B & R Sales, Inc. v. Dept. Of L & I

FILED
COURT OF APPEALS
DIVISION I
2DI5M IR 0 M1 35
sT„
ray
IN THE COURT OF APPEALS OF THE STATE OF WASHIN
DIVISION II
B &R SALES, INC., No. 45765 -2 -II
Appellant,
v.
PUBLISHED OPINION
WASHINGTON STATE DEPARTMENT OF
LABOR & INDUSTRIES,
Respondent.
MAXA, J. — B &R Sales, Inc. appeals the superior court' s order affirming the decision of
the Board of Industrial Insurance Appeals (Board) that B &R was required to pay industrial
insurance premiums for the independent contractors B & R hired to install floor coverings for its
customers. The Board' s decision was based on a finding that the contractors were " workers"
performing personal labor under RCW 51. 08. 180. B &R argues that the contractors did not
qualify as " workers" because they could not perform the contracted work without the use of -
expensive specialized tools and customized vans, and therefore the essence of their contracts was
not personal labor. B &R also argues that the contractors were excluded from mandatory
workers' compensation coverage under RCW 51. 12. 020.
We .hold that the contractors were " workers" under RCW 51. 08. 180 because the primary
object of their contracts was their personal labor despite their use of expensive specialized tools
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and equipment. We further hold that B & R waived its RCW 51. 12. 020 argument because it did
not make that argument to the Board. Therefore, we affirm the Board and the superior court.1
FACTS
Premium Assessment
B &R is a business that sells and installs floor coverings. In 2008, B &R contracted with
17 independent contractors to install materials sold to its clients. Fourteen of the contractors
were sole proprietors, and the remaining three were a partnership, a corporation, and a limited
liability company. B & R also employs an installer that does the same job as the contractor
installers.
The floor covering installation process requires the physical labor, skill, and expertise of
a professional installer. And B &R' s independent contractors were contractually required to
provide the tools they needed for installations. Some of the contractors' tools were specialized,
unique to the installation trade, and available only from specialty stores serving professional
installers. These tools included large vinyl rollers, power stretchers for carpet, and a specialized
saw with a diamond blade for cutting ceramic tile. The contractors'- other tools included saws,
trimmers, files, and nail guns. The aggregate value of each contractor' s tools ranged from
7, 000 to $ 20, 000. In addition, the contractors were required under the contract to supply a
1
The Board ruled, and the superior court affirmed, that two of the contractors —Michael Schultz
and Charles Soule —did
not qualify as workers under the former RCW 51. 08. 180 ( 1991) but did
qualify as workers under the version of RCW 51. 08. 180 effective June 12, 2008. DLI did not
file a cross appeal on this ruling. Therefore, we affirm the Board' s ruling on these two
contractors.
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customized van capable of transporting and storing their supplies and equipment as well as the
materials to be installed..
Each B & R contractor had the right under the contractor agreement to hire additional
employees to perform the installation work. However, no evidence was presented that any of the
contractors hired additional employees.
In 2009, the Department of Labor and Industries ( DLI) performed an audit on B &R and
discovered that B &R had not paid industrial insurance premiums for any of its contract installers
in 2008. DLI determined that each of the contract installers was a " worker" under RCW
51. 08. 180. An auditor assessed industrial insurance premiums, interest, and penalties against
B &R in the amount of $87, 752. 23. After B &R requested reconsideration, DLI reaffirmed its
order in May 2011.
Appeal to the Board ofIndustrial Insurance Appeals
B &R appealed DLI' s assessment. An industrial insurance appeals judge reversed DLI' s
order. Both B &R and DLI petitioned for review to the Board. The Board issued a decision and
made a finding of fact that the essence of the agreements between B & R and the 17 contractors
was the contractors' personal labor. The Board concluded that two installers, Michael Schultz
and Charles Soule, were not B &R' s workers before June 12, 2008 ( the effective date of an
amendment to RCW 51. 08. 180), but were B & R' s workers after that date.2
2 Because the Board determined that DLI' s assessment notice and order was partially incorrect,
it remanded the case to DLI to recalculate B & R' s industrial insurance premiums, interest, and
penalties.
3
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Appeal to Superior Court
B &R appealed the Board' s decision and order to the superior court. After reviewing the
record before the Board and the parties' pleadings, the superior court issued findings of fact,
conclusions of law, and a judgment affirming the Board' s decision and order.
B &R appeals.
ANALYSIS
A. STANDARD OF REVIEW
1. Superior Court Review
B &R argues that the superior court erred by applying the substantial evidence standard to
the Board' s findings of fact. B & R relies on RCW 51. 52. 115, which provides that the hearing of
industrial insurance appeals in the superior court shall be de novo. We hold that the superior
court used the correct standard of review.
Washington' s Industrial Insurance Act (IIA), Title 51 RCW, includes general judicial
review provisions that apply to workers' compensation claims. Arriaga' v. Dep' t ofLabor &
Indus., 183 Wn. App. 817, 822, 335 P.3d 977 ( 2014). RCW 51. 52. 115 provides that the hearing
in the superior court shall be de novo, but based only on the evidence offered before the Board.
However, the IIA also contains a specific provision for judicial review of DLI' s assessment
decisions. RCW 51. 48. 131, which is entitled " Notice of assessment for default in payments by
employer —Appeal" provides:
Further appeals taken from a final decision of the board under this section are
governed by the provisions relating to judicial review of administrative decisions
contained in RCW 34. 05. 510 through 34. 05. 598.
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The referenced statutory provisions are in the Administrative Procedures Act (APA),
chapter 34. 05 RCW.
Based on RCW 51. 48. 131, Washington courts consistently have held that the
APA governs judicial review of the Board' s decisions regarding assessment of industrial
insurance premiums. E.g., Xenith Grp., Inc. v. Dep' t of Labor & Indus., 167 Wn. App..
389, 393, 269 P.3d 414 ( 2012) ( premium assessments based on a finding of "worker"
status); Probst v. Dep' t of Labor & Indus., 155 Wash. App. 908, 918, 230 P.3d 271 ( 2010);
Dep' t of Labor & Indus. v. Mitchell Bros. Truck Line, Inc., 113 Wash. App. 700, 704, 54
3
P.3d 711 ( 2002). Accordingly, we hold that the APA, not RCW 51. 52. 115, determines
the superior court' s standard of review in an appeal of DLI' s assessments.
Under the APA, the superior court applies a substantial evidence standard in
reviewing an agency' s findings of fact. RCW 34.05. 570( 3)( e) provides that the superior
court can grant relief from an agency order if "[t]he order is not supported by evidence
that is substantial when viewed in light of the whole record before the court."
Accordingly, we hold that the superior court properly applied a substantial evidence
standard in reviewing the Board' s findings of fact.
3
B &R cites to Ruse v. Department of Labor & Industries, 138 Wash. 2d 1, 977 P.2d 570 ( 1999)
and Allison v. Department of Labor & Industries, 66 Wash. 2d 263, 266, 401 P.2d 982 ( 1965) for
the proposition that a trial court must apply a de' novo standard for all appeals from a final board
decision. The courts in Ruse and Allison both analyzed the standard of review arising from
RCW 51. 52. 115 in the context of cases involving workers' compensation benefits. Ruse, 138
Wash. 2d at 6 -7; Allison, 66 Wash. 2d at 267 -68. Neither case addressed a trial court' s standard of
review for premium and penalty assessment cases.
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2. Appellate Review
As noted above, the APA governs judicial review of the Board' s decision in an
industrial insurance assessment case. RCW 51. 48. 131; Xenith Grp., 167 Wash. App. at
393. On appeal from the superior court, we sit in the same position as the superior court
and review the agency' s order based on the administrative record rather than the superior
court' s decision. Xenith Grp., 167 Wn. App. at 393. An employer challenging the
validity of the agency action assessing industrial insurance premiums bears the burden of
showing that the premiums were assessed incorrectly. RCW 34. 05. 570( 1)( a); Jamison v.
Dep 't of Labor & Indus., 65 Wash. App. 125, 133, 827 P.2d 1085 ( 1992).
RCW 34. 05. 570( 3) sets out nine grounds for invalidating an administrative order.
Two grounds are applicable here: ( 1) the agency' s order is not supported by substantial
evidence, RCW 34. 05. 570( 3)( e), and ( 2) the agency erroneously interpreted or applied
the law. RCW 34. 05. 570( 3)( d). We review the Board' s findings of fact under a
substantial evidence standard, which addresses whether the record contains evidence
sufficient to persuade a fair -minded, rational person of the finding' s truth. Xenith Grp.,
167 Wash. App. at 393. We review the Board' s legal conclusions de novo, but give
substantial weight to the agency' s interpretation when the subject area falls within the
agency' s area of expertise." Mitchell Bros., 113 Wash. App. at 704.
B. " WORKERS" UNDER RCW 51. 08. 180
B & R argues that the independent contractors were not " workers" under RCW 51. 08. 180,
which defines " worker" as: " every person in this state who is engaged in the employment of or
who is working under an independent contract, the essence ofwhich is his or her personal labor
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for an employer...." ( Emphasis added.) 4 B &R claims that the essence of the contractors'
contracts was not personal labor because the contractors could not perform the contracted work
without the use of expensive specialized tools and customized vans. We disagree.
1. Standard of Review
The two other divisions of our court have applied different standards of review regarding
the determination of "worker" status under RCW 51. 08. 180. In Dana' s Housekeeping v.
Department of Labor & Industries, Division One of this court stated that "[ w]hether the essence
of the work is personal labor is a factual determination." 76 Wash. App. 600, 608, 886 P.2d 1147
1995). In Silliman v. Argus Services, Inc., Division Three of this court stated that whether
services constitute " personal labor" within the meaning of RCW 51. 08. 180 is a mixed question
of law and fact: "[ w]hat services Argus provided is a question of fact; whether these services
constitute ` personal labor' within the meaning of the statute is a question of law." 105 Wash. App.
232, 236, 19 P.3d 428 ( 2001). The court in Silliman did not mention Dana 's Housekeeping.
This division has not squarely addressed this issue.' We now apply the mixed question of
law and fact standard as articulated in Silliman. The nature of the contracts, what services the
4
Former RCW 51. 08. 180( 1) ( 1991), which was in effect until June 11, 2008 and therefore
applied for part of the 2008 audit year at issue here, contained a nearly identical definition.
The court in Dana' s Housekeeping cited to our decision in Jamison, 65 Wash. App. 125, to
support its standard of review statement. Dana' s Housekeeping, 76 Wn. App. at 608. In
Jamison we stated without citation or analysis that the Board' s factual findings would be upheld
unless they were clearly erroneous, and seemed to treat the Board' s conclusion that the
contractors were " workers" as a factual finding. 65 Wash. App. at 131. We also touched on the
issue in Peter M Black Real Estate Co. v. Department of Labor & Industries, 70 Wash. App. 482,
487, 854 P.2d 46 ( 1993). But neither case expressly states whether the " worker" determination
is a question of fact or a question of law.
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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. Jametsky v. Olsen, 179 Wash. 2d 756, 761, 317 P.3d 1003 ( 2014).
2. Essence of Independent Contracts
Our Supreme Court adopted a test for whether a contract' s essence is personal labor in
White v. Department of Labor & Industries, 48 Wash. 2d 470, 474, 294 P.2d 650 ( 1956). The court
held that a contract' s essence is not personal labor if the contract was intended to cover an
independent contractor
a) who must of necessity own or supply machinery or equipment ( as distinguished
from the usual hand tools) to perform the contract ... , or ( b) who obviously could
not perform the contract without assistance ... ,
or ( c) who of necessity or choice
employs others to do all or part of the work he has contracted to perform.
Id. at 474. In analyzing these factors, we consider the contract, the work to be done, the
situation of the parties, and other attendant circumstances. Dana' s Housekeeping, 76
Wash. App. at 608. We focus on the realities of the situation rather than the technical
requirements of the test. Id.
The issue here is the applicability of part ( a) of the White test. B &R argues for a strict
interpretation of the language in White. According to B &R, part (a) of the White test applies
here because the independent contractors were required to supply specialized equipment —not
just the usual hand tools —to perform the contract. We disagree, and we hold that a contractor
falls within the RCW 51. 08. 180 definition of "worker" if the primary object of the contract is to
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procure the contractor' s personal services rather than to procure the contractor' s specialized
equipment.
Our interpretation of RCW 51. 08. 180 and part (a) of the White test is based on the
language of the statute, relevant case law, and the guiding policies of Washington' s industrial
insurance statute. Our analysis begins with the language of RCW 51. 08. 180, which states that
whether or not a contractor is a " worker" depends on the " essence" of the contract. This
language necessarily focuses our analysis on the primary object of the contract. A contractor is
not a " worker" if the contracting party' s primary object is to secure the use of specialized
equipment and the contractor is merely the operator of that equipment. But if the contracting
party' s primary object is to obtain the personal labor of a skilled contractor, the contractor is a
worker" under RCW 51. 08. 180 even if the contractor must use specialized equipment in the
course of his or her performance of the personal labor.
The facts of White are consistent with this interpretation. In White, the claimant and her
husband owned a " donkey engine" — a specialized machine used in logging operations —and
contracted with a timber mill to use the donkey engine to gather and stack felled timber. 48
Wash. 2d at 475. The evidence established that the couple was retained to do the work because
they owned a donkey engine, and that they could not have performed the contract without the
donkey engine. Id. As a result, in White the primary object of the contract clearly was to secure
the use of the donkey engine, while the couple' s personal labor was a secondary object of the
contract — to ensure the successful operation of the donkey engine. Under those circumstances
the couple' s personal labor was not the essence of the contract.
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We adopted and applied this interpretation of RCW 51. 08. 180 in Lloyd' s of Yakima Floor
Center v. Department of Labor & Industries, 33 Wn. App. 745, 662 P.2d 391 ( 1982). That case
also involved floor covering installers, although their tools did not satisfy part (a) of the White
test because the trial court had made an unchallenged finding that they were classified as hand
tools. Lloyd' s, 33 Wash. App. at 750. The installers also were required to furnish a truck to
transport floor covering materials, but we held that such a truck was not the type of necessary
machinery or equipment referred to in White. Lloyd' s, 33 Wn. App. at 750 -51. In addressing
this issue, we stated that part (a) of the White test was " concerned with those arrangements where
the machinery and not the labor is the primary object of the agreement." Lloyd' s, 33 Wash. App.
at 751. 6
We followed Lloyd' s and focused on the primary object of the independent contract in
Jamison, 65 Wash. App. at 126. In Jamison, the issue was whether independent contractors hired
to fall and buck timber were " workers" under RCW 51. 08. 180. Id. One of the contractors
testified that he often used a " Cat tractor" to perform some of the work under his contract. Id. at
131. We rejected the argument that use of the tractor meant that the contractor was not a
worker" under part (a) of the White test, stating that the evidence supported the finding that the
6
B &R attempts to distinguish Lloyd' s because the contractors here were required to guarantee
work, indemnify B &R, and provide insurance above the required bond. While B & R correctly
notes that the three carpet layers in Lloyd' s were not required to indemnify their employer, B &R
does not explain why this is significant under the White test. Moreover, B & R does not explain
or cite to precedent that would require us to hold that the contract' s primary object was more
than personal labor based on these facts. As a result, we are unpersuaded by this attempt to
distinguish Lloyd' s.
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contractor' s labor and not the tractor was the primary object of the agreement. Jamison, 65 Wn.
App. at 131. 7
Our interpretation is further supported by the legislative mandate that industrial insurance
statutes " 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." RCW
51. 12. 010. To accomplish this legislative directive, our guiding principle in interpreting
industrial insurance provisions is to further the purpose of providing compensation to all persons
injured in their employment, with all doubts resolved in favor of the worker. Michaels v. CH2M
Hill, Inc., 171 Wash. 2d 587, 598, 257 P.3d 532 ( 2011). This means that we must liberally construe
RCW 51. 08. 180 and resolve any doubt in favor of finding that an independent contractor is a
worker."
Here, unlike in Lloyd' s, the evidence showed that the contractors needed more than " hand
tools" to perform their contracts. The contractors testified that they were required to use large
and expensive specialized equipment worth in the aggregate between $ 7, 000 and $ 20, 000.
However, the evidence also was clear that the contractors' skilled, personal labor and not
the equipment was the primary object of the contracts. B &R did not enter into the contracts to
secure the use of specialized equipment like large vinyl rollers, power stretchers for carpet,
specialized saws with a diamond blade for cutting ceramic tile, or similar equipment. Instead, a
B &R representative testified that the business relied on the contractor' s knowledge —i.e., their
7 Division One of this court used similar language in interpreting RCW 51. 08. 180, stating that a
contractor is a " worker" when the contractor' s " personal efforts constitute the main element in
accomplishing the objects of the employment."
Dana' s Housekeeping, 76 Wash. App. at 607.
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learned skills and experience —to install several different types of floor coverings. In addition,
the work the contractors performed was very labor intensive requiring the skillful installation —
by hand —of various types of flooring materials. The tools were merely ancillary to the
contractors' performance of their skilled, personal labor.
B &R also argues that part (a) of the White test applies because the contractor testified
that they needed customized vans, modified to carry long rolls of carpet and the necessary tools,
in order to do installations. We rejected a similar argument in Lloyd's, 33 Wash. App. at 750 -51.
As with the specialized equipment, securing the use of the contractors' vans clearly was not the
primary object of the independent contracts.
Finally, B &R asserted at oral argument that the flooring contractors were providing
professional services," and that as a matter of law professional services do not constitute
personal labor under RCW 51. 08. 180. However, B & R has not cited any authority for this
proposition, and nothing in RCW 51. 08. 180 or in the applicable case law suggests that a
contractor is not a " worker" if the personal labor he or she contracted to provide involves
professional" skills. Accordingly, we reject B &R' s argument.
We follow Lloyd' s and interpret RCW 51. 08. 180 as providing that an independent
contractor will be classified as a " worker" unless the primary object of the contract is the
specialized equipment. Here, the primary object of the independent contracts —the essence of
those contracts —was the contractors' skilled, personal labor and not their specialized equipment.
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Therefore, we hold that B &R' s contractors constitute " workers" under RCW 51. 08. 180. 8
C. EXCLUSION OF CERTAIN INDIVIDUALS
RCW 51. 12. 020 excludes from mandatory IIA coverage sole proprietors, partners,
certain corporate officers, and certain managing members of LLCs (limited liability company).
RCW 51. 12. 020( 5), ( 8), ( 13). B & R argues that because all of the independent contractors here
fall within one of these categories, they cannot qualify as " workers ".under the IIA. However,
B &R waived its RCW 51. 12. 020 argument because it failed to present that argument to the
Board.
As noted above, under RCW 51. 48. 131 the provisions of the APA —and specifically
RCW 34. 05. 510 through 34. 05. 598 — govern industrial insurance assessment appeals. Under
RCW 34. 05. 554( 1), issues that were not raised before the Board cannot be raised on appeal. 9
Our Supreme Court has recognized that "[ t] his rule is more than simply a technical rule of
appellate procedure; instead, it serves an important policy purpose in protecting the integrity of
administrative decisionmaking [ sic]." King County v. Wash. State Boundary Review Bd. for
King County, 122 Wn.2d648, 668, 860 P.2d 1024 ( 1993). The court recognized a number of
8B & R argues that for the contractor that was a corporation ( Double T Flooring, Inc.) and
the contractor that was an LLC ( LT Carpet Works, LLC), the worker was the entity and
could only act through their officers, members, or agents. B &R therefore argues that
those entities could not and did not perform the contracts without assistance under parts
b) and ( c) of the White test. However, as with the RCW 51. 12. 020 argument discussed
above, B & R did not make this argument before the Board. As noted above, under RCW
34. 05. 554( 1) issues that were not raised before the agency cannot be raised on appeal.
Therefore, we do not address B & R' s argument that the corporate and LLC contractors
cannot be " workers" under the White test.
9
RCW 34. 05. 554 does list four exceptions to this rule, but B & R does not argue that any one of
the exceptions applies here.
13
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other purposes for the rule: discouraging the flouting of administrative processes, protecting
agency autonomy, aiding judicial review, and promoting judicial economy. Id. at 669.
Here, B & R did not argue that RCW 51. 12. 020 exempted its contractors from being
covered under the IIA at any time before the Board. It did not raise this issue or even reference
RCW 51. 12. 020 in its petition for review, statement of issues, prehearing brief, or reply brief.
And as a result, the Board did not rule on the legal merits of this argument or determine whether
any of the independent contractors were or were not exempt under RCW 51. 12. 020. Instead,
B &R first made this argument in its opening brief to the superior court. Accordingly, RCW
34. 05. 554 precludes us from addressing this argument on appeal. Kitsap Alliance ofProp.
Owners v. Cent. Puget Sound Growth Mgmt. Hr' gs Bd., 160 Wash. App. 250, 272, 255 P.3d 696
2011).
B &R argues that it did present the RCW 51. 12. 020 argument to the Board because the
Board' s Decision and Order contained section headings regarding " legal entities as [ w] orkers."
Appellant' s Reply Br. at 8. However, these sections addressed whether corporations and LLCs
could constitute workers, not whether corporate officers and LLC members were excluded from
mandatory IIA coverage under RCW 51. 12. 020. Further, there must be more than a hint or a
slight reference to an issue in the agency record to permit our review. King County, 122 Wash. 2d
at 670.
B &R cites to Maynard Investment Co., Inc. v. McCann, 77 Wash. 2d 616, 621 -622, 465
P.2d 657 ( 1970), for its argument that we should still consider this argument despite B & R' s
failure to raise it before the Board. The court in Maynard Investment stated that " the courts have
frequently recognized that error may be considered for the first time on appeal where the matter
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in question affects the public interest." 77 Wash. 2d at 622. And there, because the issue
considered was contrary to the statute and against the policy of the State of Washington, our
Supreme Court permitted appellate review of the issue. Id. at 623.
Maynard Investment is distinguishable because it does not address the review of an
agency decision under RCW 34. 05. 554. Our Supreme Court in King County expressly rejected a
an argument similar to B & R' s and distinguished Maynard Investment, holding that it was
required to apply RCW 34. 05. 554. King County, 122 Wash. 2d at 670. As a result, the court
refused to consider an argument not raised before the agency even though it raised " issues of
serious public importance." Id. at 668.
We follow King County and hold that B & R cannot make its RCW 51. 12. 020 argument on
appeal because it did not raise the argument before the Board. Therefore, we do not address this
argument.
We affirm the Board and the superior court.
We concur:
HANSON, C.
LtE,
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