Jkh Enterprises v. Industrial Relations

• Decision Date: 22 August 2006
• Docket Number: No. H028762.,H028762.
• Citation: 48 Cal.Rptr.3d 563,142 Cal.App.4th 1046
• Court: California Court of Appeals
• Parties: JKH ENTERPRISES, INC., Plaintiff and Appellant, v. DEPARTMENT OF INDUSTRIAL RELATIONS, Defendant and Respondent.

48 Cal.Rptr.3d 563

142 Cal.App.4th 1046

JKH ENTERPRISES, INC., Plaintiff and Appellant, v. DEPARTMENT OF INDUSTRIAL RELATIONS, Defendant and Respondent.

No. H028762.

Court of Appeal, Sixth District.

August 22, 2006.

Rona Page Layton, Sims & Layton, SanJose, CA, for Plaintiff and Appellant.

David M. Balter, Division of Labor Standards Enforcement, Dept. of Industrial Relations, San Francisco, CA, for Defendant and Respondent.

DUFFY, J.

This is an appeal by JKH Enterprises, Inc., doing business as AAA Courier, from the trial court's denial of its petition for a writ of administrative mandamus. JKH provides courier services to Bay Area businesses such as title companies and law firms. JKH filed the petition for writ in an effort to overturn the administrative stop work order issued and upheld by the Department of Industrial Relations, respondent here. The stop work order and penalty were based on the Department's conclusion that JKH's drivers who accomplish the actual delivery services on its behalf are properly classified as employees, as opposed to independent contractors as JKH had characterized them, and that JKH had failed to procure workers' compensation insurance for their benefit in violation of Labor Code section 3700. The penalty ultimately assessed by the Department under Labor Code section 3722 was $15,000—$1,000 for each working driver classified as an employee on the day that the stop work order was issued.

Based on the administrative record and the deferential standard of judicial review which governs our analysis, we conclude that JKH has not demonstrated that the Department abused its discretion and we accordingly affirm the trial court's order.

STATEMENT OF THE CASE

I. Factual Background¹

JKH is a corporation. Its president is Joe K. Herrera. Herrera, as a sole proprietor, previously owned and operated a separate courier service business called VIP Courier. VIP also became subject to a similar stop order issued by the Department for the failure of that business to have procured workers' compensation insurance for its delivery drivers. VIP did not challenge the stop order but Herrera then incorporated as JKH, which then internally classified its drivers as independent contractors. But the nature of JKH's business—delivery services—was not different from that of VIP's.

Prior to their engagement by JKH, each of the drivers filled out a form entitled "Independent Contractor Profile" and an application in which the driver acknowledged his or her status as an independent contractor and provided his or her own automobile insurance information.² Once engaged by JKH, the drivers perform their work by picking up the delivery items from JKH's customers and delivering the packages to the designated locations. Although according to Herrera, the courier industry suffers a high driver turnover rate, some of JKH's drivers have maintained their working relationships with JKH for as much as several years.

The drivers are divided into two categories—"route" and "special." The route drivers regularly service the same route or territory and are paid a negotiated amount per hour depending on the mileage, time, and volume of deliveries usually involved in the particular route.³ The route drivers are not required to contact JKH's dispatcher on a regular basis because in the course of servicing the regular routes, they pick up the packages from JKH's route customers and are directed by the customer where and when to deliver the packages. But the route drivers themselves decide how best to cover their particular territories. JKH only learns of the route drivers' particular deliveries the next day through their "document registers." JKH's route customers also provide the company, for billing purposes, with information about the particular driver's time involved with respect to that customer's deliveries.

The special drivers, by contrast, perform the work of the "special" deliveries requested by JKH's customers on any given day. Each special driver is supposed to call JKH's dispatcher, usually on his or her own cell phone, each day to inform the dispatcher whether he or she wishes to work that day. Having communicated their availability to work on a given day, the special drivers then receive information from the dispatcher about where packages are to be picked up from JKH's customers for delivery. But the drivers are free to decline to perform a particular delivery when contacted by the dispatcher, even if the driver has indicated his or her availability for the day. The special drivers are not required to work either at all or on any particular schedule. They are paid by individually negotiated commissions based on the deliveries that they do.

Other than to satisfy the general assurances given by JKH to its customers that their packages will reach the appropriate local destination within two to four hours from pick-up, the special drivers, like the route drivers, are not governed by particular rules and they do not receive direction from JKH about how to perform the delivery task or what driving routes to take. Sometimes when a route driver completes a day's deliveries for a particular route, he or she will call into the dispatcher to inform that he or she is then available to deliver "specials" so as to earn extra money.

All drivers, whether route or special, use their own vehicles to make the deliveries. They pay for their own gas, car service and maintenance, and insurance. They use their own cell phones for the most part to communicate with JKH.⁴ The drivers' cars do not bear any JKH marking or logo. And the drivers themselves do not wear uniforms or badges that evidence their affiliation or relationship with JKH. Some of the drivers perform delivery services for other companies as well. Two of the drivers have their own business licenses and provide the delivery services on behalf of their own businesses, only one of which is itself a delivery service. The drivers receive no particular training, other than brief instruction on how to fill out the log sheets that verify customer deliveries and show the locations of pick-ups and deliveries.

All drivers set their own schedules and choose their own driving routes. Their work is not supervised. Indeed, JKH only has a vague idea of where its working drivers are during the business day. They are never required to report to the location of JKH's business office, and Joe Herrera has never met some of them. The drivers take time off when they want to and they are not required to ask for permission in order to do so. If not enough drivers are available to work on a given day, Joe Herrera, members of his family, and even JKH's dispatcher fill in to perform JKH's deliveries.

The drivers are paid twice a month, with no deductions taken, and they are each annually issued a federal tax form 1099 rather than a W2.⁵ They are provided no benefits. According to Joe Herrera, the drivers consider themselves to be independent contractors. The drivers turn in their delivery logs and JKH keeps track of those in order to bill its customers. But the drivers do not fill out or turn in any time sheets. Instead, JKH charges its route customers a fee, from which it pays the route drivers their negotiated hourly fee, derived from hourly figures provided to JKH by its route customers. For special deliveries, JKH charges a fee to its customer and then generally splits that amount with the special driver who performed that particular delivery.

II. Procedural Background

A. Proceedings Before the Department

On September 8, 2004, Benny Cheng, a Deputy Labor Commissioner for the Department, conducted an inspection at JKH's offices. Joe Herrera was not present at JKH's offices at the time of the inspection so Cheng initially spoke with the dispatcher, who then called Herrera. Cheng spoke with Herrera on the phone and asked if JKH's employees were covered by a policy of workers' compensation insurance. Herrera replied that all of JKH's drivers were independent contractors and JKH was therefore not required to and did not provide such insurance. Cheng asked the dispatcher for a list of the names of drivers then working for JKH, which the dispatcher provided.

Cheng asked the dispatcher some questions such as how often the drivers were paid, but the dispatcher either was reluctant to answer or did not have the information. The dispatcher did tell Cheng that he relayed information to the (special) drivers about where to pick up the delivery packages from JKH's customers. From this, Cheng concluded that the drivers were making the deliveries for the company, thus performing the actual work of its day-to-day business, and that they were under its general control in doing so. This conclusion, in turn, led Cheng to the further conclusion that JKH was using employee labor and that the drivers were not actually functioning as independent contractors but as employees, which prompted Cheng to issue the "Stop Order—Penalty Assessment" under Labor Code section 3700 that day. A penalty of $16,000 was initially calculated under Labor Code section 3722 based on a fine of $1,000 for each of the 16 driver-employees determined by Cheng to be working for JKH on that day.

The next day, Cheng issued and served a document subpoena on JKH. The subpoena sought, among other things, documents concerning the names and addresses of the drivers, time records, billing records, and cancelled paychecks. JKH produced responsive documents about a week later. Among the documents produced were the "Independent Contractor Profiles" and form applications that had been filled out by the drivers, along with lists showing the amounts paid by JKH to the drivers during the three pay periods immediately preceding the issuance of the stop order and cancelled checks. Cheng spoke with Herrera about the document production and Herrera maintained that consistently with industry standard, the drivers were independent contractors...