Three separate lawsuits challenging the Washington State Employment Security Department’s unemployment tax were recently denied a writ of certiorari by the U.S. Supreme Court. The truck carriers claimed that an independent contractor exemption should apply to their operations.
On Dec. 3, the Supreme Court decided not to hear cases filed by Hatfield Enterprizes, Gulick Trucking and MacMillan-Piper in lawsuits filed against the Washington State Employment Security Department. Although similar in nature, the three lawsuits are separate. Petitions to the Supreme Court for all three suits were filed Oct. 10.
Petitions to the Supreme Court were filed after all three carriers lost their appellate case on dates ranging from October 2017 to January 2018. The Supreme Court’s denial effectively makes the appellate court rulings the final decision.
In effect, the high court ruled the companies misclassified drivers and must pay the unemployment tax.
Hatfield Enterprizes v. state of Washington Employment Security Department
Hatfield’s appellate suit was consolidated with similar lawsuits filed by two other carriers, Swanson Hay and System-TWT Transport. The consolidated cases would set precedent for the other two lawsuits denied certiorari by the Supreme Court.
On appeal, the carriers challenged a lower court’s ruling in favor of the Employment Security Department regarding unemployment taxes assessed on payments for services to owner-operators. Hatfield was found to have misclassified 15 contractors and was assessed taxes and penalties of nearly $14,000. The lower court ordered that the assessment be reduced to 30 percent of that amount to account for the fact that the employment department relied on payment amounts approximately 70 percent of which were for equipment rather than driving services.
Similar to Title IX of the Social Security Act of 1935, the state act imposes a tax on employers on wages paid for the purpose of creating an unemployment benefit fund.
Under the act, payments to those engaged in an “independent enterprise” are exempt. A three-prong measurement is used to determine independence:
- Freedom from control.
- Independent business character or location.
- Independently established enterprise.
If just one of the three requirements is not satisfied, the wages are not exempt for the employer.
In the context of “freedom of control,” the court determined the following:
- Hatfield’s lease agreement with their owner-operators gave the carriers exclusive control and possession of their owner-operators’ trucking equipment.
- Hatfield’s agreement required owner-operators to mark their equipment with the carrier’s name, address, and operating authority number.
- Hatfield required owner-operators to comply with all rules and regulations applicable to their operations, and it reserved the right to immediately terminate their lease in the event of a violation.
- Hatfield billed customers and paid the owner-operators for transporting their customers’ freight.
- None of Hatfield’s owner-operators carried their own insurance, although they were responsible for the cost of cargo and liability insurance borne by Hatfield.
- Hatfield held all licenses and fuel permits.
- Hatfield’s owner-operators were required to maintain the leased equipment in good repair, mechanical condition, running order and appearance, including by washing and cleaning it as frequently as required to maintain a good public image.
- Hatfield retained the right to discuss and recommend actions against an owner-operator’s employees or agents in the event they damaged Hatfield’s customer relations through their negligence. It also retained the right to take possession of the owner-operator’s equipment and cargo, and complete a shipment itself if it believed the owner-operator had breached the contract in manner creating liability for Hatfield.
- Hatfield required owner-operators to have a safety inspection of the leased equipment at least once every 90 days at a federally approved inspection station.
The court pointed out that the employment security act identifies its exemptions solely for unemployment insurance tax purposes. Case law has already determined that “an individual may be both an independent contractor for some purposes and engaged in ‘employment’ for purposes of Washington’s exceedingly broad definition of covered employment.”
Consequently, the appellate court ruled that Hatfield did not prove that its owner-operators have been and will continue to be free from control or direction in performing services.
However, the carriers also argued that the act is preempted by the Federal Aviation Administration Authorization Act of 1994 (F4A). That act prevents states from enacting or enforcing a “law, regulation or other provision having the force and effect of law related to a price, route, or service of any motor carrier.”
The appellate court noted that whether federal law preempts state law is a question of congressional intent. More specifically, laws are not preempted simply because they increase the costs of operations. Laws can be preempted when the economic effects are so severe that states essentially dictate the prices, routes or services that federal law intended the market to control.
Regarding Hatfield’s operations, the employment security act will subject the company to a quarterly tax rate no more than 1.14 percent. Accordingly, the court ruled that the carriers have not proven that the unemployment insurance taxes has such a severe effect.
Gulick Trucking and MacMillan-Piper cases
In the Gulick Trucking case, the employment department found that the carrier had misclassified 120 owner-operators for unemployment insurance tax purposes. Gulick contested the classification of drivers while also arguing that the F4A preempted the employment security act.
An employment department audit found that MacMillan had misclassified 69 owner-operators. As with the other two cases, MacMillan disputed employment classification and argued federal law preemption.
Appellate courts ruled in favor of the state in both the Gulick and MacMillan cases, citing the Hatfield case just a few months prior as precedent.
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