washington's employment security act - JD Supra
LABOR & EMPLOYMENT ALERT APRIL 2018
WASHINGTON’S EMPLOYMENT SECURITY ACT by: Dave W. Wiley and Sean T. James
In Swanson Hay Co. v. State Emp loyment Sec . Dep’t, 1 Wn. App. 2d 174, 404 P.3d 517 (Wash. Ct. App. Nov. 2017), the Washington Cour t of Appeals recently held, for purposes of Washington’s Employment Security Act, that Swanson Hay and two other companies’ owner-operators are employees of the motor carriers with whom they contract. Despite the fact the motor carrier industr y has traditionally treated owner-operators as independent contractors, the Cour t determined the level of control and direction the motor carrier exercised over owner-operators renders them employees under the Employment Security Act’s broad definition of “employment.” This case demonstrates that w hen assessing whether a business is required to pay unemployment taxes, industr y practice and custom will not negate the Employment Security Act’s sweeping definition of “employment.” The Employment Security Act, presently codified in Title 50 RCW, requires employers to pay a mandator y tax on all wages paid to employees. This tax is commonly referred to as the “unemployment tax,” which is used to pay unemployment benefits to unemployed workers. An impor tant caveat to this tax obligation, however, is that an individual engaged in an independent enterprise is not considered an employee and pay-
ments to that individual are not subject to the unemployment tax. To qualify for the independent enterprise exemption, the individual must, among other things: (1) be free from control and direction of the e mployer ; (2) have a business character or location that is separate or independent from the employer’s; and (3) be engaged in an independently established trade , occupation, profession or business, of the same nature as that involved in the contract of ser vice . In Swanson Hay Co., three interstate motor carriers challenged the State’s assessment for unpaid unemployment taxes stemming from payments the motor carriers had made to their owner-operators, who the State claimed were their employees under the Employment Security Act. The carriers argued instead that the unemployment tax did not apply to payments made to owner-operators because owner-operators are not traditionally considered company “employees” with whom they contract. The carriers also argued that Washington’s Employment Security Act is p reempted by the Federal Aviation Administration Authorization Act of 1994, which expressly preempts state trucking regulations on interstate motor carriers “related to a price , route , or ser vice .” The Cour t rejected this argument noting that because the
highest unemployment tax rate is only 6- 6.5% of payroll and there is a statutor y cap on the amount an employer is required to pay, unemployment tax is not substantial enough to have a significant effect on motor carrier’s prices, routes or ser vices. Next, they argued that because owner-operators are independent contractors, not employees, the exemption for ser vices provided by an independent enterprise applies. The Cour t rejected this argument largely because the owner-operators are subject to direction and control by motor carriers. In assessing the control issue , the Cour t noted that under the Employment Security Act “[t]he crucial issue is not whether the employing unit actually controls, but whether it has the right to control the methods and details of the worker’s performance .” [emphasis added]. The Cour t noted “there is no textual basis for concluding that control exercised by the employer must be control it has freely chosen to exercise , as opposed to control it is required to exercise by l aw.” Indeed, the Cour t listed numerous other aspects of the motor carriers’ relationship with owner-operators as evidence of the control and direction the motor carriers had over owner-operators, including: (1) the lease agreements gave the
LABOR & EMPLOYMENT ALERT APRIL 2018
motor carriers exclusive control and possession of the owner-operators’ trucking equipment; (2) owner-operators were required to mark th eir equipment with the motor carrier’s name; (3) owner-operators were required to notify the motor carriers of any accident; (4) owner-operators were required to receive permission from the motor carrier to accept a load from another entity; and (5) the motor carrier held all licenses and fuel permits. Ironically, these requirements are typically the hallmark of legally enforceable lease agreements which are , in turn, required when owner-operators operate under the operating authority of a motor carrier at either the state or federal level and highlig ht the dilemma posed by the Cour t’s decision in Swanson Hay. Additionally, the Cour t found the motor carriers failed to satisfy the third requirement for the independent enterprise exception, as they were unable to demonstrate that owner-operators were
“customarily engaged in an independently established trade , occupation, profession, or business, of the same nature as that involved in the contract of ser vice” with the alleged employer. The most essential element in demonstrating that an individual is engaged in an independently established business is the ability to continue business even if the relationship with the alleged employer is terminated. On this point, the Cour t noted that the owner-operators lacked independent operating authority and that their workload is strongly aligned with the business demands of a single motor carrier. Accordingly, the Cour t held the motor carriers failed to meet their burden of demonstrating that their owner-operators were engaged in independently-established businesses.
vision II of the Wash ington Cour t of Appeals followed the decision announced in Swanson Hay. Co. in affirming the Employ ment Security Depar tment’s assessment of delinquent unemployment insurance taxes on the basis that Gulick Trucking’s drivers were covered employees, rather than independent contractors, under Washington’s Employment Security Act. The motor carriers filed a Petition for Review with the Washington Supreme Cour t on November 29, 2017. The Washington Supreme Cour t is scheduled to rule on the Petition for Review by June 29, 2018. For now, however, Swanson Hay Co. and Gulic k Truc king. Inc. remain good law and suggest that owner-operators wil l likely be deemed employees of the motor carriers with whom they contract. Accordingly, motor carriers should carefully consider paying unemployment taxes to the Depar tment when they compensate owner-operators for their ser vices.
The impact of this decision is apparently already being felt by other companies operating in the motor carrier industr y. In Gulic k Truc king, Inc . v. State , Employment Sec . Dep’t, 49646-1-II, 2018 WL 509096 (Wash. Ct. App. Jan. 23, 2018), Di-
AUTHORS
DAVID WILEY
SEAN JAMES
–
–
PHONE: 206-233-2895 EMAIL: [email protected]
PHONE: 206-233-2989 EMAIL: [email protected]
Williams Kastner has been serving clients in the Pacific Northwest since 1929. With attorneys in offices located in Washington, Oregon and Alaska, the firm offers a full range of legal services to local and international clients. For more information about Williams Kastner, visit our website at www.williamskastner.com. The materials provided and opinions expressed in this alert are for informational purposes only and not for the purpose of providing legal advice. The receipt of this information does not create an attorney-client relationship between you and Williams Kastner.
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WASHINGTON’S EMPLOYMENT SECURITY ACT by: Dave W. Wiley and Sean T. James
In Swanson Hay Co. v. State Emp loyment Sec . Dep’t, 1 Wn. App. 2d 174, 404 P.3d 517 (Wash. Ct. App. Nov. 2017), the Washington Cour t of Appeals recently held, for purposes of Washington’s Employment Security Act, that Swanson Hay and two other companies’ owner-operators are employees of the motor carriers with whom they contract. Despite the fact the motor carrier industr y has traditionally treated owner-operators as independent contractors, the Cour t determined the level of control and direction the motor carrier exercised over owner-operators renders them employees under the Employment Security Act’s broad definition of “employment.” This case demonstrates that w hen assessing whether a business is required to pay unemployment taxes, industr y practice and custom will not negate the Employment Security Act’s sweeping definition of “employment.” The Employment Security Act, presently codified in Title 50 RCW, requires employers to pay a mandator y tax on all wages paid to employees. This tax is commonly referred to as the “unemployment tax,” which is used to pay unemployment benefits to unemployed workers. An impor tant caveat to this tax obligation, however, is that an individual engaged in an independent enterprise is not considered an employee and pay-
ments to that individual are not subject to the unemployment tax. To qualify for the independent enterprise exemption, the individual must, among other things: (1) be free from control and direction of the e mployer ; (2) have a business character or location that is separate or independent from the employer’s; and (3) be engaged in an independently established trade , occupation, profession or business, of the same nature as that involved in the contract of ser vice . In Swanson Hay Co., three interstate motor carriers challenged the State’s assessment for unpaid unemployment taxes stemming from payments the motor carriers had made to their owner-operators, who the State claimed were their employees under the Employment Security Act. The carriers argued instead that the unemployment tax did not apply to payments made to owner-operators because owner-operators are not traditionally considered company “employees” with whom they contract. The carriers also argued that Washington’s Employment Security Act is p reempted by the Federal Aviation Administration Authorization Act of 1994, which expressly preempts state trucking regulations on interstate motor carriers “related to a price , route , or ser vice .” The Cour t rejected this argument noting that because the
highest unemployment tax rate is only 6- 6.5% of payroll and there is a statutor y cap on the amount an employer is required to pay, unemployment tax is not substantial enough to have a significant effect on motor carrier’s prices, routes or ser vices. Next, they argued that because owner-operators are independent contractors, not employees, the exemption for ser vices provided by an independent enterprise applies. The Cour t rejected this argument largely because the owner-operators are subject to direction and control by motor carriers. In assessing the control issue , the Cour t noted that under the Employment Security Act “[t]he crucial issue is not whether the employing unit actually controls, but whether it has the right to control the methods and details of the worker’s performance .” [emphasis added]. The Cour t noted “there is no textual basis for concluding that control exercised by the employer must be control it has freely chosen to exercise , as opposed to control it is required to exercise by l aw.” Indeed, the Cour t listed numerous other aspects of the motor carriers’ relationship with owner-operators as evidence of the control and direction the motor carriers had over owner-operators, including: (1) the lease agreements gave the
LABOR & EMPLOYMENT ALERT APRIL 2018
motor carriers exclusive control and possession of the owner-operators’ trucking equipment; (2) owner-operators were required to mark th eir equipment with the motor carrier’s name; (3) owner-operators were required to notify the motor carriers of any accident; (4) owner-operators were required to receive permission from the motor carrier to accept a load from another entity; and (5) the motor carrier held all licenses and fuel permits. Ironically, these requirements are typically the hallmark of legally enforceable lease agreements which are , in turn, required when owner-operators operate under the operating authority of a motor carrier at either the state or federal level and highlig ht the dilemma posed by the Cour t’s decision in Swanson Hay. Additionally, the Cour t found the motor carriers failed to satisfy the third requirement for the independent enterprise exception, as they were unable to demonstrate that owner-operators were
“customarily engaged in an independently established trade , occupation, profession, or business, of the same nature as that involved in the contract of ser vice” with the alleged employer. The most essential element in demonstrating that an individual is engaged in an independently established business is the ability to continue business even if the relationship with the alleged employer is terminated. On this point, the Cour t noted that the owner-operators lacked independent operating authority and that their workload is strongly aligned with the business demands of a single motor carrier. Accordingly, the Cour t held the motor carriers failed to meet their burden of demonstrating that their owner-operators were engaged in independently-established businesses.
vision II of the Wash ington Cour t of Appeals followed the decision announced in Swanson Hay. Co. in affirming the Employ ment Security Depar tment’s assessment of delinquent unemployment insurance taxes on the basis that Gulick Trucking’s drivers were covered employees, rather than independent contractors, under Washington’s Employment Security Act. The motor carriers filed a Petition for Review with the Washington Supreme Cour t on November 29, 2017. The Washington Supreme Cour t is scheduled to rule on the Petition for Review by June 29, 2018. For now, however, Swanson Hay Co. and Gulic k Truc king. Inc. remain good law and suggest that owner-operators wil l likely be deemed employees of the motor carriers with whom they contract. Accordingly, motor carriers should carefully consider paying unemployment taxes to the Depar tment when they compensate owner-operators for their ser vices.
The impact of this decision is apparently already being felt by other companies operating in the motor carrier industr y. In Gulic k Truc king, Inc . v. State , Employment Sec . Dep’t, 49646-1-II, 2018 WL 509096 (Wash. Ct. App. Jan. 23, 2018), Di-
AUTHORS
DAVID WILEY
SEAN JAMES
–
–
PHONE: 206-233-2895 EMAIL: [email protected]
PHONE: 206-233-2989 EMAIL: [email protected]
Williams Kastner has been serving clients in the Pacific Northwest since 1929. With attorneys in offices located in Washington, Oregon and Alaska, the firm offers a full range of legal services to local and international clients. For more information about Williams Kastner, visit our website at www.williamskastner.com. The materials provided and opinions expressed in this alert are for informational purposes only and not for the purpose of providing legal advice. The receipt of this information does not create an attorney-client relationship between you and Williams Kastner.
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