Lee's Drywall Co. v. State, Dept. of Labor

• Decision Date: 27 November 2007
• Docket Number: No. 35613-9-II.,35613-9-II.
• Citation: 141 Wn. App. 859,173 P.3d 934
• Court: Washington Court of Appeals
• Parties: LEE'S DRYWALL CO., INC., a Washington corporation, Appellant, v. STATE of Washington, DEPARTMENT OF LABOR & INDUSTRIES, Respondent.

173 P.3d 934

141 Wn. App. 859

LEE'S DRYWALL CO., INC., a Washington corporation, Appellant, v. STATE of Washington, DEPARTMENT OF LABOR & INDUSTRIES, Respondent.

No. 35613-9-II.

Court of Appeals of Washington, Division 2.

November 27, 2007.

Klaus Otto Snyder, Snyder Law Firm LLC, Sumner, WA, for Appellant.

James Stone Johnson, Attorney Generals Office, Olympia, WA, for Respondent.

ARMSTRONG, J.

¶ 1 Lee's Drywall Company, Inc. appeals a Board of Industrial Insurance Appeals order assessing Lee's for industrial insurance premiums that one of its subcontractors did not pay. Lee's argues that (1) the Board incorrectly interpreted and applied RCW 51.12.070, the prime contractor liability statute; (2) the Department of Labor and Industries failed to fulfill a statutory duty to collect the premiums from Lee's subcontractor before assessing them against Lee's; (3) the Department improperly implemented new rules without following required rule-making procedures; and (4) these rules unconstitutionally mandate private searches on behalf of the government and impair the contract between Lee's and its subcontractor. Finding no error, we affirm.

FACTS

¶ 2 Lee's Drywall Company, Inc. is a general contractor that primarily works as a drywall subcontractor. In the second quarter of 2003, Lee's subcontracted with Zagy's Drywall to perform drywall work. Lee's obtained proof that Zagy's was licensed, bonded, and insured before subcontracting with the company. But Lee's did not determine whether Zagy's maintained either a principal place of business that would be eligible for a business deduction for Internal Revenue Service (IRS) tax purposes or a set of books or records that reflected all items of income and expenses of the business.

¶ 3 Zagy's submitted regular invoices to Lee's, and Lee's paid Zagy's by check. Jeffrey Lee, president of Lee's, testified that Zagy's was not housed within Lee's Sumner property and that he believed Zagy's did business out of the Federal Way address it registered with the Department.

¶ 4 Zagy's failed to pay the industrial insurance premiums for its employees during the second quarter of 2003. The Department audited Zagy's, but the auditor was unable to ascertain the amount of premiums Zagy's owed from the records Isaias Guerrero, Zagy's owner, provided. And because Guerrero did his books and records on his kitchen table, the auditor concluded that the location did not qualify for an IRS business deduction.

¶ 5 The Department assessed prime contractor liability under RCW 51.12.070 against Lee's to recover the unpaid premiums. After using subcontractor reports from Lee's to determine the amount of premiums Zagy's owed for the work it did for Lee's, the Department issued an order assessing Lee's for $7,937 of Zagy's unpaid premiums.

¶ 6 Lee's appealed the Department's assessment to the Board. The industrial appeals judge (IAJ) issued a proposed decision recommending that the Board affirm the Department's order. The IAJ found that there was insufficient evidence to establish that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction or that Zagy's maintained a set of books and records that disclosed all business income and expenses.

¶ 7 The Board adopted the IAJ's decision, and the superior court affirmed the Board's decision.

¶ 8 The principal issue is whether the Board correctly interpreted RCW 51.12.070 to require Lee's to prove that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction and that Zagy's maintained a set of books or records that disclosed all of its business income and expenses.

ANALYSIS

I. Standard of Review

¶ 9 The Administrative Procedure Act (APA) governs an appeal from an assessment of industrial insurance premiums. RCW 51.48.131. In reviewing decisions of the Board, we apply APA standards directly to the administrative record. Superior Asphalt & Concrete Co. v. Dep't of Labor & Indus., 112 Wash.App. 291, 296, 49 P.3d 135 (2002) (citing Tapper v. Employment Sec. Dep't, 122 Wash.2d 397, 402, 858 P.2d 494 (1993)). The party asserting error, in this case Lee's, bears the burden of demonstrating the invalidity of the Board's action. RCW 34.05.570(1)(a).

¶ 10 We review questions of law de novo, giving substantial weight to an agency's interpretation of the statutes it administers. Superior Asphalt, 112 Wash.App. at 296, 49 P.3d 135 (citing Everett Concrete Prods., Inc. v. Dep't of Labor and Indus., 109 Wash.2d 819, 823, 748 P.2d 1112 (1988)). We review findings of fact for substantial supporting evidence. RCW 34.05.570(3)(e). Substantial evidence is evidence that would persuade a fair-minded person of the truth or correctness of the matter. King County v. Cent. Puget Sound Growth Mgmt. Hearings Bd., 142 Wash.2d 543, 553, 14 P.3d 133 (2000).

II. Prime Contractor Liability

¶ 11 Lee's contends that the Board incorrectly interpreted and applied RCW 51.12.070, the prime contractor liability statute.

¶ 12 RCW 51.12.070 imposes primary and direct liability for all industrial insurance premiums on a person, firm, or corporation that lets a contract to another to perform work.¹ But the statute contains an exception from prime contractor liability for registered contractors.² In 2003, a registered contractor was not responsible for a subcontractor's premiums if:

(1) The subcontractor is currently engaging in a business which is registered under chapter 18.27 RCW ...;

(2) The subcontractor has a principal place of business which would be eligible for a business deduction for internal revenue service tax purposes other than that furnished by the contractor for which the business has contracted to furnish services;

(3) The subcontractor maintains a separate set of books or records that reflect all items of income and expenses of the business; [and]

(4) The subcontractor has contracted to perform:

(a) The work of a contractor as defined in RCW 18.27.010. . . .

RCW 51.12.070.³

¶ 13 The Board assessed prime contractor liability against Lee's after concluding that Lee's did not establish that Zagy's maintained a principal place of business that would be eligible for an IRS business deduction or a separate set of books or records showing all business income and expenses.⁴

A. Principal Place of Business

¶ 14 Lee's asserts that the Board erroneously interpreted RCW 51.12.070(2) by requiring Lee's to prove that Zagy's maintained a principal place of business that was "in fact" eligible, not that "would be" eligible, for an IRS business deduction. Br. of Appellant at 17. Relying on Littlejohn Construction Co. v. Department of Labor & Industries, 74 Wash.App. 420, 873 P.2d 583 (1994), Lee's maintains that it had to prove only that Zagy's was truly an independent contractor with its own principal place of business.

¶ 15 Statutory interpretation is a question of law that we review de novo. Dep't of Ecology v. Campbell & Gwinn, L.L.C., 146 Wash.2d 1, 9, 43 P.3d 4 (2002). In interpreting a statute, we look for the legislature's intent; if a statute's meaning is plain on its face, we follow that plain meaning without resorting to rules of statutory construction. Campbell & Gwinn, 146 Wash.2d at 9-10, 43 P.3d 4. If, however, a statute is ambiguous, we employ various rules of statutory interpretation to find the legislature's intent. Whatcom County v. Bellingham, 128 Wash.2d 537, 546, 909 P.2d 1303 (1996).

¶ 16 Lee's concedes that RCW 51.12.070(2) is unambiguous. A subcontractor must have "a principal place of business which would be eligible for a business deduction for internal revenue service tax purposes other than that furnished by the contractor." RCW 51.12.070(2). Because this language is not subject to more than one reasonable interpretation, we follow its plain meaning. Campbell & Gwinn, 146 Wash.2d at 9-10, 43 P.3d 4.

¶ 17 Lee's reliance on Littlejohn is misplaced. In that case, the court held that a subcontractor may be liable for its own subcontractor's premiums. Littlejohn, 74 Wash. App. at 427-29, 873 P.2d 583. As part of its analysis, the court considered the legislative history of the prime contractor liability statute, including the addition in 1981 of the exception at issue here. Littlejohn, 74 Wash. App. at 427, 873 P.2d 583. The court recited the exception's four requirements, citing to RCW 51.12.070(1)-(4) in footnotes. Littlejohn, 74 Wash.App. at 427 & nn. 3-6, 873 P.2d 583. It summarized RCW 51.12.070(2) as essentially requiring the subcontractor to be "truly an independent contractor with its own principal place of business." Littlejohn, 74 Wash.App. at 427, 873 P.2d 583 (citing RCW 51.12.070(2)). But the court was not interpreting the language of RCW 51.12.070(2); it was interpreting the statute's legislative history. Because the statute is unambiguous, we do not look at the legislative history to find the legislature's intent. Campbell & Gwinn, 146 Wash.2d at 9-10, 43 P.3d 4. And Lee's suggested interpretation is improper because it ignores the language requiring that the principal place of business "would be eligible for a business deduction for internal revenue service tax purposes." See State v. J.P., 149 Wash.2d 444, 450, 69 P.3d 318 (2003) (court may not delete words from an unambiguous statute).

¶ 18 In addition, Lee's points to nothing in the record supporting its argument that the Board interpreted RCW 51.12.070(2) to require Lee's to show that Zagy's maintained a principal place of business that was "in fact" eligible for an IRS tax deduction. The Board consistently used the statutory language "would be eligible" in its discussion and findings. Board Record (BR) at 25-26. The Board did not erroneously interpret RCW 51.12.070(2).

¶ 19 Lee's also argues that the Board erred in finding insufficient evidence to establish that Zagy's met the requirements of RCW 51.12.070(2), pointing to Jeffrey Lee's testimony that Zagy's was not housed within Lee's...