is personal labor,
"we look to the contract, the work to be done, the situation of the
parties, and other attendant circumstances." "Essence," as we
have previously defined it, refers to "the 'gist or substance, the vital
sine qua non, the very heart and soul'" of the contract between the
independent contractor and the employer. When considering
whether a contract's essence is personal labor, "[w]e focus on the
realities of the situation rather than the technical requirements of
the test."!25)
"A core purpose of the IIA is to allocate the cost of workplace injuries" to
the industry that generates them, so employers make workplaces safer.26
Accordingly, the IIA is "'liberally construed'... to further the purpose of providing
compensation to all persons injured in their employment, with all doubts resolved
in favor of the worker."27
"The [IIA] requires employers to report and pay workers' compensation
premiums for all covered workers."28 "No employer or worker shall exempt
himself or herself from the burden or waive the benefits of this title by any
contract... and any such contract. .. shall be pro tanto void."29
With these principles in mind, we now consider the seminal supreme court
case considering whether the essence of a particular independent contract is the
25 Wn.2d. , 374 P.3d 1097, 1104 (2016) (emphasis omitted)
(alteration in original) (citations omitted) (first quoting Lloyd's of Yakima Floor Ctr.
v. Dep't of Labor & Indus.. 33 Wash. App. 745, 749, 662 P.2d 391 (1982); then
quoting ]d at 751; and then quoting B & R Sales, Inc., 186 Wash. App. at 377).
26 Harry v. Buse Timber & Sales. Inc.. 166 Wn.2d 1,19, 201 P.3d 1011
(2009).
27 B & R Sales. Inc., 186 Wash. App. at 379 (quoting RCW 51.12.010).
28 Lyons Enters.. Inc.. 374 P.3d at 1099.
29 RCW 51.04.060.
10
No. 73234-0-1/11
independent contractor's personal labor. That case is White v. Department of
Labor and Industries.30
In addressing that question, the court considered four of its prior cases,
each of which had different factual backgrounds. It then turned to the facts of the
case before it.
There, a sawmill owner either owned or purchased timber on a tract of
land.31 Initially, the sawmill owner hired an individual to process the timber.32
Lucinda May White, who later became a claimant of benefits under the IIA,
and her husband owned a "donkey engine."33 They orally agreed with the
sawmill owner to move their donkey engine to the tract of land where an
individual had previously handled the timber processing.34 The Whites agreed to
begin processing the logs.35
30 48 Wash. 2d 470, 294 P.2d 650 (1956).
31 ]d at 475.
32 jd
33 A "donkey engine" is composed of a single-cylinder steam engine that is
connected to a horizontal capstan. They are mounted together on several log
skids. By wrapping cables around the capstan, the engine can pull huge loads
that would otherwise require animal power. David Wilma, John Dolbeer Invents
the Donkey Engine and Revolutionizes Logging in August 1881 (March 1, 2003),
HistoryLink.org,
http://www.historvlink.org/index.cfm?kevword=donkey+engine&DisplavPage=res
ults.cfm&Submit=Go [https://perma.cc/8TQJ-CFL5].
34 White, 48 Wash. 2d at 475.
35 Id.
11
No. 73234-0-1/12
According to the supreme court, all parties conceded that the Whites were
independent contractors for the job.36 Mrs. White's duties consisted of operating
the donkey engine.37 Her husband performed other duties.38
The court stated that the parties "recognized that, without the donkey
engine, the Whites could not have performed the contract." Significantly, Mrs.
White testified that they were approached for the work because '"[they] had
equipment.'"39
Mrs. White was seriously injured while operating the donkey engine during
performance of the contract.40 The Department of Labor and Industries rejected
her claim for benefits because she was not covered under the IIA.41
On appeal, the superior court reversed.42 It concluded that Mrs. White's
personal labor was the essence of the contract between the Whites and the
sawmill owner.43
36
id
37
id
38
Id
39
Id
40
Id at 476.
41
Id
42
Id
43
Id.
12
No. 73234-0-1/13
The supreme court reversed. It identified three independent reasons for
doing so.44 The court held that the Whites' personal labor was not the essence
of the contract:
(1) because the Whites had of necessity to furnish expensive
machinery and equipment, i.e., the donkey engine (as distinguished
from the usual hand tools), to be able to perform the contract; (2)
because after the modification of the contract the contracting
parties knew that the independent contractors, the Whites, could
not personally perform all the labor required by the contract; and (3)
because after the modification of the contract the Whites did
employ [another person] to do part of the work they had contracted
to perform.145'
Here, the parties dispute whether the first and third alternative tests of
White were met. The second test is not at issue here. Specifically, the BIIA
stated in its decision and order that there is no evidence to show that the
services required the work of helpers, as the second of the above tests requires.
Special Equipment to Perform
The first test under White, as we read that decision, is concerned with
whether special equipment is required to perform the contract. We say this
because the supreme court contrasted the special equipment—the donkey
engine in that case—with "usual hand tools."46 In doing so, the court
acknowledged that ordinary equipment may be used in performing an agreement
without making that simple fact determinative in deciding the essence of the
agreement. We also note that in its recent decision in Lyons Enterprises, Inc.,
44 Id
45 id at 476-77.
46 Id. at 477.
13
No. 73234-0-1/14
the court characterized the first of the White tests to require the use of
"specialized tools" in the performance of the contract in orderfor personal labor
to not be the essence of the contract.47
In White, the specialized equipment was the donkey engine. That
equipment was the essence of that contract. It allowed the Whites to process the
logs more efficiently than the individual that processed the logs before they were
hired.
Significantly, the supreme court stated that Mrs. White testified that she
and her husband were approached for the work because '"[they] had
equipment.'"48 Thus, the fact that she operated the donkey engine did not mean
that her personal laborwas the essence of that contract. Accordingly, she was
not a "worker" under the IIA.
Here, there simply is no persuasive argument that the vehicles the drivers
are required to provide constitute special equipment, as opposed to ordinary
equipment, to perform the courier services under the agreements. Without
question, vehicles are required to perform the services. But there simply is
nothing in this record to suggest that the vehicles required to do this job are
analytically equivalent to the donkey engine in White.
The agreements that the drivers are required to sign do specify that the
vehicles must have functioning locks. This appears to be a requirement because
the drivers transport controlled substances. But we do not see anything special
47 Lyons Enters.. Inc.. 374 P.3d at 1106.
48 White. 48 Wash. 2d at 475.
14
No. 73234-0-1/15
about the requirement that the vehicles have locks. Most vehicles have locks.
And HII fails to point to anything else about vehicle requirements that makes
them specialized equipment.
We equate the vehicles in this case with the "usual hand tools" to which
the court referred in White.49 Thus, the mere fact that vehicles are necessary to
perform the services in this case does not make the vehicles the essence of
these agreements.
This view is consistent with the supreme court's recent decision in Lyons
Enterprises, Inc. It cited, with approval, Department of Labor and Industries v.
Tacoma Yellow Cab Co.,50 the decision of Division Two of this court.51 This court
rejected Tacoma Yellow Cab's claim that its independent contractor drivers were
not "workers." The realities of the relationship between the company and its
independent contractor drivers was "'simply that the essence of the independent
lease contract [was] to provide a method to place taxis and drivers on the city
streets of Tacoma to carry passengers at rates which are established by local
ordinances.'"52 "[T]he function of these drivers was no different" from that of the
49 id at 477.
50 31 Wash. App. 117, 639 P.2d 843 (1982).
51 Lyons Enters.. Inc., 374 P.3d at 1104.
52 id (alteration in original) (quoting Tacoma Yellow Cab Co., 31 Wash. App.
at 124).
15
No. 73234-0-1/16
actual employees of the company.53 Thus, the taxi drivers' personal labor was
the essence of their contracts.54
Similarly, in Lloyd's of Yakima Floor Center v. Department of Labor and
Industries, Division Two of this court concluded that the contractors' personal
labor was the essence of their contracts.55 In that case, the firm sold floor
covering materials and arranged for contractors to install the materials.56 The
contractors owned their own trucks and carpet-laying hand tools.57 The firm did
not exercise control over the contractors' installation methods as they were
experts.58
In its reasoning, Division Two of this court stated:
We do not believe that a truck used to transport floor covering
materials to a jobsite is the type of necessary machinery or
equipment which, under White, would take this agreement outside
the operation of the act. This requirement is concerned with those
arrangements where the machinery and not the labor is the
primary object of the agreement.1595
Here, the Manner of Performance of Service section of the agreements
specifies what, we conclude from the realities of the situation, constitute the
53 id
54 Tacoma Yellow Cab Co., 31 Wash. App. at 124.
55 33 Wash. App. 745, 751, 662 P.2d 391 (1982).
56 id at 747.
57 id at 750.
58 id
59 id at 751.
16
No. 73234-0-1/17
personal labor of each driver. The driver agrees, among other things, to
"faithfully and diligently devote" his or her "best efforts, skill, and abilities to
comply with customer requirements" and to "promote [HII's] welfare and best
interests."60
Consistent with this requirement, drivers submit their delivery route
schedules to the customer and HII.61 The drivers must also update and modify
their schedules if required to meet customer demands.62 Drivers must wear an
identification badge in accordance with customer requirements.63
Drivers must pass background checks as well as drug and alcohol
screening.64 Failure to comply with any of these requirements subjects drivers to
immediate termination.65
Based on these agreement requirements and the testimony below, the
realities of the situation show that the drivers' personal labor is the essence of
their agreements.
60 Trial Exhibit 20 § 3i.
61 id §3h.
62 id
63 id §3g.
64 id §3c.
65 id §3d.
17
No. 73234-0-1/18
Although the drivers must provide their own vehicles to make deliveries, it
is not "the type of necessary machinery or equipment which, under White, would
take this agreement outside the operation of the [IIA]."66
HII relies on the dissent in the BIIA's decision and order and In re: Yellow
Book Sales & Distribution Co., Inc.,67 a BIIA significant decision, to support its
argument that the drivers' personal labor is not the essence of these agreements.
That reliance is misplaced.
In that case, Yellow Book entered into independent contractor agreements
with 72 individuals to distribute telephone books.68 The BIIA concluded that the
independent contractors' personal labor was not the essence of their contracts.69
These independent contractors agreed to deliver the telephone books
within three days of picking up the books and "had to own or supply" an
automobile to conduct deliveries.70 They "freely chose" the routes, and Yellow
Book did not assign routes or supervise the contractors.71 The contractors could
also employ other people to do all or part of the contracted work without notice to
66
Lloyd's of Yakima Floor Ctr.. 33 Wash. App. at 751.
67 No. 10 11146, 2011 WL 1903472, at *1 (Wash. Bd. of Indus. Ins.
Appeals Mar. 30,2011).
68 id at *2.
69 id
70 id
71 Id.
18
No. 73234-0-1/19
Yellow Book and without Yellow Book's agreement.72 Some of the contractors
could work without assistance but those that chose to deliver along multiple
routes had to obtain assistance to perform the contract.73
Here, as in Yellow Book Sales & Distrib.. the agreements permit drivers to
hire others to make deliveries.74 But conversely, these other drivers, referred to
as Contractor Workers, must comply with the agreement provisions.75 For
example, they must have training and "possess such competence and
qualifications ... as may be necessary ... to provide services in accordance
with this Agreement."76 They must also be fluent in English, authorized to work in
the United States, and complete the alcohol, drug, and background screening
requirements.77 The agreement also provides that the Contractor Worker "will
conduct business with [HII] management, employees, and customers in a
courteous and professional manner."78
Because these facts distinguish this case from Yellow Book Sales &
Distrib., HII's argument is unpersuasive and its reliance on that case is
misplaced.
72 id
73 Id.
74 Trial Exhibit 20 §§ 3a, 3c, 3d, 3j, 6; Administrative Record at 93.
75 id §§ 3a, 3c, 3d, 3j.
76 id § 3d.
77 id § 3c.
78 id § 3i.
19
No. 73234-0-1/20
HII argues that the drivers' vehicles are the primary object of the contract.
It specifically argues that the vehicles are essential because the drivers could not
timely complete deliveries without a vehicle.
But as we previously noted in this opinion, the supreme court clarified in
White that the use of ordinary hand tools, by itself, does not make those tools the
essence of a contract. The vehicles here are the analytical equivalent of the
ordinary tools there. They are not specialized equipment.
HII also argues that PharMerica requires the drivers to agree to
background checks and drug tests and that HII "does not care who completes the
deliveries." This argument does not alter our analysis. The point is that the
requirement, regardless of its origin, is part of the agreement between HII and
each driver. That is the correct focus of our analysis. HII is not relieved of the
obligation to pay premiums just because an agreement requirement originates
from its customer, PharMerica. Specifically, "[i]f the realities demonstrate the
labor is for [the contracting firm's] benefit, the existence of a third party customer
does not place the worker outside the scope of industrial insurance coverage."79
That is the case here.
Lastly, HII argues that the drivers were not hired for any specialized skill,
which indicates that their personal labor was not the essence of their contract.
But contracting with workers without any specialized skill does not mean they do
not provide personal labor.80 So, this argument is unconvincing.
79 Dana's Housekeeping. Inc., 76 Wash. App. at 608.
80 See id.
20
No. 73234-0-1/21
Employment of Others
HII argues that the drivers' personal labor was not the essence of their
contracts, claiming that they could and did use others to make deliveries. We
disagree.
Under the third test of White, personal labor is not the essence of a
contract if an independent contractor "of necessity or choice employs others to
do all or part of the work he has contracted to perform . .. ."81 There, the Whites
actually employed another person to assist them in the log processing with the
donkey engine. We read the supreme court's decision to require actual
employment, not just the ability to employ another, to come within this category.
The supreme court's recent decision in Lyons Enterprises Inc., confirms
that this view is correct.
There, Lyons maintained that because the franchise agreement
contemplated that franchisees may hire subordinates, they met White's third test
and, thus, were outside of the act's definition of "worker."82
The supreme court disagreed, stating:
The fact that a franchisee could hire a subordinate is insufficient to
exempt an employer from IIA coverage. As the Court of Appeals
explained, this court has already rejected such an argument.1831
81 White. 48 Wash. 2d at 474 (emphasis added).
82 Lyons Enters., Inc., 374 P.3d at 1106.
83 id (citing Dep't of Labor & Indus, v. Lyons Enterprises, Inc., 186 Wn.
App. 518, 533, 347 P.3d 464 (2015)).
21
No. 73234-0-1/22
It is beyond legitimate dispute that the proper test is actual employment,
not the ability to employ others, for purposes of the third test under White.
Here, as in Lyons Enterprises Inc., the contract permits drivers to hire
others to make deliveries.84 One driver testified that he did not hire employees to
perform the deliveries. The only other driver who testified said that he never had
employees. There was no testimony or other evidence from the remaining 33
drivers involved in the determination on the question.
On this record, HII failed to show that the drivers actually "employ[] others
to do all or part of the work [they] contracted to perform . .. ."85 Accordingly,
substantial evidence supports the BIIA's finding that the drivers' personal labor
was the essence of their contract with HII. These findings support the BIIA's
conclusion that the drivers are workers.
HII appears to argue that the BIIA disregarded evidence that drivers relied
on others to perform deliveries, claiming this was error because there was no
conflicting evidence. HII specifically relies on testimony from its CEO stating that
drivers often "use employees or subcontractors to provide the labor needed." HII
also relies on one driver's testimony stating that he uses others to handle his
route when he is unavailable. But that same driver also testified he does not
employ others. The BIIA was entitled to rely on this latter statement to make its
factual determination in view of the conflicting evidence on this point. And the
84 Trial Exhibit 20 §§ 2b, 3a, 3c, 6; Administrative Record at 93.
85 White. 48 Wash. 2d at 474.
22
No. 73234-0-1/23
BIIA was not required to accept the CEO's testimony in light of conflicting
evidence on this point.
HII also argues that the critical inquiry is whether the agreement "clearly
and unequivocally provides that the work to be performed can be delegated." In
light of the supreme court's recent decision in Lyons Enterprises Inc., this
argument is without any legal force.
HII cites Massachusetts Mutual Life Insurance Co. v. Department of Labor
and Industries86 in further support of its argument. That case is distinguishable.
There, this court concluded that contract agents who delegated significant
portions of their duties were not workers because "the contracting parties
contemplated the delegation of duties by the independent contractor."87 But in
that case, this court determined that the agents did in fact "delegate significant
portions of their duties to others."88
Here, HII fails to show that the drivers delegated a significant portion of
their delivery duties to others. There was no evidence from the two drivers who
testified showing how often they used other drivers to cover their routes. And
there was no evidence on this point from the remaining 31 drivers.
86 51 Wash. App. 159, 752 P.2d 381 (1988).
87idat165.
88 id
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No. 73234-0-1/24
HII argues that declining to perform work falls within the White test and
that the drivers who decline deliveries are not workers under the IIA. HII cites no
authority to support this argument, and we need not further address it.89
EXCEPTION TO "WORKER"
HII argues that the drivers fall under an express exception to RCW
51.08.180's "worker" definition. We hold that HII has failed in its burden to
establish that the exception of RCW 51.08.195 applies to this case.
RCW 51.08.180 provides in relevant part:
"Worker" means every person in this state . . . who is working under
an independent contract, the essence of which is his or her
personal labor... or as an exception to the definition of worker,
a person is not a worker if he or she meets the tests set forth in
subsections (1) through (6) of RCW 51.08.195 P°]
RCW 51.08.195, the exception stated above, provides in relevant part:
As an exception to the definition ... of "worker" under RCW
51.08.180, services performed by an individual for remuneration
shall not constitute employment subject to this title if it is shown
that:
(1) The individual has been and will continue to be free from control
or direction over the performance of the service, both under the
contract of service and in fact; and
(2) The service is either outside the usual course of business for
which the service is performed, or the service is performed outside
all of the places of business of the enterprise for which the service
is performed, or the individual is responsible, both under the
contract and in fact, for the costs of the principal place of business
from which the service is performed; and
(3) The individual is customarily engaged in an independently
established trade, occupation, profession, or business, of the same
89 See Darkenwald v. Emp't Sec. Dep't. 183 Wash. 2d 237, 248, 350 P.3d
647(2015); RAP 10.3(a)(6).
90 (Emphasis added.)
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No. 73234-0-1/25
nature as that involved in the contract of service, or the individual
has a principal place of business for the business the individual is
conducting that is eligible for a business deduction for federal
income tax purposes; and
(4) On the effective date of the contract of service, the individual is
responsible for filing at the next applicable filing period, both under
the contract of service and in fact, a schedule of expenses with the
internal revenue service for the type of business the individual is
conducting; and
(5) On the effective date of the contract of service, or within a
reasonable period after the effective date of the contract, the
individual has established an account with the department of
revenue, and other state agencies as required by the particular
case, for the business the individual is conducting for the payment
of all state taxes normally paid by employers and businesses and
has registered for and received a unified business identifier number
from the state of Washington; and
(6) On the effective date of the contract of service, the individual is
maintaining a separate set of books or records that reflect all items
of income and expenses of the business which the individual is
conducting.
"All six subparts [of the statute] must be satisfied for the exception to
apply—a contractor who does not meet any one of these conditions is a 'worker'
for IIA purposes."91 In Lyons Enterprises Inc., the supreme court recently stated
what the plain words of this statute make clear: Failure to meet any subsection of
this statute precludes the application of this exception.92
In this case, the parties dispute whether one or more of the six
subsections applies to the drivers. For example, the Department concedes that
the 33 drivers probably meet the second of the above subsections of the test.
91 Lyons Enters.. Inc.. 186 Wash. App. at 536.
92 Lyons Enters., Inc., 374 P.3d at 1107.
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No. 73234-0-1/26
But, as the Department correctly argues, this is immaterial to the outcome here
because all six subsections must be met for each driver for the exception to
apply. We agree with this view.
Control or Direction
HII has the burden to establish that it does not have the right to control the
drivers.93 We hold that it has failed to meet this burden.
Under RCW 51.08.195(1), an independent contractor is not a "worker" if
"[t]he individual has been and will continue to be free from control or direction
over the performance of the service, both under the contract of service and in
fact." A contractor is "free from direction or control" if the individual is responsible
for providing a service without the contracting firm's "direct supervision over the .
.. methods and details of performance or having the right to exercise that
authority under the contract."94
Here, when we consider the realities of the situation, HII exercises
direction and control over the drivers' performance.
As we previously explained in this opinion, the agreement contains a
lengthy "Manner of Performance of Service" provision detailing driver
requirements and responsibilities.95 One section states that the contractor is
"solely responsible" for providing services "in a courteous, efficient, expeditious,
93 RCW 51.48.131; RCW 34.05.570(1 )(a): B & R Sales. Inc.. 186 Wash. App.
at 375.
94 WAC 296-17-31002.
95 Trial Exhibit 20 § 3.
26
No. 73234-0-1/27
reliable, safe, and secure manner, and in all cases in accordance with" the
contract requirements.96 The contract requires that drivers provide HII with timely
status reports for deliveries and directs what drivers must do to be
compensated.97 Drivers also may be required to wear uniforms and must wear
identification badges with HII's name on it.98
The contract requires that drivers "diligently devote his[] best efforts, skill
and abilities to comply with customer requirements and to faithfully enhance and
promote [HII's] welfare and best interests."99 Drivers must also "provide services
within the time frame requested by the customer on 95% of Contractor's
deliveries" and agree to drug testing and background checks.100
The contract also contains confidentiality and non-solicitation sections,
stating that a driver can work for third parties, provided that their "performance of
such services for others does not impair or impede the Contractor's performance
of his[] duties and responsibilities under this Agreement."101
The contract further provides that HII can immediately terminate the
contract in certain circumstances and that either party can terminate the contract
96 Trial Exhibit 20 § 3a.
97 id § 3f, Schedule A.
98 Trial Exhibit 20 § 3g.
99 Trial Exhibit 20 § 3i.
100id§§ 15-16, Schedule A.
101 id §6.
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No. 73234-0-1/28
by giving the other party 14 days written notice.102 Route drivers may choose to
reject deliveries, but they must notify HII of such rejection.103 A delivery rejection
by route drivers generally constitutes a material breach of the contract and
provides grounds for immediate contract termination.104
Additionally, the drivers are not free from HII's direction or control in fact.
One stat driver, Keith Parker, testified to the delivery process, stating that he
confirms the pickup of items with HII dispatch and later confirms the delivery with
dispatch. He and Stat driver Charles Hawley also testified that they contact HII if
there is a delivery issue, such as heavy traffic. HII's CEO also testified that
customer complaints go to HII, who then investigates.
In sum, this evidence shows that HII directs the manner in which the
drivers perform the services under the agreements. This evidence demonstrates
that the drivers do not have "the responsibility to deliver a finished product or
service without [HII] either exercising direct supervision over... methods and
details of performance or having the right to exercise that authority under the
contract."105 Thus, substantial evidence supports the BIIA's finding that the
drivers were not "free from the firm's control or direction over the performances of
their service," "both under the contract of service and in fact."106 These findings
102id§12.
103 id at Schedule A.
104 id
105 WAC 296-17-31002.
106 Administrative Record at 8; RCW 51.08.195(1).
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No. 73234-0-1/29
support the BIIA's conclusion that the drivers are not excepted from RCW
51.08.180's worker definition.
HII argues that it has no right to control the drivers, stating that the drivers
are free to determine how to meet their delivery schedule, subject to customer
requirements. HII relies on the fact that its customer sets the requirements that
HII includes in its contracts. The fact that the customer sets the requirements is
immaterial to the analysis. In any event, HII cites no authority for the proposition
that third party requirements negate the contracting firm's control over the
contractors.
HII's failure to establish that RCW 51.08.195(1) applies to any of the 33
drivers is dispositive. Regardless of whether HII establishes the application of
the statute's other subparts to one of more of the drivers, the failure here makes
the other subparts immaterial to the outcome. Thus, we need not address in this
opinion any of the other subsections of this statute.
"SOLE PROPRIETOR" EMPLOYMENT EXCLUDED
HII argues that the drivers are categorically excluded from coverage under
the IIA because they are "sole proprietors." We again disagree.
HII argues that the plain language of RCW 51.12.020 categorically
exempts all sole proprietors from coverage under the IIA. From this, it argues
further that none of those of its drivers who are sole proprietors are "workers"
under RCW 51.12.180. It further argues that case authority supports this
argument.
29
No. 73234-0-1/30
RCW 51.12.020 provides in relevant part:
The following are the only employments which shall not be included
within the mandatory coverage of this title:
(5) Sole proprietors or partners.
We interpret statutes to determine and apply the legislature's intent.107
The legislature's intent is solely derived "from the statute's plain language,
considering the text of the provision at issue ... ."108 We "look to the statute's
plain and ordinary meaning, reading the enactment as a whole, [and]
harmonizing its provisions by reading them in context with related provisions."109
We must also avoid absurd results when interpreting statutes.110
We review de novo questions of statutory interpretation.111
Here, we must harmonize three statutes: RCW 51.08.180, RCW
51.08.195, and RCW 51.12.020(5). In doing so, we must avoid absurd results.
RCW 51.08.180 provides that "every person in this state . . . who is
working under an independent contract, the essence of which is his or her
personal labor" is a "worker" under the IIA. This is so, unless the person satisfies
the exception explicitly listed in the statute. The word "person" is sufficiently
107 See Segura v. Cabrera, 184 Wash. 2d 587, 593, 362 P.3d 1278 (2015).
108 id at 591.
109 id at 593.
110 State v. Larson. 184 Wash. 2d 843, 851, 365 P.3d 740 (2015).
111 W. Plaza, LLC v. Tison. 184 Wash. 2d 702, 707, 364 P.3d 76 (2015).
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No. 73234-0-1/31
broad to include one who operates a business as a sole proprietor. That a
"person" works under "an independent contract" does not change this.
As we stated previously in this opinion, RCW 51.08.195 states the
exceptions to worker status under RCW 51.08.180. Nowhere among the six
subcategories of this statute is there an exemption for "sole proprietors."
RCW 51.12.020(5) provides that sole proprietors "shall not be included
within the mandatory coverage" of the IIA. A sole proprietorship is "[a] business
in which one person owns all the assets, owes all the liabilities, and operates in
his or her personal capacity."112
Here, the question is whether the last of these three statutes categorically
exempts sole proprietors from the operation of RCW 51.08.180, which defines
workers. We conclude that cannot be the legislature's intent.
We start with the legislature's declaration of policy respecting the IIA.
RCW 51.12.010 states as follows:
There is a hazard in all employment and it is the purpose of this title
to embrace all employments which are within the legislative
jurisdiction of the state.
This title shall be liberally construed for the purpose of
reducing to a minimum the suffering and economic loss
arising from injuries and/or death occurring in the course of
employment.[n3]
With this declaration of policy in mind, we must be cautious in construing
RCW 51.12.020(5) to categorically exclude all sole proprietors from coverage
112 Sole Proprietorship, Black's Law Dictionary 1607 (10th ed. 2014).
113 (Emphasis added.)
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No. 73234-0-1/32
under the IIA. We believe that to do otherwise is inconsistent with the stated
mandate to reduce to a minimum the suffering and economic loss arising from
injuries and/or death occurring in the course of employment.
We note that neither RCW 51.08.180 nor the exception to "worker" status
under RCW 51.08.195 references RCW 51.12.020(5)'s sole proprietor exclusion.
We hold that the most reasonable way to harmonize interpretation of these three
statutes is to conclude that the legislature intended to include within the scope of
"worker" those sole proprietors who met RCW 51.08.180's requirements and who
were not excluded by RCW 51.08.195. Thus, even though a person may choose
to set up his or her business as a sole proprietorship, that alone does not exclude
that person from IIA coverage as a "worker." No other interpretation of these
statutes makes sense.
HII argues that 12 of the drivers were sole proprietors and thus excluded
from coverage under the IIA. It cites two cases in support of this argument.
Neither case requires a different result here.
Department of Labor and Industries v. Fankhauser114 is one case on
which HII relies. In that case, the supreme court stated that sole proprietors "are
expressly excluded from mandatory coverage and are not required to participate
in Washington's workers' compensation system."115 It also stated that sole
114 121 Wash. 2d 304, 849 P.2d 1209 (1993).
115 Id. at 309.
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No. 73234-0-1/33
proprietors are not considered workers automatically covered under the statute
and can opt into the workers' compensation system.116
But that case is distinguishable. There, the issue was whether two people
were barred from receiving workers' compensation under the "last injurious
exposure" rule.117 The individuals were exposed to asbestos during employment
that was covered under the IIA, but their latest exposure occurred while they
were self-employed.118 The supreme court was neither asked to address nor did
it address the issue in this case: whether persons who are independent
contractors are "workers" under RCW 51.08.180. Thus, the broad language in
that case on which HII relies does not control the outcome here.
HII also cites Dosanjh v. Bhatti.119 That case is even more attenuated
than Fankhauser, which it quotes. That was a wrongful death lawsuit discussing,
in part, whether the IIA prohibited tort suits between coworkers.120 Obviously,
that is not the issue here.
HII also refers to the Department manual to support its argument, which
states "[t]he excluded employments in RCW 51.12.020 are exempt from
mandatory coverage regardless of whether the individual supplies only their
116 id
117 id at 306.
118 id
11985Wn. App. 769, 934P.2d 1210(1997)
120 id at 774-75.
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No. 73234-0-1/34
personal labor."121 The chief problem with this argument is that even if we were
to accept the proposition that a Department manual necessarily correctly states
the law, HII fails to show that it relied, to its detriment, on this manual. Thus, this
argument is unpersuasive and we reject it.
HII also argues that the sole proprietor exclusion statute is specific and
that the "worker" statute is general. Thus, it argues that where these statutes
conflict, the sole proprietor exclusion statute controls.
But our courts do not apply this rule when statutes do not conflict.122 The
rule applies only after a court attempts to read statutes governing the same
subject matter and "conclude[s] that the statutes conflict to the extent they cannot
be harmonized."123 We have harmonized these statutes, and this rule simply
does not apply.
Lastly, HII argues that the sole proprietor exception is met here "by
anyone who was registered as [such] during the audit period." HII cites no
authority to support this argument. Accordingly, we do not address it further.
121
Trial Exhibit 34.
122 O.S.T. ex rel. G.T. v. Regence BlueShield, 181 Wash. 2d 691, 701, 335
P.3d 416 (2014).
123 id
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No. 73234-0-1/35
REASONABLENESS OF PENALTIES
HII assigns error to the BIIA's determination that the Department assessed
reasonable penalties for the violation of the statutes. But HII fails to argue this
point on appeal. Accordingly, any challenges to this determination are waived.124
We affirm the superior court judgment affirming the BIIA's decision and
order.
WE CONCUR:
124 See RAP 10.3(a)(6); Jackson v. Quality Loan Serv. Corp.. 186 Wn.
App. 838, 845-46, 347 P.3d 487, review denied, 184 Wash. 2d 1011 (2015).
35