Swanson Hay Co. v. State

Citation404 P.3d 517
Decision Date31 October 2017
Docket NumberNo. 34566-1-111 (consolidated with No. 34567-0-111, No. 34568-8-111).,34566-1-111 (consolidated with No. 34567-0-111, No. 34568-8-111).
Parties SWANSON HAY COMPANY, Appellant, v. STATE of Washington EMPLOYMENT SECURITY DEPARTMENT, Respondent. Hatfield Enterprizes, Inc., a Washington corporation, Appellant, v. State of Washington Employment Security Department, Respondent. System-TWT Transport, a Washington corporation, Appellant, v. State of Washington Employment Security Department, Respondent.
CourtCourt of Appeals of Washington

Ryan R. McNeice, McNeice Wheeler PLLC, Po Box 14758, 11404 E Sprague Ave, Spokane Valley, WA, 99214-0758, Philip Albert Talmadge, Thomas M. Fitzpatrick, Talmadge/Fitzpatrick/Tribe, 2775 Harbor Ave Sw, Third Floor Ste C, Seattle, WA, 98126-2138, Aaron Paul Riensche, Ogden Murphy Wallace PLLC, 901 5th Ave Ste 3500, Seattle, WA, 98164-2008 Counsels for Appellants.

Eric Daniel Peterson, Leah E. Harris, Washington State Attorney General's Office, 800 5th Ave Ste 2000, Seattle, WA, 98104-3188 Counsels for Respondents.

Laura Elizabeth Kruse, Betts Patterson & Mines PS, 701 Pike St Ste 1400, Seattle, WA, 98101-3927, Amicus Curiae on behalf of American Trucking Associations, Inc.

PUBLISHED OPINION

Siddoway, J.

¶ 1 The common law, the Washington legislature, and the United States Congress have defined whether two parties stand in an employment as opposed to an independent contractor relationship in different ways, depending on the context. This case illustrates that it can be clearer to ask not whether someone is an independent contractor, but to ask instead whether the contractor is independent for a given purpose: e.g., for the purpose of the doctrine of respondeat superior, for federal payroll tax purposes, for state worker's compensation, or for other state law purposes. At issue here is employment security—the context in which, in Washington, the relationship is more likely than any other to be viewed as employment.

¶ 2 The three motor carriers in this consolidated appeal challenge assessments of unemployment insurance taxes on amounts they paid for services provided by "owner-operators," meaning individuals who own trucking equipment, lease it to a carrier, and then use that equipment under contract to haul freight for that carrier. The carriers did not meet their burden of demonstrating that the owner-operators' services qualify for the narrow exemption from unemployment insurance tax liability for payments to sufficiently independent enterprises. We find no federal preemption of the tax's application to the owner-operators' services and no basis on which the agency's final order was arbitrary or capricious. We affirm.

BACKGROUND
Washington's Employment Security Act

¶ 3 Title IX of the Social Security Act of 1935 for the first time imposed a federal excise tax on employers on wages paid, for the purpose of creating an unemployment benefit fund. Steward Machine Co. v. Davis, 301 U.S. 548, 574, 57 S.Ct. 883, 81 L.Ed. 1279 (1937). The tax began with the year 1936 and was payable for the first time on January 31, 1937. Id. An employer could claim a 90 percent credit against the tax for contributions paid to an unemployment fund under a state law, provided the state law had been certified to the United States Secretary of the Treasury as meeting criteria designed in part "to give assurance that the state unemployment compensation law [is] one in substance as well as name."

Id. at 575, 57 S.Ct. 883. The tax and largely offsetting credit were described by supporters as "the states and the nation joining in a cooperative endeavor to avert a common evil": the problem of unemployment that the nation had suffered at unprecedented levels during the years 1929 to 1936. Id. at 587, 586, 57 S.Ct. 883.

¶ 4 Before Congress considered adoption of the act, most states held back from adopting state unemployment compensation laws despite the ravages of the Great Depression. Id. at 588, 57 S.Ct. 883. This was not for "lack of sympathetic interest," but "through alarm lest in laying such a toll upon their industries, they would place themselves in a position of economic disadvantage as compared with neighbors or competitors." Id. "The federal Act, from the nature of its ninety per cent credit device, [was] obviously an invitation to the states to enter the field of unemployment insurance." Standard Dredging Corp. v. Murphy, 319 U.S. 306, 310, 63 S.Ct. 1067, 87 L.Ed. 1416 (1943) (citing Buckstaff Bath House Co. v. McKinley, 308 U.S. 358, 363, 60 S.Ct. 279, 84 L.Ed. 322 (1939) ). Most states accepted the invitation and adopted state unemployment compensation laws. See Benjamin S. Asia, Employment Relation: Common-Law Concept and Legislative Definition, 55 YALE L. J. 76, 83-85, nn.24-34 (1945) (discussing laws adopted by 31 states and the District of Columbia).

¶ 5 Criteria by which the Social Security Board would certify state laws were limited to what was "basic and essential" to provide reasonable protection to the unemployed, with "[a] wide range of judgment ... given to the several states as to the particular type of statute to be spread upon their books." Steward, 301 U.S. at 593, 57 S.Ct. 883. But to assist state legislatures, the Social Security Board published draft laws in 1936 and 1937 as examples meeting the federal requirements.1 Following a recommendation by the Committee on Legal Affairs of the Interstate Conference of Unemployment Compensation Agencies that "employment" for purposes of the state laws should be broadly defined, using a pioneering 1935 Wisconsin law as a model, a draft bill published by the Social Security Board in January 1937 tracked Wisconsin's expansive definition of employment. Asia, supra at 83, n.21. It broadly defined employment to mean "service, including service in interstate commerce, performed for wages or under any contract of hire, written or oral, express or implied ...." Draft Bill, 1937 ed., § 2(i)(1) at 7. To narrowly exempt payments to individuals engaged in an independent enterprise, it employed a three-part measure of independence, often referred to as the "ABC" definition, that included a freedom from control ("A") requirement, an independent business character or location ("B") requirement, and an independently established enterprise ("C") requirement. The "C" requirement was described as "at once the most radical departure from common-law criteria and the most relevant of the three tests to the purposes of the unemployment compensation program." Asia, supra at 87.

¶ 6 In March 1937, the Washington Legislature enacted an unemployment compensation act substantially based on the Social Security Board's draft bills, to take effect immediately.

LAWS OF 1937, ch. 162 § 24, at 617. Tracking language in the draft bills, its preamble described "economic insecurity due to unemployment" as the "greatest hazard of our economic life." Id., § 2, at 574, presently codified at RCW 50.01.010. It authorized taxation to create resources from which to provide benefits for persons "unemployed through no fault of their own" by applying "the insurance principle of sharing the risks, and by the systematic accumulation of funds during periods of employment to provide benefits for periods of unemployment." Id. at 575, 57 S.Ct. 883.

¶ 7 Section 19(g)(1) of the 1937 Washington legislation tracked Wisconsin's and the Social Security Board's definition of employment. Its "ABC" definition of exempt independent enterprises, which was virtually identical to the Social Security Board's 1937 draft bill,2 provided:

Services performed by an individual for remuneration shall be deemed to be employment subject to this act unless and until it is shown to the satisfaction of the director that:
(i) Such individual has been and will continue to be free from control or direction over the performance of such service, both under his contract of service and in fact; and
(ii) Such service is either outside the usual course of the business for which such service is performed, or that such service is performed outside of all the places of business of the enterprises for which such service is performed; and
(iii) Such individual is customarily engaged in an independently established trade, occupation, profession or business, of the same nature as that involved in the contract of service.

LAWS OF 1937, ch. 162, § 19(g)(5). As later observed by our Supreme Court, because the requirements were stated in the conjunctive, a failure to satisfy any one of them rendered the exemption unavailable.

Penick v. Emp't Sec. Dep't, 82 Wash.App. 30, 42, 917 P.2d 136 (1996).

¶ 8 In 1945, the Washington legislature repealed all acts relating to unemployment compensation and enacted a new unemployment compensation act, presently codified as amended in Title 50 RCW. LAWS OF 1945, ch. 35 §§ 1-192, at 76-151. The breadth of "employment" covered by the act was made even clearer by the addition of language describing "personal service, of whatever nature," etc., as "unlimited by the relationship of master and servant as known to the common law or any other legal relationship." Id. at § 11.

Appellants and the assessments

¶ 9 In proceedings below, the appellant-carriers, Swanson Hay, Co. (Swanson), System-TWT Transport (System), and Hatfield Enterprizes, Inc. (Hatfield), appealed unemployment taxes assessed by the Employment Security Department (Department) on the carriers' payments for services to owner-operators. They participated in evidentiary or summary judgment proceedings before an administrative law judge (ALJ) and filed petitions for review of the ALJ's adverse determinations by the Department's commissioner (Commissioner). The Commissioner entered modified findings and conclusions but affirmed determinations adverse to the carriers.

¶ 10 There are some differences in the three carriers' operations and audit history. System was identified for audit through the work of an "underground economy unit" of the Department and was originally assessed $264,057.40 in taxes for the...

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