Petition for Writ of Certiorari — MacMillan-Piper, Inc., Petitioner v. Washington State Employment Security Department

Supreme Court briefOct 10, 2018

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No. 18In the

Supreme Court of the United States

MACMILLAN-PIPER, INC.,

A WASHINGTON CORPORATION,

Petitioner,

STATE OF WASHINGTON EMPLOYMENT

SECURITY DEPARTMENT,

Respondent.

On Petition for a Writ of Certiorari to the Court of

A ppeals of the State of Washington, Division I

PETITION FOR A WRIT OF CERTIORARI

A aron Riensche

Ogden Murphy

Wallace, P.L.L.C.

901 Fifth Avenue, Suite 3500

Seattle, WA 9816408

(206) 447-7000

Philip A. Talmadge

Counsel of Record

Talmadge/Fitzpatrick /Tribe

2775 Harbor Avenue SW

Third Floor, Suite C

Seattle, WA 98126

(206) 574-6661

phil@tal-fitzlaw.com

Counsel for Petitioners

282656

(800) 274-3321 • (800) 359-6859

QUESTIONS PRESENTED

1. The Federal Aviation Administration Authorization

Act, 49 U.S.C. § 14501(c)(1), (“FAAAA”) broadly preempts

any state action that relates even indirectly to a carrier’s

prices, routes, or services. Washington State’s statute

defining independent contractors for unemployment

compensation taxes, Wash. Rev. Code § 50.04.140, makes

it impossible for such federally-authorized independent

contractors in the trucking industry (owner/operators)

to ever be anything but trucking carriers’ employees.

Such a reclassification eliminates an established business

model in that industry. Is such a reclassification scheme

preempted by the FAAAA, given its direct and indirect

effects on prices, routes, and services of trucking carriers?

2. 49 C.F.R. § 376.12 regulates the relationship

between tr ucking car r iers and ow ner/operators,

specifically providing in C.F.R. § 376.12(c)(4) that

compliance with the federal requirement of exclusive

carrier possession, control, and use of owner/operator

equipment during the duration of the parties’ equipment

lease may not affect whether an owner/operator is an

employee or independent contractor under state law.

Are courts barred from considering federally-mandated

lease contract provisions in determining carrier control

over an owner/operator for purposes of unemployment

compensation taxation?

PARTIES TO THE PROCEEDING

Petitioners

MACMILLAN-PIPER, INC., a Washington corporation,

Respondent

STATE OF WASHINGTON EMPLOYMENT SECURITY

DEPARTMENT

iii

CORPORATE DISCLOSURE FORM

Pursuant to Supreme Court Rule 29.6, petitioner

MacMillan-Piper, Inc. provides the following Corporate

Disclosure Statement:

1. Petitioner MacMillan-Piper Inc. has no parent

corporation, and no publicly held company owns 10% or

more of its stock.

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED . . . . . . . . . . . . . . . . . . . . . . . i

PARTIES TO THE PROCEEDING . . . . . . . . . . . . . . . . ii

CORPORATE DISCLOSURE FORM . . . . . . . . . . . . . iii

TABLE OF CONTENTS . . . . . . . . . . . . . . . . . . . . . . . . . iv

TABLE OF APPENDICES . . . . . . . . . . . . . . . . . . . . . . . vi

TABLE OF AUTHORITIES . . . . . . . . . . . . . . . . . . . . . vii

OPINIONS BELOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

STATEMENT OF JURISDICTION . . . . . . . . . . . . . . . 1

STATUTORY PROVISIONS INVOLVED . . . . . . . . . . 1

STATEMENT OF THE CASE . . . . . . . . . . . . . . . . . . . 13

(1) Owner/Operators in the Trucking Industry . . . 13

(2) Petitioners’ Operations . . . . . . . . . . . . . . . . . . . . 14

(3) The State Targeted Washington’s Trucking

Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17

(4) Procedural History . . . . . . . . . . . . . . . . . . . . . . . 20

REASONS FOR GRANTING THE PETITION . . . . 20

Table of Contents

Page

(1) Washington State’s Effective Elimination

of the Owner/Operator Business Model Is

Federally Preempted . . . . . . . . . . . . . . . . . . . . . . 21

(a) T he Wa sh i ng t on Cou r t s Fa i led

t o A pply T h i s Cou r t ’s FA A A A

Jurisprudence Providing Expansive

Fe d e r a l P r e e m p t i o n o f L o c a l

Laws A f fecti ng P r ices, Rout es,

or Services in Trucking . . . . . . . . . . . . . . . . 22

(b) Washington State’s Effective End to

the Owner/Operator Business Model

for Unemployment Compensation Tax

Purposes Affects Prices, Routes, or

Services in the Trucking Industry . . . . . . 26

Laws that Effectively Ban the Use of the

Owner/Operator Business Model Affect

Carrier Prices, Routes, or Services and

Are FAAAA- Preempted . . . . . . . . . . . . . . 30

(2) Compliance with Federally-Mandated

Lease Terms in 49 C.F.R. § 376.12 Is Not

Evidence of Carrier Control over Owner/

Operators for State Law Purposes . . . . . . . . . . 35

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

TABLE OF APPENDICES

Page

APPENDIX A — UNPUBLISHED OPINION

OF THE COURT OF APPEALS OF THE

STATE OF WA SHINGTON DI V ISION

ONE, FILED DECEMBER 26, 2017 . . . . . . . . . . . . 1a

A P PEN DI X B — DECI SION OF T H E

EMPLOYMENT SECURITY DEPARTMENT

OF T H E S TAT E OF WA S H I NGT ON

DATED AUGUST 31, 2015 . . . . . . . . . . . . . . . . . . . . 19a

APPENDIX C — ORDER OF THE SUPERIOR

COURT OF THE STATE OF WASHINGTON

IN A N D FOR T H E COU N T Y OF

KING, DATED JULY, 2016 . . . . . . . . . . . . . . . . . . . 64a

A PPEN DI X D — OR DER OF T H E

SUPREME COURT OF WASHINGTON,

FILED JULY 12, 2018 . . . . . . . . . . . . . . . . . . . . . . . 76a

vii

TABLE OF CITED AUTHORITIES

Page

CASES

American Airlines v. Wolens,

513 U.S. 219 (1995) . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

American Trucking Ass’ns, Inc. v.

City of Los Angeles,

596 F.3d 602 (9th Cir. 2010) . . . . . . . . . . . . . . . . . . . . 23

California Trucking Ass’n v. Su,

__ F.3d __, 2018 WL 4288953 (9th Cir. 2018) . . 29, 30

Californians for Safe & Competitive Dump

Truck Transp. v. Mendonca,

152 F.3d 1184 (9th Cir. 1998), cert. denied,

526 U.S. 1060 (1999) . . . . . . . . . . . . . . . . . . . . . . . . . . 25

CEVA Freight, LLC v. Emp’t Dep’t,

279 Or. App. 570, 379 P.3d 776, review denied,

360 Or. 751 (2016) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Cole v. City of Dallas,

314 F.3d 730 (5th Cir. 2002) . . . . . . . . . . . . . . . . . . . . 22

Costello v. BeavEx Corp.,

810 F.3d 1045 (7th Cir. 2016), cert. denied,

137 S. Ct. 2289 (2017) . . . . . . . . . . . . . . . . . . . . . . . . . 25

Dan’s City Used Cars, Inc. v. Pelkey,

569 U.S. 251 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

viii

Cited Authorities

Page

Dilts v. Penske Logistics, LLC,

769 F.3d 637 (9th Cir. 2014), cert. denied,

135 S. Ct. 2049 (2015) . . . . . . . . . . . . . . . . . . . . . . 25, 29

Dynamex Operations West, Inc. v.

Superior Court,

416 P.3d 1 (Cal. 2018) . . . . . . . . . . . . . . . . . . . . 28-29, 30

Filo Foods, LLC v. City of Sea-Tac,

357 P.3d 1040 (Wash. 2015) . . . . . . . . . . . . . . . . . . . . 30

Goyal v. CSX Intermodal Terminals, Inc.,

2018 WL 4649829 (N.D. Cal. 2018) . . . . . . . . . . . . . . 27

Gulick Trucking Inc. v.

State of Washington Emp’t Sec. Dep’t,

2018 WL 509096 (Wash. App. 2018) . . . . . . . . . . . . . . 1

Henry Industries, Inc. v.

Dep’t of Labor & Indus.,

381 P.3d 172 (Wash. App. 2016) . . . . . . . . . . . . . . . . . 30

Hernandez v. Triple Ell Transp., Inc.,

175 P.3d 199 (Idaho 2007) . . . . . . . . . . . . . . . . . . . . . . 39

Hillman v. Maretta,

569 U.S. 483 (2013) . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Home Transp., Inc. v. Idaho Dep’t of Labor,

318 P.3d 940 (Ida. 2014) . . . . . . . . . . . . . . . . . . . . . . . 35

Cited Authorities

Page

In re Federal Preemption of Provisions of the

Motor Carrier Act,

566 N.W.2d 299 (Mich. App. 1997), review

denied, 587 N.W.2d 632 (Mich. 1998),

cert. denied, 525 U.S. 1018 (1998) . . . . . . . . . . . . . . . 24

MacMillan-Piper, Inc. v.

State of Washington Emp’t Sec. Dep’t,

2017 WL 6594805 (Wash. App. 2017) . . . . . . . . . . . . . 1

Mass. Delivery Ass’n v. Coakley,

769 F.3d 11 (1st Cir. 2014) . . . . . . . . . . . . . . . . . . . . . . 29

Mass. Delivery Ass’n v. Healey,

117 F. Supp. 3d 86 (D. Mass), aff’d,

821 F.3d 187 (1st Cir. 2016) . . . . . . . . . . . . 29, 32, 33, 34

Morales v. Trans World Airlines, Inc.,

504 U.S. 374 (1992) . . . . . . . . . . . . . . . . . . . . . . . . 23, 33

Nw., Inc. v. Ginsberg,

572 U.S. 273 (2014) . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Owner-Operator Indep. Drivers Ass’n v.

Mayflower Transit, Inc.,

161 F. Supp. 2d 948 (S.D. Ind. 2001) . . . . . . . . . . . . . 14

Penick v. Emp’t Sec. Dep’t,

917 P.2d 136 (Wash. App. 1996), review denied,

925 P.2d 989 (Wash. 1996). . . . . . . . . . . . . . . . . . . . . 17

Cited Authorities

Page

Pistolesi v. Calabrese,

2015 WL 1573364 (S.D.N.Y. 2015) . . . . . . . . . . . . . . . 17

Pouliot v. Paul Arpin Van Lines, Inc.,

292 F. Supp. 2d 374 (D. Conn. 2003) . . . . . . . . . . . . . 39

Reed v. Indus. Comm’n,

534 P.2d 1090 (Ariz. App. 1975) . . . . . . . . . . . . . . . . . 38

Remington v. J.B. Hunt Transport, Inc.,

2016 WL 4975194 (D. Mass. 2016) . . . . . . . . . 26, 27, 39

Rodriguez v. RWA Trucking Co.,

219 Cal. App. 4th 692 (Cal. App. 2013) . . . . . . . . . 26, 27

Rowe v. New Hampshire Motor Transp. Ass’n,

552 U.S. 364 (2008) . . . . . . . . . . . . . . . . . . . . . . . passim

Sanchez v. Lasership, Inc.,

937 F. Supp. 2d 730 (E.D. Va. 2013) . . . . . . . . . . . . . 29

Schwann v. FedEx Ground Package Sys., Inc.,

813 F.3d 429 (1st Cir. 2016) . . . . . . . . . . . . . . 29, 32, 33

Sida of Hawaii, Inc. v. NLRB,

512 F.2d 354 (9th Cir. 1975) . . . . . . . . . . . . . . . . . . . . 39

Swanson Hay Co. v.

State of Washington Emp’t Sec. Dep’t,

404 P.3d 517 (Wash. App. 2017) . . . . . . . . . 1, 30, 35, 38

Cited Authorities

Page

Tamez v. S.W. Motor Transp., Inc.,

155 S.W.2d 564 (Tex. Civ. App. 2004) . . . . . . . . . . . . 39

United Parcel Serv., Inc. v. Flores-Galarza,

318 F.3d 323 (1st Cir. 2003) . . . . . . . . . . . . . . . . . . . . 24

Wash. State Dep’t of Labor & Indus. v.

Mitchell Bros. Truck Line, Inc.,

54 P.3d 711 (Wash. App. 2002) . . . . . . . . . . . . . . . . . . 17

Wash. Trucking Ass’ns v.

State, Emp’t Sec. Dep’t.

369 P.3d 170 (Wash. App. 2016), rev’d,

393 P.3d 761 (Wash. 2017) . . . . . . . . . . . . . . . . . . . . . .19

Western Ports v. Emp’t Sec. Dep’t,

41 P.3d 510 (Wash. App. 2002) . . . . . . . . . . . . . . . 37, 39

Wilkinson v. Palmetto State Transp. Co.,

676 S.E.2d 700 (S.C. 2009), cert. denied,

130 S. Ct. 741 (2009) . . . . . . . . . . . . . . . . . . . . . . . . . . 39

STATUTES AND OTHER AUTHORITIES

28 U.S.C. § 1257(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

49 U.S.C. § 13906 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

49 U.S.C. § 14102 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1, 6

xii

Cited Authorities

Page

49 U.S.C. § 14102(a) . . . . . . . . . . . . . . . . . . . . . . . 15, 23, 37

49 U.S.C. § 14501 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

49 U.S.C. § 14501(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . 21, 23

49 U.S.C. § 41713(b)(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

49 C.F.R. § 376 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

49 C.F.R. § 376.11 . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

49 C.F.R. § 376.11(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

49 C.F.R. § 376.11(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

49 C.F.R. § 376.11(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

49 C.F.R. § 376.11(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

49 C.F.R. § 376.11(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

49 C.F.R. § 376.11(d)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

49 C.F.R. § 376.11(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

49 C.F.R. § 376.12 . . . . . . . . . . . . . . . . . . . . . . . . . . . passim

49 C.F.R. § 376.12(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

49 C.F.R. § 376.12(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

xiii

Cited Authorities

Page

49 C.F.R. § 376.12(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5, 14

49 C.F.R. § 376.12(c)(1) . . . . . . . . . . . . . . . . . . . . . . . . . 5, 27

49 C.F.R. § 376.12(c)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

49 C.F.R. § 376.12(c)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

49 C.F.R. § 376.12(c)(4) . . . . . . . . . . . . . . . . . . . 6, 37, 38, 39

49 C.F.R. § 376.12(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

49 C.F.R. § 376.12(e) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7, 27

49 C.F.R. § 376.12(f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

49 C.F.R. § 376.12(g0 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

49 C.F.R. § 376.12(h) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9, 16

49 C.F.R. § 376.12(i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

49 C.F.R. § 376.12(j) . . . . . . . . . . . . . . . . . . . . . . . . . . 10, 14

49 C.F.R. § 376.12(k) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

49 C.F.R. § 376.12(l) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

49 C.F.R. § 376.12(m) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

49 C.F.R. § 376.22 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27, 36

xiv

Cited Authorities

Page

49 C.F.R. § 376.31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

49 C.F.R. § 382.107 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

49 C.F.R. § 382.601 . . . . . . . . . . . . . . . . . . . . . . . . . . . 23, 28

49 C.F.R. § 385.5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

49 C.F.R. § 390 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4, 27

49 C.F.R. § 390.11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

49 C.F.R. § 390.21(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 27

49 C.F.R. § 392.60 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

49 C.F.R. § 396.3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Ch. 432, Laws of 2009, § 13 . . . . . . . . . . . . . . . . . . . . . . . 18

H.R. Conf. Rep. No. 103-677 . . . . . . . . . . . . . . . . . . . . . . 22

Rule 10(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Rule 10(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

Mass. Gen. Laws, ch. 149 § 148B . . . . . . . . . . . . . . . 28, 32

Wash. Admin. Code § 192-320-005 . . . . . . . . . . . . . . . . . 34

Cited Authorities

Page

Wash. Rev. Code § 50.04.140 . . . . . . . . . . . . . . . . . . passim

Wash. Rev. Code § 50.04.140(1)(a) . . . . . . . . . . . . . . . . . . 36

Wash. Rev. Code § 50.20.050(2)(b)(v) . . . . . . . . . . . . . . . 35

Wash. Rev. Code § 50.24.010 . . . . . . . . . . . . . . . . . . . . . . 20

Wash. Rev. Code § 50.24.160 . . . . . . . . . . . . . . . . . . . . . . 16

Wash. Rev. Code § 50.29.021(2) . . . . . . . . . . . . . . . . . . . . 34

Wash. Rev. Code § 50.29.025 . . . . . . . . . . . . . . . . . . . . . . 34

Wash. Rev. Code § 51.08.180 . . . . . . . . . . . . . . . . . . . . . . 17

Wash. Rev. Code § 51.12.110 . . . . . . . . . . . . . . . . . . . . . . 16

Douglas C. Grawe, Have Truck, Will Drive:

The Tr ucking Industr y and the Use of

Independent Owner-Operators Over Time,

35 Transp. L.J. 115 (2008) . . . . . . . . . . . . . . . . . . . . . 13

Jessica Goldstein, The Lease and Interchange

of Vehicles in the Motor Carrier Industry,

32 Transp. L.J. 131 (Spring 2005) . . . . . . . . . . . . . . . 37

Petition to Amend Lease & Interchange of

Ve h i c l e R e g u l a t i o n s , 8 I .C .C . 2 d 6 6 9

(I.C.C. June 29, 1992) . . . . . . . . . . . . . . . . . . . . . . . . . 38

OPINIONS BELOW

Three separate divisions of the Washington Court of

Appeals affirmed trial court decisions approving of the

Washington State Employment Security Department’s

(“ESD”) assessments of unemployment taxes against

trucking carriers for remuneration paid to independent

contractor owner/operators. Swanson Hay Co. v. State of

Washington Employment Security Department, 404 P.3d

517 (Wash. App. 2017); MacMillan-Piper, Inc. v. State of

Washington Employment Security Department, 2017 WL

6594805 (Wash. App. 2017); Gulick Trucking Inc. v. State

of Washington Employment Security Department, 2018

WL 509096 (Wash. App. 2018). The present action involves

MacMillan-Piper, Inc. (“MP”). App. A. The Washington

Supreme Court denied review in this case on July 12,

2018. See App. D.

STATEMENT OF JURISDICTION

The Court has jurisdiction under 28 U.S.C. § 1257(a)

to review federal questions arising from State courts.

STATUTORY PROVISIONS INVOLVED

49 U.S.C. § 14102:

(a) General authority of Secretary.—The Secretary may

require a motor carrier providing transportation subject

to jurisdiction under subchapter I of chapter 135 that uses

motor vehicles not owned by it to transport property under

an arrangement with another party to—

(1) make the arrangement in writing signed by the parties

specifying its duration and the compensation to be paid

by the motor carrier;

(2) carry a copy of the arrangement in each motor vehicle

to which it applies during the period the arrangement is

in effect;

(3) inspect the motor vehicles and obtain liability and cargo

insurance on them; and

(4) have control of and be responsible for operating

those motor vehicles in compliance with requirements

prescribed by the Secretary on safety of operations and

equipment, and with other applicable law as if the motor

vehicles were owned by the motor carrier.

49 U.S.C. § 14501:

(1) General rule.—

Except as provided in paragraphs (2) and (3), a State,

political subdivision of a State, or political authority of 2 or

more States may not enact or enforce a law, regulation, or

other provision having the force and effect of law related

to a price, route, or service of any motor carrier (other

than a carrier affiliated with a direct air carrier covered

by section 41713(b)(4)) or any motor private carrier, broker,

or freight forwarder with respect to the transportation

of property.

49 C.F.R. § 376.11:

Other than through the interchange of equipment as set

forth in § 376.31, and under the exemptions set forth in

subpart C of these regulations, the authorized carrier may

perform authorized transportation in equipment it does

not own only under the following conditions:

(a) Lease. There shall be a written lease granting the use

of the equipment and meeting the requirements contained

in § 376.12.

(b) Receipts for equipment. Receipts, specifically

identifying the equipment to be leased and stating the

date and time of day possession is transferred, shall be

given as follows:

(1) When possession of the equipment is taken by the

authorized carrier, it shall give the owner of the equipment

a receipt. The receipt identified in this section may be

transmitted by mail, telegraph, or other similar means

of communication.

(2) When possession of the equipment by the authorized

carrier ends, a receipt shall be given in accordance with

the terms of the lease agreement if the lease agreement

requires a receipt.

(3) Authorized representatives of the carrier and the

owner may take possession of leased equipment and give

and receive the receipts required under this subsection.

acquiring the use of equipment under this section shall

identify the equipment as being in its service as follows:

(1) During the period of the lease, the carrier shall

identify the equipment in accordance with the FMCSA’s

requirements in 49 CFR part 390 of this chapter

(Identification of Vehicles).

(2) Unless a copy of the lease is carried on the equipment,

the authorized carrier shall keep a statement with the

equipment during the period of the lease certifying that

the equipment is being operated by it. The statement shall

also specify the name of the owner, the date and length

of the lease, any restrictions in the lease relative to the

commodities to be transported, and the address at which

the original lease is kept by the authorized carrier. This

statement shall be prepared by the authorized carrier or

its authorized representative.

(d) Records of equipment. The authorized carrier using

equipment leased under this section shall keep records of

the equipment as follows:

(1) The authorized carrier shall prepare and keep

documents covering each trip for which the equipment

is used in its service. These documents shall contain the

name and address of the owner of the equipment, the

point of origin, the time and date of departure, and the

point of final destination. Also, the authorized carrier

shall carry papers with the leased equipment during its

operation containing this information and identifying the

lading and clearly indicating that the transportation is

under its responsibility. These papers shall be preserved

by the authorized carrier as part of its transportation

records. Leases which contain the information required

by the provisions in this paragraph may be used and

retained instead of such documents or papers. As to

lease agreements negotiated under a master lease, this

provision is complied with by having a copy of a master

lease in the unit of equipment in question and where the

balance of documentation called for by this paragraph is

included in the freight documents prepared for the specific

movement.

(2) [Reserved]

49 C.F.R. § 376.12:

Except as provided in the exemptions set forth in subpart

C of this part, the written lease required under § 376.11(a)

shall contain the following provisions. The required lease

provisions shall be adhered to and performed by the

authorized carrier.

(a) Parties. The lease shall be made between the

authorized carrier and the owner of the equipment.

The lease shall be signed by these parties or by their

authorized representatives.

(b) Duration to be specific. The lease shall specify the

time and date or the circumstances on which the lease

begins and ends. These times or circumstances shall

coincide with the times for the giving of receipts required

by § 376.11(b).

(1) The lease shall provide that the authorized carrier

lessee shall have exclusive possession, control, and use

of the equipment for the duration of the lease. The lease

shall further provide that the authorized carrier lessee

shall assume complete responsibility for the operation of

the equipment for the duration of the lease.

(2) Provision may be made in the lease for considering the

authorized carrier lessee as the owner of the equipment

for the purpose of subleasing it under these regulations

to other authorized carriers during the lease.

(3) When an authorized carrier of household goods leases

equipment for the transportation of household goods, as

defined by the Secretary, the parties may provide in the

lease that the provisions required by paragraph (c)(1) of

this section apply only during the time the equipment is

operated by or for the authorized carrier lessee.

(4) Nothing in the provisions required by paragraph

(c)(1) of this section is intended to affect whether the

lessor or driver provided by the lessor is an independent

contractor or an employee of the authorized carrier lessee.

An independent contractor relationship may exist when a

carrier lessee complies with 49 U.S.C. 14102 and attendant

administrative requirements.

(d) Compensation to be specified. The amount to be paid

by the authorized carrier for equipment and driver’s

services shall be clearly stated on the face of the lease

or in an addendum which is attached to the lease. Such

lease or addendum shall be delivered to the lessor prior

to the commencement of any trip in the service of the

authorized carrier. An authorized representative of the

lessor may accept these documents. The amount to be paid

may be expressed as a percentage of gross revenue, a flat

rate per mile, a variable rate depending on the direction

traveled or the type of commodity transported, or by any

other method of compensation mutually agreed upon by

the parties to the lease. The compensation stated on the

lease or in the attached addendum may apply to equipment

and driver’s services either separately or as a combined

amount.

(e) Items specified in lease. The lease shall clearly specify

which party is responsible for removing identification

devices from the equipment upon the termination of the

lease and when and how these devices, other than those

painted directly on the equipment, will be returned to

the carrier. The lease shall clearly specify the manner in

which a receipt will be given to the authorized carrier by

the equipment owner when the latter retakes possession

of the equipment upon termination of the lease agreement,

if a receipt is required at all by the lease. The lease shall

clearly specify the responsibility of each party with respect

to the cost of fuel, fuel taxes, empty mileage, permits of

all types, tolls, ferries, detention and accessorial services,

base plates and licenses, and any unused portions of such

items. The lease shall clearly specify who is responsible

for loading and unloading the property onto and from

the motor vehicle, and the compensation, if any, to be

paid for this service. Except when the violation results

from the acts or omissions of the lessor, the authorized

carrier lessee shall assume the risks and costs of fines

for overweight and oversize trailers when the trailers are

pre-loaded, sealed, or the load is containerized, or when

the trailer or lading is otherwise outside of the lessor’s

control, and for improperly permitted overdimension

and overweight loads and shall reimburse the lessor for

any fines paid by the lessor. If the authorized carrier is

authorized to receive a refund or a credit for base plates

purchased by the lessor from, and issued in the name of,

the authorized carrier, or if the base plates are authorized

to be sold by the authorized carrier to another lessor the

authorized carrier shall refund to the initial lessor on

whose behalf the base plate was first obtained a prorated

share of the amount received.

(f) Payment period. The lease shall specify that payment

to the lessor shall be made within 15 days after submission

of the necessary delivery documents and other paperwork

concerning a trip in the service of the authorized carrier.

The paperwork required before the lessor can receive

payment is limited to log books required by the Department

of Transportation and those documents necessary for the

authorized carrier to secure payment from the shipper. In

addition, the lease may provide that, upon termination of

the lease agreement, as a condition precedent to payment,

the lessor shall remove all identification devices of the

authorized carrier and, except in the case of identification

painted directly on equipment, return them to the carrier.

If the identification device has been lost or stolen, a letter

certifying its removal will satisfy this requirement.

Until this requirement is complied with, the carrier may

withhold final payment. The authorized carrier may

require the submission of additional documents by the

lessor but not as a prerequisite to payment. Payment to

the lessor shall not be made contingent upon submission

of a bill of lading to which no exceptions have been taken.

The authorized carrier shall not set time limits for the

submission by the lessor of required delivery documents

and other paperwork.

(g) Copies of freight bill or other form of freight

documentation. When a lessor’s revenue is based on

a percentage of the gross revenue for a shipment, the

lease must specify that the authorized carrier will give

the lessor, before or at the time of settlement, a copy of

the rated freight bill or a computer-generated document

containing the same information, or, in the case of contract

carriers, any other form of documentation actually used

for a shipment containing the same information that would

appear on a rated freight bill. When a computer-generated

document is provided, the lease will permit lessor to

view, during normal business hours, a copy of any actual

document underlying the computer-generated document.

Regardless of the method of compensation, the lease must

permit lessor to examine copies of the carrier’s tariff or,

in the case of contract carriers, other documents from

which rates and charges are computed, provided that

where rates and charges are computed from a contract

of a contract carrier, only those portions of the contract

containing the same information that would appear on a

rated freight bill need be disclosed. The authorized carrier

may delete the names of shippers and consignees shown

on the freight bill or other form of documentation.

(h) Charge-back items. The lease shall clearly specify

all items that may be initially paid for by the authorized

carrier, but ultimately deducted from the lessor’s

compensation at the time of payment or settlement,

together with a recitation as to how the amount of each

item is to be computed. The lessor shall be afforded copies

of those documents which are necessary to determine the

validity of the charge.

(i) Products, equipment, or services from authorized

carrier. The lease shall specify that the lessor is not

required to purchase or rent any products, equipment,

or services from the authorized carrier as a condition

of entering into the lease arrangement. The lease shall

specify the terms of any agreement in which the lessor

is a party to an equipment purchase or rental contract

which gives the authorized carrier the right to make

deductions from the lessor’s compensation for purchase

or rental payments.

(j) Insurance.

(1) The lease shall clearly specify the legal obligation of the

authorized carrier to maintain insurance coverage for the

protection of the public pursuant to FMCSA regulations

under 49 U.S.C. 13906. The lease shall further specify

who is responsible for providing any other insurance

coverage for the operation of the leased equipment, such

as bobtail insurance. If the authorized carrier will make

a charge back to the lessor for any of this insurance, the

lease shall specify the amount which will be charged-back

to the lessor.

(2) If the lessor purchases any insurance coverage for

the operation of the leased equipment from or through

the authorized carrier, the lease shall specify that the

authorized carrier will provide the lessor with a copy of

each policy upon the request of the lessor. Also, where the

lessor purchases such insurance in this manner, the lease

shall specify that the authorized carrier will provide the

lessor with a certificate of insurance for each such policy.

Each certificate of insurance shall include the name of the

insurer, the policy number, the effective dates of the policy,

the amounts and types of coverage, the cost to the lessor

for each type of coverage, and the deductible amount for

each type of coverage for which the lessor may be liable.

(3) The lease shall clearly specify the conditions under

which deductions for cargo or property damage may

be made from the lessor’s settlements. The lease shall

further specify that the authorized carrier must provide

the lessor with a written explanation and itemization of

any deductions for cargo or property damage made from

any compensation of money owed to the lessor. The written

explanation and itemization must be delivered to the lessor

before any deductions are made.

(k) Escrow funds. If escrow funds are required, the lease

shall specify:

(1) The amount of any escrow fund or performance bond

required to be paid by the lessor to the authorized carrier

or to a third party.

(2) The specific items to which the escrow fund can be

applied.

(3) That while the escrow fund is under the control of the

authorized carrier, the authorized carrier shall provide

an accounting to the lessor of any transactions involving

such fund. The carrier shall perform this accounting in

one of the following ways:

(i) By clearly indicating in individual settlement sheets

the amount and description of any deduction or addition

made to the escrow fund; or

(ii) By providing a separate accounting to the lessor of

any transactions involving the escrow fund. This separate

accounting shall be done on a monthly basis.

(4) The right of the lessor to demand to have an accounting

for transactions involving the escrow fund at any time.

(5) That while the escrow fund is under the control of the

carrier, the carrier shall pay interest on the escrow fund

on at least a quarterly basis. For purposes of calculating

the balance of the escrow fund on which interest must be

paid, the carrier may deduct a sum equal to the average

advance made to the individual lessor during the period

of time for which interest is paid. The interest rate shall

be established on the date the interest period begins and

shall be at least equal to the average yield or equivalent

coupon issue yield on 91-day, 13-week Treasury bills as

established in the weekly auction by the Department of

Treasury.

(6) The conditions the lessor must fulfill in order to have

the escrow fund returned. At the time of the return of the

escrow fund, the authorized carrier may deduct monies for

those obligations incurred by the lessor which have been

previously specified in the lease, and shall provide a final

accounting to the lessor of all such final deductions made

to the escrow fund. The lease shall further specify that

in no event shall the escrow fund be returned later than

45 days from the date of termination.

(l) Copies of the lease. An original and two copies of each

lease shall be signed by the parties. The authorized carrier

shall keep the original and shall place a copy of the lease

on the equipment during the period of the lease unless a

statement as provided for in § 376.11(c)(2) is carried on

the equipment instead. The owner of the equipment shall

keep the other copy of the lease.

(m) This paragraph applies to owners who are not

agents but whose equipment is used by an agent of an

authorized carrier in providing transportation on behalf

of that authorized carrier. In this situation, the authorized

carrier is obligated to ensure that these owners receive

all the rights and benefits due an owner under the leasing

regulations, especially those set forth in paragraphs (d)(k) of this section. This is true regardless of whether the

lease for the equipment is directly between the authorized

carrier and its agent rather than directly between the

authorized carrier and each of these owners. The lease

between an authorized carrier and its agent shall specify

this obligation.

STATEMENT OF THE CASE

(1) Owner/Operators in the Trucking Industry

Owner/operators have long been important in the

trucking industry. See generally, Douglas C. Grawe,

Have Truck, Will Drive: The Trucking Industry and

the Use of Independent Owner-Operators Over Time,

35 Transp. L.J. 115 (2008). They are used in most, if not

all, sectors of the industry, including long-haul trucking,

household-goods moving, and intermodal operations. App.

59a. Because demand in the contemporary American

trucking industry fluctuates so dramatically, the industry

is structured around these independent owner/operators,

who provide carriers with a flexible supply of trucking

equipment.

For owner/operators, an independent-contractor

relationship is similarly beneficial. In this era of increased

shipping demand because of internet shopping, today’s

shippers are sophisticated and now look for “one stop”

shopping for their shipping needs. It would thus be

extremely difficult for an individual owning a single truck

to compete. By contracting with large trucking carriers,

owner/operators can overcome this obstacle and still

maintain a small business. The firms give owner/operators

access to higher-paying freight than they would have

access to if they operated under their own authority and

make it easier for owner/operators to obtain insurance.

The federal government requires all motor carriers

to engage owner/operators through a written lease

agreement, under 49 C.F.R. § 376, known as the Truthin-Leasing regulations. Owner-Operator Indep. Drivers

Ass’n v. Mayflower Transit, Inc., 161 F. Supp. 2d 948, 953

n.2 (S.D. Ind. 2001). These regulations not only require

a written lease contract, but also specify certain terms

that must be included in the equipment lease agreement.

See, e.g., 49 C.F.R. §§ 376.11, 376.12.1

(2) Petitioners’ Operations

Four interstate motor carriers are petitioning this

Court for a writ of certiorari. They share certain common

1. For example, the regulations mandate that owner/

operators operate exclusively under a carrier’s federal license

granted by the USDOT and that the owner/operator be insured

by the carrier (although the owner/operator must pay for

that insurance). 49 C.F.R. § 376.12(c), (j). These requirements

promote public safety by ensuring that all trucks are covered by

adequate insurance and by facilitating the collection of safety

data for carriers. As will be discussed infra, federal regulations

specifically provide that these requirements do not constitute

“control” for purpose of state law regulatory schemes.

characteristics. Each is licensed by the United States

Department of Transportation (“USDOT”) and the

Federal Motor Carrier Safety Administration (“FMCSA”).

Each operates in interstate commerce. Each carrier leases

trucking equipment from owner/operators. Each carrier,

with the exception of MP, is involved in the long haul of

freight and utilizes both company drivers and owner/

operators to accomplish such operations.

Central to the existence of owner/operators as

independent businesses, is the fact that owner/operators

make an enormous capital investment in their businesses.

The truck alone represents an investment of roughly

$200,000. Owner/operators have a trade association

designed to protect their interests as small businesses. 2

In leasing equipment, each carrier had equipment

lease agreements with owner/operators in the form

mandated by federal law. 49 U.S.C. § 14102(a); 49 C.F.R.

§ 376.11; 49 C.F.R. § 376.12. As was generally determined

by ESD in the administrative process, those agreements

made clear that the owner/operator had complete control

over the selection of drivers or laborers for the trucks,

and over the selection of the routes for the delivery of

the cargo the carriers asked them to deliver. The owner/

operators also determined employee hours, stops/rest

breaks, attendance and performance standards, and

general working conditions. The owner/operators could

reject loads offered to them by the carriers. Critically,

2. A national organization, the Owner/Operator Independent

Drivers Association (“OOIDA”) has 153,000 members nationally

who value their business independence. https://www.ooida.com/

WhoWeAre/.

although the carriers might advance expenses to the

owner/operators as a convenience, as federal regulations

permitted, 49 C.F.R. § 376.12(h), the owner/operators

were ultimately responsible for the cost of the operation

of their equipment including general vehicle maintenance,

insurance, permits, base plates, license fees, taxes, fuel,

lubricants, cold weather protection, tie-down gear and

cargo protection equipment, tires, tolls, fines, and driver

wages and payroll taxes. 3 The owner/operators were

generally paid a percentage of the fee paid to the carrier

by the customer.

There are significant differences in the carriers’

operations, however. Unlike the other carriers, MP is

not a trucking company. Rather, it performs drayage 4

services for its customers acting as a container freight

station for international import and export cargo. App.

31a. Basically, it transloads its customers’ cargo from one

mode of conveyance to another, for example, from a rail car

into a steamship line container. Id. 5 MP does not own any

3. In addition to paying worker compensation premiums

and unemployment compensation taxes for their drivers, owner/

operators may elect coverage for themselves, Wash. Rev. Code §

50.24.160; Wash. Rev. Code § 51.12.110.

4. Drayage involves a truck picking up a container from

a point designated by the customer, such as the port, and then

transporting the loaded container to another point designated

by the customer, such as the rail head for out-shipment or local

delivery. App. 31a. Again, demand for cargo transport is cyclical

in the drayage business.

5. In doing so, it assists customers when U.S. Customs &

Border Protection asks to inspect cargo. MP unloads the cargo,

makes it available for inspection, and then reloads it.

trucking equipment for drayage. When customers need

such services, MP offers the loads to owner/operators, who

have the necessary equipment. Id. However, the terms of

the relationship between MP and its owner/operators are

consistent with those of the other carriers.

MP’s president, Steve Stivala, explained that because

MP does not own its own trucking equipment, it does not

hire employees to provide such services because they only

use owner/operators; he declared that if MP could not use

owner/operators MP would leave the drayage business.

App. 39a. 6

(3) The State Targeted Washing ton’s Trucking

Industry

Reversing Washington public policy that had long

treated owner/operators as independent contractors,7

6. This unrebutted fact demonstrates the impact of state

regulation on a carrier’s services. See Pistolesi v. Calabrese,

2015 WL 1573364 at *6 (S.D.N.Y. 2015) (preemption applies to

regulations that would have the logical effect of limiting the

number of actors in the market).

7. Owner/operators are not carrier employees under

Washington’s worker compensation laws. Wash. Rev. Code §

51.08.180; Wash. State Dep’t of Labor & Indus. v. Mitchell Bros.

Truck Line, Inc., 54 P.3d 711 (Wash. App. 2002). ESD previously

treated owner/operators as independent contractors. Penick

v. Emp’t Sec. Dep’t, 917 P.2d 136 (Wash. App. 1996), review

denied, 925 P.2d 989 (Wash. 1996). ESD previously instructed its

auditors the distinction between independent owner/operators

and employee truck drivers, on the basis of the “Independent

Trucker Tests.” These tests provide that owner/operators qualify

as independent contractors if they: (1) normally have the right to

and without specific legislative authority, ESD joined

with Washington’s Department of Revenue (“DOR”)

and Department of Labor & Industries (“DOLI”) (the

agency administering worker compensation) to form

an “underground economy task force” (“UETF”). 8 The

UETF targeted the trucking industry and its historical

use of owner/operators. 9 None of the carriers here

were “underground” enterprises. All were rigorously

regulated under federal law and their relationship with

owner-operators is also federally-regulated. The carriers’

operations are also regulated for safety purposes under

state law. Their trucks operate openly on Washington’s

roads. They are taxed under state law and were current

in the payment of applicable Washington taxes.

As noted supra, ESD had standards for conducting

its audits including a Tax Audit Manual (“TAM”) that

provided factors for an auditor to consider in determining

hire and fire any driver of the truck, set wage amounts, select

routes, and establish or approve procedures for loading and

unloading; (2) perform all services other than loading or unloading

freight outside the carrier’s places of business; and (3) maintain a

separate set of books and are responsible for the majority of cost

items. ESD abandoned those tests when it targeted the industry.

8. http://w w w.lni.wa.gov/Main/AboutLNI/Legislature/

PDFs/Reports/2015/ UndergroundEconomyBenchmarkReport.

pdf (last visited November 2, 2016). Ch. 432, Laws of 2009, § 13

required DOR, DOLI, and ESD to “coordinate” their efforts and

report annually to the Legislature. Apart from that direction to

“coordinate,” the Legislature, by statute, and ESD, by rulemaking,

have never defined the UETF’s organization, mission, or authority.

9. ESD notes from a meeting of its officials indicated that

in the preceding eighteen months, ESD had audited 284 trucking

companies. Those notes also stated that ESD “targeted trucking.”

if work is performed by an independent contractor. ESD

also provided its auditors a Status Manual (“SM”) that

supplied the Independent Trucker tests. Finally, ESD

generally required that all audits be conducted according

to Generally Accepted Auditing Standards, which

mandate auditor objectivity. It did not follow any of these

standards.10

Moreover, ESD auditors were compromised by ESD

job performance quotas requiring them to assess a certain

amount of unpaid taxes, and to reclassify a certain number

of independent contractors to employee status. One auditor

even had the audacity to ask the governor to pay her a

percentage bonus based on revenues she generated for the

State. In Hatfield’s administrative proceedings, evidence

was adduced that ESD leadership even directed auditors

to impose taxes on owner/operator equipment knowing

that such assessments were illegal under Washington law

that confined unemployment compensation taxation to

wages paid by the taxpayer; ESD wanted to “leverage”

settlement by carriers. See generally, Wash. Trucking

Ass’ns v. State, Emp’t Sec. Dep’t. 369 P.3d 170, 176-77

(Wash. App. 2016) rev’d, 393 P.3d 761 (Wash. 2017).

Ultimately, based on these so-called “audits,” ESD

issued notices of assessment against the petitioning

carriers (for taxes, penalties, and interest. As to MP, ESD

10. Although it initially admitted it had to follow the TAM/SM

standards, in later cases, ESD shifted course and took the position

that compliance with its manuals was optional. Brian Sonntag,

Washington’s elected State Auditor for 20 years, observed that

ESD created a system of no standards, no supervisory or peer

review, no quality control, and institutional interference with

auditor objectivity.

assessed taxes on equipment payments when state law

expressly limited the tax to the wages paid to the covered

worker. Wash. Rev. Code § 50.24.010. The carriers filed

administrative appeals.

(4) Procedural History

The petitioning carriers were subjected to lengthy

administrative proceedings in which ESD ultimately

backed down on assessing unemployment taxes on the

equipment the owner/operators leased to petitioners. In

MP’s case, ESD’s Commissioner eventually affirmed the

assessments, a final agency action for purposes of judicial

review, app. B, and MP sought review in superior court.

The court affirmed the assessments. App. C.

On appeal, the Washington Court of Appeals affirmed

the trial court decision. App. A. That opinion effectively

upheld an interpretation of Wash. Rev. Code § 50.04.140,

relating to independent contractors, that makes it

impossible for an owner/operator to be anything but a

trucking carrier employee. The Washington Supreme

Court denied review. App. D.

REASONS FOR GRANTING THE PETITION

Washington State targeted Washington’s trucking

in hundreds of “audits,” as part of a politically-motivated

effort to restructure Washington’s federally-regulated

trucking industry by eliminating the industry’s historical

use of owner/operators. Indeed, federal motor carrier law

specifically authorizes owner/operators and specifies the

contents of the carrier-owner/operator equipment-leasing

agreements.

When Congress deregulated interstate trucking

in 1980 and intrastate trucking in 1994, it enacted the

FAAAA, 49 U.S.C. § 14501(c)(1), a statute that broadly

preempts any local or state laws that affect routes, prices,

or services in the trucking industry.

The Washington courts’ interpretation of Wash.

Rev. Code § 50.04.140, the definition of an independent

contractor for purposes of unemployment compensation

taxation, makes it impossible for an owner/operator

to be an independent contractor, just as occurred in

Massachusetts by statute and California by judicial

decision, as will be discussed infra. The Washington

courts’ decisions condone the effective elimination of the

owner/operator business model in the trucking industry

for purposes of unemployment compensation taxation.

Those courts failed to apply the FAAAA as Congress and

this Court’s precedents direct. The Washington courts’

decisions permit a backdoor attempt by state authorities

to disrupt the modern American trucking industry,

and create a patchwork of inconsistent state-by-state

regulations of interstate trucking, something Congress

emphatically rejected.

(1) Washington State’s Effective Elimination of the

Owner/Operator Business Model Is Federally

Preempted

The Washington court’s opinion interprets Wash. Rev.

Code § 50.04.140, the statute dealing with independent

contractor status for unemployment compensation taxes

that mirrors the so-called ABC test for independent

contractor status, in a fashion that renders it impossible

for an ow ner/operator to ever be an independent

contractor for unemployment compensation tax purposes.

In particular, no owner/operator will ever have an

independently established business because such owner/

operators function under a carrier’s federal operating

authority. App. 11a. Second, it adopts the Ninth Circuit’s

limitation on FAAAA preemption with regard to statutes

of “general applicability.” App. 12a. Finally, it allows

federally-mandated equipment leasing contract terms

to be used as evidence of control by carriers over owner/

operators. App. 8a-10a.

(a) The Washington Courts Failed to Apply This

Court’s FAAAA Jurisprudence Providing

Expansive Federal Preemption of Local

Laws Affecting Prices, Routes, or Services in

Trucking

The Washington court decisions are but further

evidence of a split of authority on the proper interpretation

of the FAAAA. Those decisions join the courts who have

found what amounts to a nonexistent FAAAA exception

for “background laws of general applicability.”

When Congress de-regulated interstate trucking in

1980 and intrastate trucking in 1994, it sought to remove

obstacles to “national and regional carriers attempting

to conduct a standard way of doing business.” Cole v.

City of Dallas, 314 F.3d 730, 734 (5th Cir. 2002) (quoting

H. R. Conf. Rep. No. 103-677, at 87, reprinted in 1994

U.S.C.C.A.N. at 1759). It enacted the FAAAA’s express

preemption to make sure market forces would prevail and

that local jurisdictions would not re-regulate the trucking

industry in a “patchwork of state-service determining

laws, rules, and regulations.” Rowe v. New Hampshire

Motor Transp. Ass’n, 552 U.S. 364, 367-68, 370-71, 378

(2008).11 The FAAAA’s preemptive language bars states

from “enacting or enforcing a law, regulation, or other

provision . . . related to a price, route, or service” of any

carrier with respect to the transportation of property.

49 U.S.C. § 14501(c)(1) (emphasis added). This Court has

mandated that FAAAA preemption must be construed

broadly, consistent with its broad interpretation of

similar preemptive language enacted by Congress for

airline deregulation. Morales v. Trans World Airlines,

Inc., 504 U.S. 374, 383-84 (1992); Rowe, 552 U.S. at 370-71

(Congress adopted FAAAA preemptive language knowing

of broad construction of same language in Morales).12

Given this broad federal preemption and the

importance of owner/operators to the trucking industry,

every time a state or local government has attempted to

directly ban owner/operators in the industry, courts have

held such efforts to be FAAAA-preempted.13

11. Congress also specifically directed USDOT to regulate

lease agreements between carriers and owner/operators. 49 U.S.C.

§ 14102(a). In the interest of public safety, the regulations also

mandate that trucking carriers provide liability insurance and

ensure that drivers have undergone mandatory drug testing. 49

C.F.R. §§ 376.11, 376.12, 382.601.

12. In Dan’s City Used Cars, Inc. v. Pelkey, 569 U.S. 251

(2013), this Court held that the FAAAA did not preempt a state

law damages claim arising from storage and disposal of towed

vehicle because FAAAA preempted only local laws addressing the

transportation of property, but it also re-affirmed the holding in

Rowe that the FAAAA’s preemption is broad, and encompasses

even local laws indirectly affecting carrier prices, routes, or

services. Id. at 260.

13. E.g., American Trucking Ass’ns, Inc. v. City of Los

Angeles, 596 F.3d 602, 604-05 (9th Cir. 2010) (local regulation

developed in the guise of promoting port environmental policies

As noted supra, the Washington courts concluded,

however, that if the governmental action involves a law of

“general applicability,” even if carrier routes, prices, or

services are affected, the law is not federally-preempted.

This holding contradicts this Court’s FAAAA preemption

decisions. In Rowe, the Court made clear that even laws

that indirectly impact prices, routes, or services are

preempted, provided they have a significant impact. Even

if a law can be characterized as “generally applicable,” it

is preempted if its effect intrudes upon trucking carrier

routes, prices, and services, as this Court has made

clear. E.g., American Airlines v. Wolens, 513 U.S. 219

(1995) (preempting Illinois consumer protection statute,

a statute of general applicability); Nw., Inc. v. Ginsberg,

572 U.S. 273 (2014) (preempting general common-law claim

for breach of the implied covenant of good faith and fair

dealing, principles of general applicability); United Parcel

Serv., Inc. v. Flores-Galarza, 318 F.3d 323 (1st Cir. 2003)

(Puerto Rico’s enforcement of excise tax against airlines

was ADA-preempted).

The Washington courts’ misinterpretation of the

FAAAA and this Court’s precedents is not isolated. Other

courts continue to mistakenly suggest that “general” state

laws are not subject to the FAAAA’s broad preemption,

creating an exception found nowhere in the FAAAA’s

actual statutory language. Those courts failed to faithfully

prohibiting use of independent contractor drivers at port was

preempted); In re Federal Preemption of Provisions of the Motor

Carrier Act, 566 N.W.2d 299, 308–09 (Mich. App. 1997), review

denied, 587 N.W.2d 632 (Mich. 1998), cert. denied, 525 U.S. 1018

(1998) (striking down as preempted a regulation mandating that

a truck be operated only by persons who were employees of the

trucking carrier).

apply this Court’s requisite analysis of the law’s impact

on carrier prices, routes, or services.14 This Court has

expressly rejected attempts to imply exceptions to the

broad scope of the FAAAA preemptive language not found

in the FAAAA itself. Rowe, 552 U.S. at 374 (rejecting

public health exception to FAAAA preemption – “The Act

says nothing about a public health exception.”).

This Court should grant review to make it clear that

there is no “generally applicable statute” exception to the

broad sweep of FAAAA preemption. The Washington

Supreme Court has joined the Seventh and Ninth Circuits

(Costello, 810 F.3d at 1055; Dilts, 769 F.3d at 650) in an

interpretation of the FAAAA that is directly at odds with

this Court’s expansive interpretation of that express

federal preemption statute in Rowe. Rule 10(c). Those

courts’ FAAAA preemption interpretation simply cannot

be squared with that of the First Circuit. Rule 10(b). This

Court should reaffirm the Rowe court’s holding that local

laws indirectly affecting prices, routes, or services in more

than a tenuous fashion are preempted.

14. E.g., Californians for Safe & Competitive Dump Truck

Transp. v. Mendonca, 152 F.3d 1184 (9th Cir. 1998), cert. denied,

526 U.S. 1060 (1999) (FAAAA does not preempt employee drivers’

claims for violations of prevailing wage laws); Dilts v. Penske

Logistics, LLC, 769 F.3d 637 (9th Cir. 2014), cert. denied, 135

S. Ct. 2049 (2015) (FAAAA does not preempt employee drivers’

claims for violations of meal and rest-break laws); Costello v.

BeavEx Corp., 810 F.3d 1045 (7th Cir. 2016), cert denied, 137 S.

Ct. 2289 (2017).

(b) Washington State’s Effective End to the Owner/

Operator Business Model for Unemployment

Compensation Tax Purposes Affects Prices,

Routes, or Services in the Trucking Industry

The Washington courts’ interpretation of Wash. Rev.

Code § 50.04.140 makes it impossible for any owner/

operator to ever qualify as an exempted independent

contractor in the unemployment compensation tax

context. Indeed, ESD never disputed this fact below.

The Washington courts’ decisions make such an outcome

crystal clear. In this way, a state has deprived a federallyregulated industry of the right to use the owner/operator

business model. 15 As such, the State’s actions affect

15. Ultimately, at its most basic, under a conflict preemption

type of analysis that is at the core of the FAAAA’s express

preemptive language, the Washington courts’ interpretation of

Wash. Rev. Code § 50.04.140 re-regulates (and makes illegal) what

federal law specifically has determined is legal in the trucking

industry (the owner/operator business model). Hillman v. Maretta,

569 U.S. 483, 490 (2013) (a conflict is present “when compliance

with both federal and state regulations is impossible.”). Stated

another way, preemption is required if the state law is an obstacle

to the accomplishment of the purposes and objectives of Congress.

Id. at 1950. See also, Remington v. J.B. Hunt Transport, Inc.,

2016 WL 4975194 (D. Mass. 2016) (claim that the deduction of

expenses for repairs, cargo losses, insurance, or administrative

fees from owner/operator compensation constituted “control” by

carriers where the owner/operator regulations of 49 C.F.R. Part

376 authorized such deductions was preempted; as the court

succinctly observed: “What is explicitly permitted by federal

regulations cannot be forbidden by state law.” Id. at *4.); Rodriguez

v. RWA Trucking Co., 219 Cal. App. 4th 692, 710 (Cal. App. 2013)

(California insurance law could not prohibit charge back to truck

drivers of insurance costs in light of federal law). That there is

confusion on the scope of FAAAA preemption is supported by

prices, routes, and services in the industry. Washington

State’s action here as to unemployment compensation

taxation is no different than the outright ban of owner/

operators by the Ports of Los Angeles/Long Beach or the

Michigan Legislature. For example, in finding that the

control element of Wash. Rev. Code § 50.04.140 cannot be

met, as noted supra, the Washington courts emphasized

the fact that owner/operators must operate under a

trucking carrier’s federal authority or permit. But federal

regulations require that leased equipment be operated

under the carrier’s USDOT authority.16 This fact alone

makes it impossible for an owner/operator ever to meet

the test of Wash. Rev. Code § 50.04.140. The Washington

court ruled that other federally-mandated terms in an

equipment lease may be evidence of carrier direction

or control.17 As will be established infra, that decision

the decision on Truth-in-Lending deductions in Goyal v. CSX

Intermodal Terminals, Inc., 2018 WL 4649829 (N.D. Cal. 2018)

that arrives at a contradictory result to that of the Remington

and Rodriguez courts.

16. See 49 C.F.R. § 390.21(b)(2) (requiring all commercial

motor vehicles to bear the carrier’s FMCSA identification number

preceded by the letters “USDOT”); see also, 49 C.F.R. § 376.11(c)

(1) (requiring carrier during lease period to identify equipment

in accordance with 49 C.F.R. part 390).

17. Compare App. 7a-10a with 49 C.F.R. §§ 376.11(c)(1)

(requiring proper identification), 376.11(d)(1) (documentation must

clearly indicate that the transportation is under the carrier’s

responsibility), 376.12(c)(1) (requiring carrier to take exclusive,

use, possession, and control of and full responsibility for the leased

equipment), 376.12(e) (requiring the lease to clearly specify which

party is responsible for removing identification devices from the

equipment upon lease termination), 376.22 (requiring written

agreement for a carrier to lease equipment that is under lease

is contrary to federal law. All of these lease terms are

required by federal regulations for an owner/operator to

have a valid contract with a trucking carrier; a carrier

complying with federal law will never meet the test of

Wash. Rev. Code § 50.04.140.

The Washington courts’ interpretation of local laws

to effectively bar the owner/operator business model in

the trucking industry is not an isolated phenomenon. That

business model is under attack in numerous states. For

example, Massachusetts enacted a statute, Mass. Gen.

Laws, ch. 149 § 148B, to distinguish between employees

and independent contractors for a variety of its labor

laws that adopted what amounts to the same standard

Washington courts have adopted for independent

contractors in Wash. Rev. Code § 50.04.140. 18 The

California Supreme Court held in Dynamex Operations

to another carrier), 379 app. A (specifying required retention

periods for various categories of records and reports, including

shipping documents and inspection and repair reports), 382.601

(requiring carriers to institute drug and alcohol testing policy

applicable to all “drivers”), 382.107 (defining “driver” as including

“independent owner-operator contractors”), 385.5 (unqualified

drivers and improperly driven vehicles adversely affect carrier’s

safety rating), 390.11 (carrier must require drivers to observe

all duties imposed by federal motor carrier safety regulations);

392.60 (requiring carrier to give written authorization for any

passengers), 396.3 (carriers must systematically inspect or cause

to be inspected all vehicles subject to their control and keep

inspection and maintenance records).

18. The Massachusetts statute sets out three elements that

must be proven for an individual to be considered an independent

contractor. It is a statute of general applicability, applying to

various Massachusetts employment statutes.

West, Inc. v. Superior Court, 416 P.3d 1 (Cal. 2018) that

the so-called ABC test for determining if carrier drivers

were independent contractors or carrier employees

compelled the conclusion that they were employees. In

particular, under category B of the test, because drivers

were in the same general business as the carriers, they

were employees. Id. at 38-39.19

In extended litigation over the Massachusetts statute

that essentially incorporated the ABC test into the

analysis of any labor statute, courts interpreting it have

held that it is FAAAA-preempted with regard to its second

statutory element as it relates to the trucking industry

because it affects prices, routes, or services by effectively

eliminating a particular employment or business model in

the trucking industry, and creating a patchwork of state

laws, contrary to the deregulation intent of Congress.

Sanchez v. Lasership, Inc., 937 F. Supp. 2d 730 (E.D. Va.

2013); Mass. Delivery Ass’n v. Coakley, 769 F.3d 11, 17

(1st Cir. 2014); Schwann v. FedEx Ground Package Sys.,

Inc., 813 F.3d 429 (1st Cir. 2016); Mass. Delivery Ass’n v.

Healey, 821 F.3d 187 (1st Cir. 2016).

19. In California Trucking Ass’n v. Su, __ F.3d __, 2018 WL

4288953 (9th Cir. 2018), the Ninth Circuit held that California’s

common law definition of an independent contractor, applied

generally by that State’s labor laws, was not FAAAA-preempted,

concluding that the FAAAA principally addressed barriers to

entry in trucking, tariffs, price regulations, and laws governing the

types of commodities carriers could transport. Id. at *4. The court

consequently reaffirmed Dilts, ruling that FAAAA preemption

did not extend to generally applicable “background regulation

in an area of traditional state power.” Id. The court determined

Dynamex to be inapplicable to its analysis. Id. at *3 n.4.

Although this case pertains only to the trucking

industry’s use of the owner/operator business model in the

unemployment compensation tax context, there is little

doubt that the assault on such a model is more general

both in Washington State and other states, requiring

this Court to articulate the correct FAAAA test so that

state re-regulation of the trucking industry in the guise

of applying state wage and hour, worker compensation,

or other laws will not continue unabated. 20 Indeed, one of

the courts conceded that there is advocacy “from some

quarters” for applying ESD’s analysis of independent

contractors elsewhere. Swanson Hay, 404 P.3d at 528-29.

Effectively Ban the Use of the Owner/Operator

Business Model Affect Carrier Prices, Routes,

or Services and Are FAAAA- Preempted

Even if this Court’s analysis focuses solely on an

effective ban on the owner/operator business model in

20. As noted supra at n.10, Washington State’s effort to deny

trucking firms the use of the owner/operator model in wage and

hours laws and worker compensation, denominating those firms

a part of the “underground economy” persists. See also, e.g., Filo

Foods, LLC v. City of Sea-Tac, 357 P.3d 1040 (Wash. 2015) (local

minimum wage ordinance for airport-related hospitality and

transportation industries not ADA preempted); Henry Industries,

Inc. v. Dep’t of Labor & Indus., 381 P.3d 172 (Wash. App. 2016)

(courier’s owner/operator drivers were carrier employees for

worker compensation purposes).

Moreover, the cases cited supra document that states like

California similarly assault the owner/operator business model

outside the narrow setting of unemployment compensation. See

Dynamex, Su, supra.

the unemployment compensation setting alone, those

statutes are preempted under the FAAAA and Rowe. The

Washington courts found insufficient impact on trucking

prices, routes, or services, despite unrebutted contrary

evidence that ESD’s conduct affected routes, prices, and

services. App. 38a-39a.

Larry Pursley, Executive Vice President of the

Washington Trucking Associations, Washington’s

principal trade organization for trucking firms, who has

33 years of experience in the trucking industry, testified

that ESD’s assessments would imperil the structure

of Washington’s trucking industry. He explained that

owner/operators provide a flexible supply of equipment in

an industry with volatile demand. To meet this demand

with employees, carriers would need to maintain higher

equipment and personnel levels than the market calls for

normally. The added costs—not just of the equipment

and the personnel, but also of the associated expenses—

would necessarily be passed on to customers in the

form of higher prices. App. 39a. Joe Rajkovacz, formerly

OOIDA’s Director of Regulatory Affairs, testified

that ESD’s attempt to reclassify owner/operators will

undoubtedly lead to diminished economic choices and

reduced income for owner/operators. He also testified

that owner/operators located outside Washington who

lease equipment to carriers in Washington will enjoy a

competitive edge in the marketplace.

The reality of ESD’s effective ban on the owner/

operator model for trucking carriers in the unemployment

compensation tax context is that such carriers will be

put to a choice. They can restructure their business

and make all drivers company employees. 21 If they do

so, the impact on prices, routes, or services is manifest.

Trucking companies will face the expense of permanent

compensation and benefits for drivers as employees, even

when there are times when such permanent drivers are

unneeded due to the cyclical nature of service demand for

such companies. The carriers will be obliged to pay statemandated unemployment compensation taxes and worker

compensation premiums.22 If trucking carriers cannot use

owner/operators, they will need to purchase equipment for

company drivers. Such equipment is not cheap and may

often sit idle as cargo needs fluctuate. These are real costs.

This interference also has a logical effect on routes.

As the First Circuit in Schwann explained, independent

contractors assume “the risks and benefits of increased

or decreased efficiencies achieved by the selected routes,”

21. In seeking to uphold ESD’s assertion, its counsel argued

below that trucking carriers could restructure their businesses

to treat owner/operators as employees in some contexts and

independent contractors in others. But that argument is unrealistic,

and impractical as the district court in Healey noted in rejecting

a similar argument, that such an approach was a “significant

burden,” that could be found nowhere in actual practice. Mass.

Delivery Ass’n v. Healey, 117 F. Supp. 3d 86, 95 (D. Mass), aff’d,

821 F.3d 187 (1st Cir. 2016). This fact alone makes crystal clear

the impact of Washington State’s regulation on carrier services.

22. The district court in Healey explained that the “potential

logical, if indirect, effect of Section 148B is to increase [the

carrier’s] prices by increasing its costs.” Healey, supra at 93. The

court ruled that the logical relation to prices could not be averted

simply by claiming that cost increases were slight. Id. Likewise,

the unemployment taxes here increase carriers’ costs now and in

the future.

while employees would likely “have a different array of

incentives that could render their selection of routes less

efficient.” 813 F.3d at 439. Forcing a carrier to treat owner/

operators as employees relates to routes, in addition to

prices and services.

Finally, the states’ imposition of an unwanted

business model – employees rather than owner/operators

– on trucking firms impact trucking industry services. 23

FAAAA preemption is intended to prevent states from

substituting their “own governmental commands for

‘competitive market forces’ in determining (to a significant

degree) the services that motor carriers will provide.”

Rowe, 552 U.S. at 372 (quoting Morales, 504 U.S. at 378).

As the district court in Healey explained, if a carrier

wishes to fulfill on-demand requests for unscheduled

deliveries with employee drivers, it necessarily must have

on-call employees available. “Retaining on-call employees

forces [the carrier] to incur costs that translate into

23. Such a state effort to supplant the owner/operator

business model for trucking companies with a model of the

government’s choosing necessarily constitutes an effort by

Washington State to supplant market forces with State regulation,

something the FAAAA was specifically designed to forestall. As

the First Circuit noted in Schwann, whether to provide services

through employees or through independent contractors is a

significant business decision which “implicates the way in which

a company chooses to allocate its resources and incentivize

those persons providing the service.” Schwann, 813 F.3d at 438.

Washington State’s interference with carriers’ decision to lease

equipment would pose “a serious potential impediment to the

achievement of the FAAAA’s objectives because a court, rather

than the market participant, would ultimately determine what

services that company provides and how it chooses to provide

them.” Id.

increased prices. . . . Conversely, if [the carrier] endeavors

to maintain its current prices, then the practical effect

of [the statute] is to force it to abandon a service now

demanded by the competitive marketplace.” 117 F. Supp.

3d at 93.

The other option available to trucking carriers faced

with an interpretation of unemployment compensation tax

laws like that of the Washington courts is to retain the

owner/operator model for unemployment compensation

taxation and then risk whether such an admission that

owner/operators are carrier employees in that setting will

not be used against them in other settings like wage and

hours laws or worker compensation. Such an uncertain

prospect is a nightmare for carriers.

To remain competitive, trucking firms that rely on

owner/operators as a flexible supply of equipment will

have to change how they do business, adopting some

combination of: (a) reducing their capacity to respond

to f luctuating demand for transportation services;

(b) increasing their operating costs by adding new

employees and equipment, which would sit idle during

leaner times; or (c) raising prices to account for increased

costs and/or taxes. In fact, further evidencing the adverse

impact of ESD’s actions, Washington State even imposes

a higher tax rate on businesses using a flexible personnel

model. ESD punishes businesses using a flexible personnel

model with short-term employees to fill temporary surges

in demand, by increasing their tax rate whenever their

employees file for unemployment compensation. See Wash.

Rev. Code § 50.29.021(2), .025; Wash. Admin. Code § 192320-005. Indeed, a trucking carrier would be at risk of

an unemployment claim, and corresponding tax increase,

any time an owner/operator’s income is reduced by 25%

or more. See Wash. Rev. Code § 50.20.050(2)(b)(v). ESD

incentivizes businesses that favor permanent employees

and discourages businesses that seek to use a flexible

workforce. All of these changes from the owner/operator

business model constitute a direct interference with

carriers’ services.

In sum, the Washington courts interpretation of state

unemployment compensation laws joins an interpretation

of such laws by other states that affects carrier prices,

routes, or services within the meaning of the FAAAA.

This Court should grant review to vindicate the critical

federal policy of deregulation in the trucking industry

and to avoid the effective state re-regulation of trucking. 24

(2) Compliance with Federally-Mandated Lease Terms

in 49 C.F.R. § 376.12 Is Not Evidence of Carrier

Control over Owner/Operators for State Law

Purposes

Despite a contrary federal regulation, the Washington

courts held that state agencies could treat federallymandated elements in equipment leases as evidence of

carrier direction or control over owner/operators. 25 Such a

24. A patchwork of state laws is not mere rhetoric.

Washington’s neighboring states, Oregon and Idaho, for example,

have held carriers to be exempt from taxation for owner/operators.

See CEVA Freight, LLC v. Employment Dep’t, 279 Or. App. 570,

379 P.3d 776, review denied, 360 Or. 751 (2016); Home Transp.,

Inc. v. Idaho Dep’t of Labor, 318 P.3d 940 (Ida. 2014).

25. The Swanson Hay court focused on the fact that owner/

operators do not operate under their federal licenses. 404 P.3d at

540-41. But federal law requires owner/operators to operate under

determination flouts federal law. This Court should grant

review to make clear that this is impermissible.

Wash. Rev. Code § 50.04.140(1)(a) required the

carriers to document that the owner/operators have 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.” The leasing agreements with owner/

operators utilized by all of the petitioners contained terms

mandated by 49 C.F.R. Part 376.

Those federally-mandated lease terms governing the

relationship between carriers and owner/operators are

extensive. 26 ESD concluded in each case that federallymandated lease provisions established “control” by the

petitioners, even though those trucking carriers exerted

little actual control over how the owner/operators

performed the trucking services in question. The owner/

operators decided whether to take a load, who would

drive the truck, the route the truck would take, and the

hours of truck operation, to name a few. ESD’s conclusion

fundamentally misstates the law in two very key respects.

a trucking carrier’s FMCSA license. See 49 C.F.R. § 376.11(c).

Simply put, owner/operators are not owner/operators if they

operate under their own federal authority.

26. In addition to the provisions of 49 C.F.R. §§ 376.11 and

376.12 referenced supra, ESD highlighted the fact that MP must

provide written authorization for equipment to be leased to other

carriers. App. 48a. This is a federal requirement, 49 C.F.R. §

376.22, designed to ensure accountability for the leased equipment.

ESD noted further that MP has the right to take possession

of the equipment to complete a shipment if the owner/operator

breaches the contract. App. 49a. But completion of contracts is

not just related to services––it is the service that carriers offer

their customers.

The carrier petitioners did not exercise control over

the owner/operators merely because they complied with

federally-mandated equipment lease terms. 49 C.F.R. Part

376.27 Western Ports v. Emp’t Sec. Dep’t, 41 P.3d 510 (Wash.

App. 2002), affirmed by the Washington court decisions

here, was wrong as to this issue.

Those mandatory federal equipment lease terms

carry out federal motor carrier safety policy. Anticipating

that states would attempt to do exactly what ESD has

done here, the federal government dealt with one of the

mandatory lease terms – mandating that the carrier

have exclusive control over the leased equipment – by

expressly providing that “[n]othing” in the “exclusive use”

requirement “is intended to affect whether the lessor or

driver provided by the lessor is an independent contractor

or an employee of the authorized carrier lessee.” 49 C.F.R.

§ 376.12(c)(4).

Recognizing that state authorities were confused

about the impact of federally-mandated exclusivity

on state law control issues, before the full federal

deregulation of trucking, the Interstate Commerce

Commission promulgated the predecessor to 49 C.F.R. §

376.12(c)(4), and issued an explanation for that regulation,

emphasizing that “exclusive possession, control, and use”

of an owner/operator’s equipment was to have no impact on

27. 49 U.S.C. § 14102(a) provides for federal regulation of

a carrier’s lease of motor vehicle equipment. This regulation

is necessary for the efficient management of the motor carrier

industry. Jessica Goldstein, The Lease and Interchange of Vehicles

in the Motor Carrier Industry, 32 Transp. L.J. 131 (Spring 2005).

49 C.F.R. § 376.11 et seq. dictates the specific terms and conditions

by which a carrier may perform authorized transportation in

equipment it does not own.

state law determinations of control over owner/operators.

1992 WL 17965. That agency reinforced that position in

a subsequent 1994 declaratory order. 1994 WL 70557. 28

With regard to the other specific lease terms mandated

in 49 C.F.R. Part 376 for inclusion in a carrier-owner/

operator equipment lease agreement it is no different.

The federal government, not the carrier, imposes the lease

requirements on both the carrier and owner/operator.

Thus, any “control” exercised is that of the federal

government, not the carrier, and it is exercised over both

parties. Ensuring compliance with federal regulatory and

safety requirements is not evidence of a carrier right to

control the owner/operator. 29

28. The court in Swanson Hay asserted that the ICC’s

ostensible rationale for its rule was incorrect. 404 P.3d at 532. But

that court neglected to reference the 1992 ICC guidance, published

when § 376.12(c)(4) was promulgated, which stated that “most

courts have correctly interpreted the appropriate scope of the

control regulation and have held that the type of control required

by the regulation does not affect ‘employment’ status....” Petition

to Amend Lease & Interchange of Vehicle Regulations, 8 I.C.C.2d

669, 671 (I.C.C. June 29, 1992) (emphasis added). But “some courts

and State workers’ compensation and employment agencies”

had improperly used compliance with the leasing regulations as

“prima facie evidence of an employer-employee relationship” and

had erroneously found that it “evidences the type of control that

is indicative of an employer-employee relationship.” Id. (emphasis

added). The intent of this section was not limited to rejecting some

notion of federal vicarious liability. It was to disabuse courts and

state administrative agencies of the notion that compliance with

the federal requirement was prima facie evidence of an employeremployee relationship between carriers and owner/operators.

29. See, e.g., Reed v. Indus. Comm’n, 534 P.2d 1090 (Ariz.

App. 1975) (government regulations imposed on carriers and, in

In Western Ports, the Washington court determined

that ESD could properly consider all such federallymandated controls in applying the statutory test for

exemption. Western Ports is wrong in light of the specific

language of 49 C.F.R. § 376.12(c)(4) and the reason for

the federal mandate of lease terms in 49 C.F.R. Part 376.

Plainly, the carriers did not mandate such factors. When

the government controls the contract provisions, it is

the government, not the contracting parties, exercising

control. Western Ports also missed the point recognized

by the Remington court that the FAAAA itself may also

preempt its analysis. 2016 WL 4975194 at *5.

As evidenced by the terms of 49 C.F.R. § 376.12(c)(4)

on exclusivity, the case law from numerous jurisdictions

opining that compliance w ith federally-mandated

directives is not evidence of control for state law purposes,

and Western Ports, there is a split of authority on the

question of whether compliance with federal law mandates

turn, applied to owner/operators do not indicate control); Sida

of Hawaii, Inc. v. NLRB, 512 F.2d 354, 359 (9th Cir. 1975) (“fact

that a putative employer incorporates into its regulations controls

required by a government agency does not establish an employeremployee relationship.”); Pouliot v. Paul Arpin Van Lines, Inc.,

292 F. Supp. 2d 374, 383 (D. Conn. 2003) (lease regulations have no

impact on the type of relationship that exists between the parties

to the lease); Tamez v. S.W. Motor Transp., Inc., 155 S.W.2d 564,

573 (Tex. Civ. App. 2004) (existence of lease does not have any

impact on relationship between owner/operator and trucking firm);

Hernandez v. Triple Ell Transp., Inc., 175 P.3d 199, 205 (Idaho

2007) (adherence to federal law” was not evidence of a carrier’s

control over an owner/operator); Wilkinson v. Palmetto State

Transp. Co., 676 S.E.2d 700, 705 (S.C. 2009), cert. denied, 130 S.

Ct. 741 (2009) (federal regulation “is not intended to affect” the

independent contractor determination under state law).

may, in effect, be used against parties under state law.

This Court should grant review to vindicate the federal

policy and to prevent states from using the federallyrequired provisions of 49 C.F.R. Part 376 in equipment

leases against carriers in determining if they control

owner/operators for state law purposes.

CONCLUSION

Lower courts are misapplying this Court’s FAAAA

precedents, creating an exemption from the broad federal

preemption of local laws directed by Congress in that

statute for “background laws of general applicability.” The

FAAAA’s language does not authorize such an exception

to Congressional policy any more than did “public health”

in Rowe.

The business model for an entire industr y is

implicated by the Washington courts’ decisions here.

That business model drives today’s modern trucking

industry. Washington, like many other states utilizing a

similar definition of an independent contractor, effectively

eliminates the use of owner/operators in the unemployment

compensation tax setting, adversely affecting carrier

prices, routes, and services. Washington’s Wash. Rev.

Code § 50.04.140 is preempted by the FAAAA, when

properly analyzed.

Further, state courts are using trucking carrier

compliance with federally-mandated equipment lease

provisions to find that carriers “control” independent

contractors for state law purposes. This is but an aspect

of attempted re-regulation of trucking carriers despite

Congressional de-regulation policy.

This Court should grant MP’s petition and reverse

the decision of the Washington court.

DATED this 10th day of October, 2018.

Respectfully submitted,

A aron Riensche

Philip A. Talmadge

Ogden Murphy

Counsel of Record

Wallace, P.L.L.C.

Talmadge/Fitzpatrick /Tribe

901 Fifth Avenue, Suite 3500 2775 Harbor Avenue SW

Seattle, WA 9816408

Third Floor, Suite C

(206) 447-7000

Seattle, WA 98126

(206) 574-6661

phil@tal-fitzlaw.com

Counsel for Petitioners

APPENDIX

APPENDIx A —Appendix

UNPuBLISHED

OPINION

OF THE COuRT OF aPPEaLS OF THE STATE

OF WaSHINGTON, DIVISION ONE,

FILED DECEMBER 26, 2017

IN THE COURt OF APPeaLS OF THE STATE

OF WaShinGtOn, DiViSiOn One

November 8, 2017, Oral Argument;

December 26, 2017, Filed

No. 75534-0-I

MacMiLLan-PiPeR Inc.,

A WASHINGTON CORPORATION,

Appellant,

STATE OF WASHINGTON, EmPLOYment

SecURitY DePaRtment,

Respondent.

Appeal from King County Superior Court. Docket No:

15-2-23444-7. Judge signing: Honorable Mariane C

Spearman. Judgment or order under review.

Date filed: 07/18/2016.

UNPUBLISHED OPINION

Verellen, C.J. — This appeal includes the question

whether trucking owner-operators who contracted

Appendix A

with MacMillan-Piper, Inc. (MacMillan) qualified for

the statutory independent contractor exemption from

unemployment taxes. Consistent with a recent decision

by Division III of this court in Swanson Hay Co. v.

State Employment Security Department,1 we conclude

MacMillan exerted extensive control over the method and

detail of how the driving services were to be performed

and therefore did not establish it was entitled to an

exemption under RCW 50.04.140(1)(a).

The Federal Aviation Administration Authorization

Act (FAAAA) preempts state laws that significantly

impact motor carriers’ prices, routes, or services. 2

Because the Employment Security Act (ESA), Title 50

RCW, applies generally to state employers and has a

tenuous relationship with the carrier’s prices, routes,

or services, the ESA is not federally preempted in this

setting.

The Employment Security Department (Department)

calculated the original audit assessment amount based

on the records MacMillan provided. MacMillan does not

establish the assessment was arbitrary and capricious or

that its due process rights were violated.

Therefore, we affirm.

1. 1 Wn. App. 2d 174, 404 P.3d 517 (2017).

2. 49 U.S.C.A. § 14501(c)(1).

Appendix A

FACTS

MacMillan is involved in drayage, the moving of

freight containers and cargo a short distance from point to

point, often from the port to a rail yard or other designated

place. To provide those services, MacMillan contracts with

“owner-operators” who own tractors or tractor-trailers.

The owner-operators provide the trucking equipment

with drivers to perform drayage services for MacMillan.

MacMillan operates under authority from the Federal

Motor Carrier Safety Administration and the Department

of Transportation. The owner-operators haul freight using

MacMillan’s operating authority.

The owner-operator contracts include provisions

addressing the obligations of the owner-operators, such as

(i) MacMillan has the “right to full possession and control”

of the equipment during the lease term, (ii) owneroperators must report for duty at 7:30 a.m. with adequate

fuel for a full day’s work, must notify MacMillan by 7:00

a.m. if they will not be available that day, and must give

two weeks’ notice if they will not be available for two or

more consecutive days, (iii) an owner-operator’s refusal to

perform a dispatch is considered a material breach of the

agreement, (iv) owner-operators shall haul no freight for

other carriers during the lease term without MacMillan’s

written permission, (v) drivers must meet federal and state

safety requirements and may be rejected by MacMillan

“for any reason,” (vi) owner-operators must submit to

MacMillan records of hours on duty, daily inspections,

vehicle tonnage, log sheets and other documents, (vii)

owner-operators must “immediately” report collisions or

Appendix A

citations to MacMillan, maintain the equipment consistent

with regulations, perform daily re-trip inspections,

consent to installation of communication equipment “at

the sole discretion and for the sole benefit of MacMillanPiper,” and display decals or placards on the equipment

indicating it is leased to MacMillan. 3

Other than requiring owner-operators to report for

duty daily at 7:30 a.m., MacMillan does not set or control

the hours owner-operators work, choose the routes they

drive, or dictate the order in which they make deliveries.

The owner-operators are responsible for all operating

expenses, including maintenance, licensing, fuel, tolls,

permits, insurance, and costs for any laborers or drivers

they hire.

In 2011, the Department audited MacMillan. The

audit determined that 69 owner-operators should be

reclassified as “in employment” instead of independent

contractors under the ESA. The Department issued

MacMillan a tax assessment covering the first quarter

of 2009 through the third quarter of 2011 in the amount

of $130,440.81. MacMillan filed an administrative appeal.

The administrative law judge (ALJ) denied MacMillan’s

motion for summary judgment. The ALJ granted the

Department’s cross-motion for summary judgment, ruling

the owner-operators were in MacMillan’s employment

under RCW 50.04.100 and not exempt under RCW

50.04.140(1) because they performed personal services

for wages, which benefited MacMillan, and they were not

free from MacMillan’s control or direction.

3. Administrative Record (AR) at 216-17.

Appendix A

The ALJ denied MacMillan’s motion to dismiss the

assessments and held an evidentiary hearing to determine

the accuracy of the assessed amount. The ALJ entered

an initial order finding that 30 percent of the payments

MacMillan made to owner-operators were for driving

services and were thus taxable. The ALJ found that two

of the drivers should have been excluded because the

only instruction they received was where to pick up and

transport the freight, and they each had their own motor

carrier authority.

On review, the commissioner’s review office issued

the commissioner’s final decision affirming the ALJ’s

ruling. The commissioner confirmed that MacMillan

exerted “extensive controls over the methods and details

of how the driving services are to be performed by the

owner-operators”4 and failed to satisfy the requirements

of RCW 50.04.140(1)(a). The commissioner did not address

the remaining elements of the independent contractor

exemption test. MacMillan appealed, and the King County

Superior Court upheld the order.

MacMillan appeals.

ANALYSIS

Although there are minor differences in facts and

arguments, we agree with Division III’s conclusion in

Swanson Hay that owner-operators with similar contracts

are not exempt from unemployment taxes. 5

4. AR at 1116.

5. 404 P.3d at 523.

Appendix A

Judicial review of the commissioner’s decision is

governed by the Administrative Procedure Act (APA), ch.

34.05 RCW.6 We sit in the same position as the superior

court and apply the standards of the APA directly to

the record before the agency.7 On review of a decision

by the commissioner, we give great deference to the

commissioner’s factual findings and substantial weight

to the agency’s interpretation of law. 8

I. RCW 50.04.140(1) Exemption

Under Washington’s ESA, employers must contribute

to the unemploy ment compensation fund for the

benefit of their employees. 9 The ESA is intended to

mitigate the effects of involuntary unemployment by

applying the “‘insurance principle of sharing the risks,

and by the systematic accumulation of funds during

periods of employment.’” 10 Courts liberally construe

the statute to accomplish this goal, viewing “with

caution any construction that would narrow” coverage.11

6. RCW 34.05.510; RCW 50.32.120.

7. W. Ports Transp., Inc. v. Emp’t Sec., 110 Wn. App. 440, 449,

41 P.3d 510 (2002).

8. Wilson v. Emp’t Sec. Dep’t of State, 87 Wn. App. 197, 200-01,

940 P.2d 269 (1997).

9. RCW 50.01.010; RCW 50.24.010.

10. Penick v. Emp’t Sec. Dep’t, 82 Wn. App. 30, 36, 917 P.2d 136

(1996) (quoting RCW 50.01.010).

11. W. Ports, 110 Wn. App. at 450 (citing Shoreline Cmty. Coll.

Dist. No. 7 v. Emp’t Sec. Dep’t, 120 Wn.2d 394, 406, 842 P.2d 938

(1992)).

Appendix A

“[E]xemptions from taxation statutes are strictly

construed in favor of applying the tax, with the burden

of proof on the party who seeks the exemption.”12 An

individual may be both an independent contractor for some

purposes and engaged in “employment” for purposes of

the state’s broad definition of covered employment.13

“Employment” is defined under RCW 50.04.100.

Unless an exemption applies, “employment” exists if

the worker performs personal services for the alleged

employer and if the employer pays wages for those

services.14 RCW 50.04.140 includes an exemption to

unemployment taxes.15 The inquiry under the statute is not

whether owner-operators are independent contractors for

other purposes but whether they meet all of the prongs of

the exemption test contained in the ESA, “regardless of

common law definitions.”16 The term “employment” under

the ESA is “unlimited by the relationship of master and

servant as known to the common law or any other legal

relationship.”17 The ESA offers two methods to establish

the exemption under RCW 50.04.140. MacMillan focuses

its argument on the “control” subsection of the first

method.

12. Id. at 451 (citing In re Assessment Against Fors Farms, 75

Wn.2d 383, 387, 450 P.2d 973 (1969)).

13. Id. at 458.

14. Id. at 451.

15. RCW 50.04.140.

16. W. Ports, 110 Wn. App. at 459.

17. RCW 50.04.100; W. Ports, 110 Wn. App. at 458-59.

Appendix A

Under RCW 50.04.140(1), the employer must prove:

(1)(a) Such individual has been and will continue to

be free from control or direction over the performance

of such service, both under his or her contract of service

and in fact; and

(b) Such service is either outside the usual course of

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

independently established trade, occupation, profession,

or business, of the same nature as that involved in the

contract of service.18

MacMillan argues that federally mandated lease

terms do not preclude an independent contractor

relationship and that in Western Ports Transportation,

Inc. v. Employment Security Department, this court

wrongly decided that such owner-operator lease provisions

establish control for purposes of unemployment taxes.19

Specifically, MacMillan contends that Western Ports

conflicts with 49 C.F.R. § 376.12, which requires carriers

to “assume complete responsibility” for the operation of

the leased equipment and to have “exclusive possession,

control, and use of the equipment.” 20

18. RCW 50.04.140(1) (emphasis added).

19. 110 Wn. App. 440, 41 P.3d 510 (2002).

20. 49 C.F.R. § 376.12(c)(1).

Appendix A

49 C.F.R. § 376.12(c)(4) provides:

Nothing in the [required exclusive possession,

control and use provision] is intended to

affect whether the lessor … is an independent

contractor or an employee of the authorized

carrier lessee. An independent contractor

relationship may exist when a carrier lessee

complies with 49 U.S.C. 14102 and attendant

administrative requirements. 21

This qualifying provision is silent about the other federal

lease requirements and safety regulations governing the

relationship between motor carriers and owner-operators,

which are included in MacMillan’s contract. 22

MacMillan asserts “[i]t is contrary to extensive

authority that makes it clear that when the government

controls the contract provisions, it is the government, not

the contracting parties, exercising control.” 23

Thus, the critical inquiry is whether it is improper to

consider the federally mandated limitations required for

lease provisions for owner-operators. This court in Western

Ports recognized it is proper to consider them, 24 and the

21. 49 C.F.R. § 376.12(c)(4).

22. W. Ports, 110 Wn. App. at 456-57.

23. Br. of App. at 38.

24. W. Ports, 110 Wn. App. at 454.

10a

Appendix A

Swanson Hay court arrived at the same conclusion. 25 We

agree. Importantly, the statutory standard is independent

of and unrelated to common law concepts underlying

the independent contractor analysis in other settings.

Here, “control” in its plain meaning extends to the right

to control, regardless of the source. We decline to look

beyond the plain language. The previously listed lease

provisions provide MacMillan an extensive right to control

the method and details of driving services.

MacMillan argues it established the second and third

elements of RCW 50.04.140. We do not reach these two

elements given our conclusion on the control element of

RCW 50.04.140(1).

II. Federal Preemption

MacMi llan a rg ues federal law preempts the

assessment. MacMillan focuses on Rowe v. New

Hampshire Motor Transport Association, 26 arguing that

decision overruled Western Ports.

“‘The purpose of Congress is the ultimate touchstone’

in every preemption case.” 27 “We address preemption

claims presuming Congress did not intend to supplant

25. Swanson Hay, 404 P.3d at 532-33.

26. 552 U.S. 364, 128 S. Ct. 989, 169 L. Ed. 2d 933 (2008).

27. W. Ports, 110 Wn. App. at 457 (quoting Retail Clerks Int’l

Ass’n v. Schermerhorn, 375 U.S. 96, 103, 84 S. Ct. 219, 222, 11 L.

Ed. 2d 179 (1963)).

11a

Appendix A

state law.”28 “In Washington, there is a strong presumption

against finding preemption and state laws are not

superseded by federal law unless it can be determined it

is the clear and manifest purpose of Congress.” 29 As noted

in Swanson Hay, the Western Ports court did not address

express preemption, but more recent authority instructs

that state laws that affect prices, routes, or services in

“‘only a tenuous, remote, or peripheral … manner’” 30 do

not trigger express preemption.

MacMillan contends, unless preempted, the federally

mandated lease provisions will always establish control

and, unlike the carriers in Swanson Hay, MacMillan does

not own any trucks. Thus, without preemption, its business

model will become obsolete.

28. Id. (quoting New York State Conference of Blue Cross &

Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 654-55, 115 S.

Ct. 1671, 131 L. Ed. 2d 695 (1995)).

29. Dep’t of Labor & Indus. v. Lanier Brugh, 135 Wn. App. 808,

815-16, 147 P.3d 588 (2006).

30. Rowe, 552 U.S. at 371 (quoting Morales v. Trans World

Airlines, Inc., 504 U.S. 374, 390, 112 S. Ct. 2031, 119 L. Ed. 2d 157

(1992)); Dilts v. Penske Logistics, LLC, 769 F.3d 637, 643 (9th Cir.

2014) (quoting id.); see also Dan’s City Used Cars, Inc. v. Pelkey, 569

U.S. 251, 133 S. Ct. 1769, 1773, 185 L. Ed. 2d 909 (2013) (“Although

[49 U.S.C.] § 14501(c)(1) otherwise tracks the ADA’s air-carrier

preemption provision, the FAAAA formulation’s one conspicuous

alteration—addition of the words ‘with respect to the transportation

of property’—significantly limits the FAAAA’s preemptive scope. It

is not sufficient for a state law to relate the ‘price, route, or service’ of

a motor carrier in any capacity; the law must also concern a motor

carrier’s ‘transportation of property.’”) (emphasis added).

12a

Appendix A

In cases in which courts have found preemption, the

statute established a binding requirement on how the

service was to be performed. 31 The ESA is a generally

applicable background law for state employers, similar to

the meal and rest break laws in Dilts v. Penske Logistics,

LLC 32 and the minimum wage laws in Filo Foods,

LLC v. City of SeaTac 33 and Californians for Safe and

Competitive Dump Truck Transportation v. Mendonca.34

MacMillan does not establish the unemployment tax

directly regulates the transportation of property or

the service of a motor carrier, 35 nor does MacMillan

distinguish the holding in First Circuit cases that “motor

carriers are not exempt ‘from state taxes, state lawsuits

of many kinds, and perhaps most other state regulation

of any consequence.’” 36

31. See Rowe, 522 U.S. at 372-73 (holding the FA A A A

preempted state tobacco laws, recognizing the state statute directly

targeted trucking and delivery services and the licensing statute

required “carriers to offer a system of services that the market does

not now provide” and would “freeze into place services that carriers

might prefer to discontinue in the future.”); Morales, 504 U.S. at 388

(holding the FAAAA preempted state standards against deceptive

airline fare advertising because each standard included an express

reference to airfares, and the standards collectively established

“binding requirements as to how tickets may be marketed if they

are to be sold at given prices.”)

32. 769 F.3d 637 (9th Cir. 2014).

33. 183 Wn.2d 770, 357 P.3d 1040 (2015).

34. 152 F.3d 1184 (9th Cir. 1998).

35. See Dan’s City, 569 U.S. at 261, 265.

36. Schwann v. FedEx Ground Package Sys., Inc., 813 F.3d

429, 440 (1st Cir. 2016) (quoting DiFiore v. Am. Airlines, Inc., 646

F.3d 81, 89 (1st Cir. 2011)).

13a

Appendix A

MacMillan emphasizes the $53,833.69 in unemployment

insurance tax liability it will owe over a nearly three-year

period would increase its operating costs. But as the Ninth

Circuit recognized, a state law will not be preempted “just

because it shifts incentives and makes it more costly for

motor carriers to choose some routes or services relative

to others, leading the carriers to reallocate resources or

make different business decisions. 37

Here, MacMillan offered declarations in support of

summary judgment suggesting the unemployment taxes

would severely impact its business model, but none of

those declarations stated the unemployment tax would be

a determinative factor affecting its model. 38 MacMillan

relies on cases from other jurisdictions, but those cases

are not persuasive; such a conclusory impact does not

trigger field or conflict preemption. 39

37. Dilts, 769 F.3d at 647 (emphasis added).

38. See AR at 72-85.

39. See Schwann, 813 F.3d 429, 440 (acknowledging the state’s

interference with a business decision implicates the way in which

a company chooses to allocate its resources would have a “logical

effect” on routes, but that court did not perform its analysis under

the control prong of its statute. That court also clarified that “motor

carriers are not exempt ‘from state taxes, state lawsuits of many

kinds, and perhaps most other state regulation of any consequence.’”

(quoting DiFiore, 646 F.3d at 89)); see also Vargas v. Spirit Delivery

& Distrib. Servs., Inc., 245 F. Supp. 3d 268, 283-84 (D. Mass. 2017)

(noting the freedom from control prong is one of the typical elements

used to determine independent contractor statutes in many states and

for purposes of federal law and thus are less likely to have an effect

on a carrier’s pricing, routes, and services. The court acknowledged

14a

Appendix A

We agree with Swanson Hay and conclude there is

no preemption in this setting.

III. Audit and Assessment

MacMillan argues the Department’s audits and

assessments are arbitrary and capricious. We disagree.

Courts may reverse a final order that is arbitrary

and capricious. 40 An administrative agency order is

arbitrary and capricious if it is willful and unreasoning

and disregards or does not consider the facts and

circumstances underlying the decision.41 “An action will

not be held arbitrary and capricious when exercised

honestly and upon due consideration, even where there is

room for two opinions.”42

Here, the Department calculated its assessment

based on the total remuneration reported on MacMillan’s

empirical evidence is not necessary, but the proponent “must still

make more than conclusory allegations” that such a finding “would

have a significant impact on its process, routes or services.” And it

recognized that the policy behind statutory schemes that protect

workers are “traditionally within the police powers of the state and

that while many rules and regulations applicable to carriers affect

their price, routes and services, such impact is generally tenuous

and does not require the carriers to change their business model.”).

40. RCW 34.05.570(3)(i).

41. Beatty v. Washington Fish and Wildlife Com’n, 185 Wn.

App. 426, 341 P.3d 291 (2015).

42. W. Ports, 110 Wn. App. at 450.

15a

Appendix A

Internal Revenue Service 1099 forms as nonemployee

compensation and backed out wages that exceeded the

maximum taxable wage base. MacMillan argues the

Department arbitrarily failed to bifurcate remuneration

between equipment and services, resulting in overinflated

taxes. But MacMillan did not provide the Department

with records as required by RCW 50.12.070 and WAC

192-310-050 on which contrary calculations could be made.

RCW 50.12.070(1)(a) requires employers to keep true

and accurate work records “containing such information

as the commissioner may prescribe.” The commissioner

requires employers to keep records of worker total

gross pay period earnings, the specific sums withheld

from the earnings of each worker, and the purpose of

each sum withheld to equate to net pay.43 Employers are

also required to keep payroll and accounting records,44

and they must keep these records open to inspection.45

When an employer fails to provide sufficient wage

information during an audit, the Department may

generate an “arbitrary report,” in which it may calculate

an assessment based on “information otherwise available

to the [D]epartment.”46 This report is “deemed to be prima

facie correct.”47

43. WAC 192-310-050(1)(g)-(i).

44. WAC 192-310-050(2)(a).

45. RCW 50.12.070(1)(a).

46. WAC 192-340-020; RCW 50.12.080.

47. RCW 50.12.080.

16a

Appendix A

MacMillan did not produce records showing which

portions of the 1099 payments were for wages and

which were for equipment lease. MacMillan only offered

testimony from a forensic accountant who “researched

the costs of trucking by reviewing articles and websites

on the internet and by talking to selected trucking

companies,” but he did not review any of MacMillan’s

records showing an equipment allocation, or talk with any

owner-operators.48

MacMillan does not establish the Department acted

arbitrarily and capriciously.

MacMillan argues the audit violated both procedural

and substantive due process. “Procedural due process

requires notice and an opportunity to be heard prior to

final agency action.”49 “To establish a procedural due

process violation, the party must establish that he or

she has been deprived of notice and opportunity to be

heard prior to a final, not tentative, determination.”50 An

agency violates substantive due process when its decision

is “irrational, arbitrary and capricious” or “was tainted

by improper motive.”51

MacMillan had notice of the assessment and an

opportunity to be heard before the Department’s final

48. AR at 1040 (Finding of Fact 4.26).

49. Motley-Motley, Inc. v. State, 127 Wn. App. 62, 81, 110 P.3d

812 (2005).

50. Id.

51. Id. at 82.

17a

Appendix A

order. Once the Department issues an assessment, the

employer has 30 days to file an appeal. 52 If the employer

does not file a timely appeal, the assessment becomes

final.53 By filing an appeal, MacMillan had an opportunity

to be heard before the assessment became final. And

“to constitute a violation, the party must be prejudiced.

Prejudice relates to the inability to prepare or present a

defense.”54 MacMillan does not establish it was prejudiced

in its ability to prepare or present its challenge to the

assessment.

MacMillan’s substantive due process claim focuses on

an alleged improper/bad-faith motive by the Department,

including the Department’s failure to implement its prior

agreement in similar audits that 70 percent of remuneration

should be allocated to equipment. MacMillan relies on

Motley-Motley, Inc. v. State, but that case addressed

substantive due process related to property rights and

land use decisions. 55 MacMillan does not offer compelling

authority that those same fundamental rights attach to an

audit, or that a de novo hearing and two stages of judicial

review did not ameliorate those concerns.

MacMillan contends the assessment is “ void”

because it exceeded statutory authority. But orders

are void only if there is a defect in personal or subject

52. RCW 50.32.030.

53. RCW 50.32.030.

54. Motley-Motley, 127 Wn. App. at 81 (citation omitted).

55. 127 Wn. App. 62, 110 P.3d 812 (2005).

18a

Appendix A

matter jurisdiction. 56 MacMillan does not establish the

commissioner administered authority outside of “the

provisions of the act itself and the rules prescribed

thereby.”57 An agency lacks subject matter jurisdiction

only when it does not have authority to adjudicate the

“type of controversy” in question.58 Here, the Department

has broad subject matter jurisdiction to issue orders

and notices of assessment for unemployment insurances

taxes. 59

We conclude the Department’s assessments were not

arbitrary and capricious, nor did they violate due process.

Therefore, we affirm.

/s /

M Ann and cox, JJ., concur.

56. Marley v. Dep’t of Labor & Indus., 125 Wn.2d 533, 537-38,

886 P.2d 189 (1994).

57. In re Jullin, 23 Wn.2d 1, 15, 158 P.2d 319 (1945).

58. Marley, 125 Wn.2d at 539; Dougherty v. Dep’t of Labor &

Indus., 150 Wn.2d 310, 317, 76 P.3d 1183 (2003); Magee v. Rite Aid,

167 Wn. App. 60, 72-73, 277 P.3d 1 (2012).

59. Title 50 RCW; Marley, 125 Wn.2d at 542.

19a

APPENDIx BAppendix

— DECISION

OF THE

EMPLOYMENT SECURITY DEPaRTMENT OF

THE STaTE OF WaSHINGTON,

DaTED aUGUST 31, 2015

BEFORE THE COMMISSIONER OF THE

EMPLOYMENT SECURITY DEPARTMENT OF

THE STATE OF WASHNGTON

Review No. 2015-0256-CP

Docket No. 01-2012-21703T

In re :

MACMILLAN-PIPER, INC. DECISION

Tax ID No. 331454-00-0

DECISION OF COMMISSIONER

This is an unemployment insurance tax dispute

bet ween the Employ ment Secu r ity Depa r tment

(“ Department”) and the interested employer, MacMillanPiper, Inc. (“MP”). The Department conducted an audit

of MP for 2009, 2010, and first three calendar quarters of

2011. As a result of the audit, 71 individuals hired by MP

during the period at issue were reclassified as employees

of MP and their wages were deemed reportable to the

Department for unemployment insurance tax purposes.

See Exhibit 1, pp. 145-153. The Department issued an

Order and Notice of Assessment on December 21, 2011,

assessing MP contributions, penalties, and interest in the

amount of $130,440.81. See Exhibit 2. MP filed a timely

20a

Appendix B

appeal from the Order and Notice of Assessment. See

Exhibit 3.

The parties filed extensive motions before the Office of

Administrative Hearings (“OAH”) prior to the evidentiary

hearing held on September 16 and 17, 2014. Specifically,

MP filed the following four motions: Motion for Summary

Judgment on Federal Preemption, Amended Motion

to Dismiss Void Assessments, Motion to Compel, and

Consolidated Motions in Limine.1 The OAH denied MP’s

first three motions in their entirety, but granted in part

and denied in part MP’s Consolidated Motions in Limine.

On the other hand, the Department filed a Cross-Motion

for Partial Summary Judgment and a Motion to Exclude

Witnesses and Strike Exhibits. The OAH granted in part

and denied in part the Department’s Motion to Exclude

Witnesses and Strike Exhibits. The OAH further granted

the Department’s Motion for Partial Summary Judgment,

holding· that the owner-operators were in “employment”

of MP pursuit to RCW 50.04.100 and that their personal

services were not exempted from coverage pursuant to

RCW 50.04.140. Thereafter, the parties proceeded to the

evidentiary hearing to determine the correct amount

of the contributions, penalties, and interest. After the

evidentiary hearing the OAH issued a Tax Case Initial

Order, holding that 30 percent of the remuneration MP

paid to the owner operators constituted wages pursuant to

RCW 50.04.320(1) and that the penalties imposed upon MP

1. MP’s four motions were filed with and heard by the OAH in

conjunction with two oth er matters: In re Swanson Hay Company

Inc., OAH Docket No. 01-2012-21705T and In re Hatfield Enterprizes,

Inc., OAH Docket No . 01-2012-21704T.

21a

Appendix B

during the period in question should be waived pursuant

to RCW 50.12.220(6).

MP timely petitioned the Commissioner for review

of the OAH’s rulings in many of the prehearing motions.

Specifically, MP challenges: (1) the OAH’s Order Granting

Department’s Cross-Motion for Partial Summary

Judgment; (2) the OAH’s Order Denying Employers’

Motion for Summary Judgment on Federal Preemption;

(3) the OAH’s Order Denying Amended Employers’ Motion

to Dismiss Void Assessments; (4) the portions of the

OAH’s Order Granting Department’s Motions to Exclude

Witnesses and Strike Exhibits; and (5) the portions of the

OAH’s Order Denying Carriers’ Consolidated Motions

in Limine. On the other hand, the Department crosspetitioned the Commissioner for review of the OAH’s

Tax Case Initial Order. In particular, the Department

challenges the OAH’s decision to only tax 30 percent of

the total remuneration MP paid to the owner-operators

as well as the OAH’s decision to waive the penalties for

the period in question. Pursuant to chapter 192-04 WAC

this matter has been delegated by the Commissioner

to the Commissioner’s Review Office. Having reviewed

the entire record (including the audio recording of the

various hearings) and having given due regard to the

findings of the administrative law judge pursuant to RCW

34.05.464(4), we hereby enter the following.

Preemption

The Social Security Act of 1935 (Public Law 74-271)

created the federal-state unemployment compensation

program. The program has two main objectives: (1) to

22a

Appendix B

provide temporary and partial wage to involuntarily

workers who have been recently employed; and (2) to help

stabilize the economy during recessions. The Federal

Unemployment Tax Act of 1939 (“FUTA”) and Titles

III, IX, and XII of the Social Security Act (“SSA”) form

the basic framework of the unemployment compensation

system. The U.S. Department of Labor oversees the

system, with each state administering its own program.

Federal law defines certain requirements for the

unemployment compensation program. For example, SSA

and FUTA set forth broad coverage provisions, some

benefit provisions, the federal tax base and rate, and

administrative requirements. Each state then designs

its own unemployment compensation program within

the framework of the federal requirements. The state

statute sets forth the benefits structure (e.g., eligibility/

disqualification provisions, benefit amount) and the state

tax structure (e.g., state taxable wage base and tax rates).

Generally speaking, FUTA applies to employers who

employ one or more employees in covered employment in

at least 20 weeks in the current or preceding calendar

year or who pay wages of $1,500 or more during any

calendar quarter of the current or preceding calendar

year. See 26 U.S.C. § 3306(a)(1). Under FUTA, the tenn

“employee” is defined by reference to section 3121(d)

of the Internal Revenue Code. See 26 U.S.C. § 3306(i).

In turn, 26 U.S.C. § 3121(d)(2) defines “employee” to

be any individual who, under the usual common law

rules applicable in determining the employer-employee

relationship, has the status of an employee. In 1987, the

IRS issued Revenue Ruling 87-41, distilling years of case

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Appendix B

law interpreting “usual common law rules” into a more

manageable 20-factor test 2 While these 20 factors are

commonly relied upon, it is not an exhaustive list and other

factors may be relevant. Furthermore, some factors may

be given more weight than others in a particular case.

In 1996, the IRS reorganized the 20 factors into three

broad categories: behavioral control, financial control,

and relationship of the parties. See IRS, Independent

Contractor or Employee? Training Materials, Training

3320-102 (October 30, 1996). However, regardless of the

length and complexity of the tests developed by the IRS

to clarify coverage issues for federal taxation purposes,

we have cautioned that FUTA does not purport to fix the

scope of coverage of unemployment compensation laws.

See In re Coast Aluminum Products, Inc., Empl Sec.

Dec. 817 (1970) (“A wide range of judgment is given to

the several states as to the particular type of statute to

be spread upon their books.” (quoting Steward Machine

Co. v. Davis, 301 U.S. 548, 593 (1937))).

State legislatures tend to cover employers and

employment that are subject to the federal taxation.

Although the extent of state coverage is greatly influenced

2. The 20 factors are instructions; training; integration;

services rendered personally; hiring, supervising, and paying

assistants; continuing relationship; set hours of work; full time

required; doing work on employer’s premises; order or sequence set;

oral or written reports; payment by hour, week, month; payment of

business and/or traveling expenses; furnishing of tools and materials;

significant investment; realization of profit or loss; working for more

than one firm at a time; making service available to general public;

right to discharge; and right to terminate. See Rev.Rul. 87-41, 1987-1

C.B. 296.

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Appendix B

by federal statute, each state is free to determine the

employers who are liable for contributions and the

workers who accrue rights under its own unemployment

compensation laws. Here in Washington the first version.

of the Employment Security Act (or “Act”), which was then

referred to as “Unemployment Compensation Act,” was

enacted by the state legislature in 1937. See Laws of 1937,

ch. 162. This first version of the Act contained a definition

of “employment,” see Laws of 1937, ch. 162, § 19(g)(1)3; and

a three-prong “independent contractor” or ABC test. See

Laws of 1937, ch. 162, § 19(g)(5).4

3. In the first version of the Act, “employment” was defined to

mean “service, including service in interstate commerce, performed

for wages or under any contract of hire, written or oral, express or

implied.” See Laws of 1937, ch. 162, § 19(g)(1).

4. In the first version of the Act, the “independent contractor”

or ABC test read as follows:

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.

See Laws of1937, ch. 162, § 19(g)(5).

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Appendix B

The legislature introduced major revisions to the

definition of “employment” in 1945 by adding, among

other things, the phrase “unlimited by the relationship

of master and servant as known to the common law

or any other legal relationship.” See Laws of 1945, ch.

35, § 11 (emphasis added). The added language greatly

expanded the scope other employment relationship as

covered by the Employment Security Act beyond the

scope of the employment relationship as covered by FUTA.

Compare RCW 50.04.100 with 26 U.S.C. § 3306(i) and

26 U.S.C. § 3121(d)(2); see also In re All-State Constr.

Co., 70 Wn.2d 657, 664, 425 P.2d 16 (1967) (the test to be

applied in determining the employment relationship under

the Act is a statutory one; and common law distinctions

between employees and independent contractors are

inapplicable); Skrivanich v. Davis, 29 Wn.2d 150, 158,

186 P.2d 364 (1947) (the 1945 legislature intended and

deliberately concluded to extend the coverage of the Act

and by express language to preclude any construction that

might limit the operation of the Act to the relationship of

master and servant as known to the common law or any

other legal relationship); Unemp’t Comp. Dep’t v. Hunt,

17 Wn.2d 228, 236, 135 P.2d 89 (1943) (our unemployment

compensation act does not confine. taxable employment to

the relationship of master and servant, but brings. withinits purview many individuals who would otherwise have

been excluded under common law concepts of master and

servant, or principal and agent). Since then, the definition

of “employment” under the Act has remained largely

unchanged. Moreover, the “independent contractor” or

ABC test has also remained the same, except that in

1991 the legislature added a separate, six-prong test to

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Appendix B

the traditional three-prong test. See ESSB 5837, ch. 246

§ 6, 52nd Leg., Reg. Sess. (Wash. 1991); compare RCW

50.04.140(1) with RCW 50.04.140(2).

Over the years, the appellate courts in Washington

as well as the Commissioner’s Review Office (as the final

agency decision-maker on behalf of the Department)

have grappled with the concept of “employment” under

RCW 50.04.100 and applied the “independent contractor”

test under RCW 50.04.140 in various factual scenarios,

finding any given relationship either within or outside the

intended scope of the Act. See, e.g., State v. Goessman,

13 Wn.2d 598, 126 P.2d 201 (1942 ) (barbers were held to

be in employment of the barber shop; but the legislature

later enacted RCW 50.04.225 to exempt barbers from

covered employment); Skrivanich, 29 Wn.2d 150 (crew

members were in employment of the fishing vessel); AllState Constr. Co., 70 Wn.2d 657 (siding applicators were

in employment of the construction company); Miller v.

Emp’t Sec. Dep’t, 3 Wn. App. 503, 476 P.2d 138 (1970)

(individuals performing bucking and falling activities were

in employment of the logging contractor); Schuffenhauer

v. Emp’ t Sec. Dep’t, 86 Wn.2d 233 , 543 P.2d 343 (1975)

(clam diggers, were in employment of the wholesaler

of clams); Daily Herald Co. v . Emp’t Sec. Dep’t, 91

Wn.2d 559, 588 P.2d 1157 (1979) (bundle droppers were

in employment of the newspaper publisher); Jerome v.

Emp’t Sec. Dep’t, 69 Wn. App. 810, 850 P.2d 1345. (1993)

(food demonstrators were in employment of the food

demonstration business); Affordable Cabs, Inc. v. Emp’t

Sec. Dep’t, 124 Wn. App . 361, 101 P.3d 440 (2004) (taxicab

drivers were in employment of the taxicab company); but,

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Appendix B

see, e.g., Cascade Nursing Serv. Ltd. v. Emp’t Sec. Dep’

t, 71 Wn. App. 23, 856 P.2d 421 (1993) (nurses were not in

employment of the nurse referral agency); In re Judson

Enterprises, Inc., Empl. Sec. Comm’r Dec. 2d 982 (2012)

(no employment relationship was found because a business

entity could not be an employee unless it was shown that

the business entity is actually an individual disguised as

a business entity).

Two state appellate decisions pertained specifically

to the trucking industry. In Penick v. Emp’t Sec. Dep’t,

82 Wn. App. 30, 917 P.2d 136 (1996), Division Two of the

Court of Appeals dealt with the relationship between

a motor carrier who owned the trucks and the drivers

who were hired to drive the trucks (“contract drivers”).

In that case, the motor carrier owned the trucks and

operated them under its authority from the Interstate

Commerce Commission. The carrier supplied fuel,

repairs and maintenance, license, and insurance; and it

also handled state and federal reporting requirements.

The contract drivers paid their own federal income tax,

social security and medicare taxes, and motel and food

expenses; they did not receive sick leave, vacations, or

other benefits. The contract drivers could hire a “lumper”

if they needed help in loading or unloading. The contracts,

which could be terminated by either party at any time,

entitled the contract drivers to 20 percent of the gross

revenue generated by the loads they hauled. In the event

of an accident, the contract drivers were required to

pay damages not covered by the $2,500 deductible of the

carrier’ s insurance policy. The contract drivers were also

liable for shortage and cargo damage, The drivers often

28a

Appendix B

installed a variety of amenities on their assigned trucks to

make life on the road more comfortable. The motor carrier

secured the load for the outgoing trip, and the contract

drivers occasionally obtained their own loads. Any driver

was free to reject an offer to haul a load secured by the

carrier and, instead, could choose to haul a load obtained

by the driver. The carrier obtained return loads for about

half the trips, and the drivers found their own return loads

for the other half of the trips. The motor carrier handled

the billing and collection and provided bi-weekly draws

for trip expenses to the drivers. It also made bi-weekly

payments to the drivers for their share of the payment

for a particular haul. The carrier required its drivers to

clean the inside and outside of the truck, adhere to all

federal and state laws and safety regulations, and to call

in every day by 10 a.m. while en route. But the motor

carrier allowed the drivers to select their own routes

and to select their driving hours, so long as the hours

complied with legal requirements regarding maximum

driving time and rest periods. The carrier also permitted

the drivers to take other people with them. Id. at 34-35.

After examining all relevant facts, the Penick court held

that the contract drivers were in employment of the motor

carrier pursuant to RCW 50.04.100 and that their driving

services were not exempted from coverage under the

“independent contractor” test pursuant to RCW 50.04.140.

Id at 39-44. However, the Penick court did not address

the coverage issue pertaining to the owner-operators

(who owned the trucks but leased them to the carrier)

because the motor carrier prevailed on that issue before

the Commissioner’s Review Office and did not appeal. Id.

at 39. Because the Commissioner’s Review Office did not

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Appendix B

publish the decision in the Penick matter, our holdings

in that matter cannot be deemed precedential. See RCW

50.32.095 (commissioner may designate certain decisions

as precedents by publishing them); see also W. Ports

Transp., Inc. v. Emp’t Sec. Dep’t, 110 Wn. App. 440; 459,

41 P.3d 510 (2002) (unpublished decisions of Commissioner

have no precedential value).

Six years later, Division One of the Court of Appeals

·spoke on the coverage issue pertaining to the relationship

between a motor carrier and one of its owner-operators;

See W. Ports Transp., 110 Wn. App. 440 . In W. Ports,

the motor carrier contracted for the exclusive use of

approximately 170 trucks-with-drivers (or owneroperators). The owner-operator either provided and

drove their own trucks or hired others to drive them

exclusively for the carrier. The standard independent

contractor agreement contained various requirements

that were dictated by federal regulations governing

motor carriers that utilized leased vehicles-with-drivers

in interstate commerce; it also contained the carrier’s own

rules and policies. Pursuant to the independent contractor

agreement, the owner-operators were required to operate

their trucks exclusively for the carrier, have the carrier’s

insignia on the trucks, purchase their insurance through

the carrier’s fleet insurance coverage, participate in all

the company’s drug and alcohol testing programs, obtain

the carrier’s permission before carrying passengers,

notify the carrier of accidents, roadside inspections, and

citations, keep the trucks clean and in good repair and

operating condition in accordance with all governmental

regulations, and submit monthly vehicle maintenance

30a

Appendix B

reports. The carrier determined the owner-operator’s

pickup and delivery points and required them to call or

come in to its dispatch center to obtain assignments not

previously scheduled and to file daily logs of their activities.

The owner-operators received flat rate payments for the

loads hauled and were paid twice per month. The carrier

had broad rights of discharge under the independent

contractor agreement, and could terminate the contract

or discipline the owner-operators for tardiness, failure

to regularly contact the dispatch unit, failure to perform

contractual undertakings, theft, dishonest, unsafe

operation of the trucks, failure of equipment to comply

with federal or state licensing requirements, and failure

to abide by any written company policy. The owneroperators, however, did have some autonomy. For example,

the owner-operators decided the route to take in making

deliveries; they also could have other drivers to operate

the trucks in providing services under terms of the

independent contractor agreement. The owner-operators

paid all of their truck operating expenses and deducted

the expenses on their federal income tax returns. Id. at

445-47.

Based on these facts, the W. Ports court found that the

carrier exerted considerable direction and control over the

driving services performed by the owner-operator and,

accordingly, it failed the first prong of the “independent

contractor” test under RCW 50.04.140(l)(a). Id at 45254. The W. Ports court also considered and rejected the

carrier’s contention that federal transportation lawpreempted state employment security law. Id. at 454-57.

31a

Appendix B

In this case, the interested employer, MP, was founded

in 1969; and since then, it has been providing prompt,

efficient services for shippers around the globe. Currently,

MP, is the largest container freight station in the Pacific

Northwest and operates four facilities in Seattle and two

facilities in Tacoma. MP handles both import and export

cargo, ranging from lumber and paper to steel, dry

bulk commodities, and refrigerated goods. MP unloads

approximately 11,000 railcars annually; and it trans-loads,

de-vans, load-outs, or drays roughly 6·,000 containers per

month. See Exhibit 1, p. 181.

MP’s core business is to serve as a container freight

station for international cargo import and export. MP’s

business deals primarily with export cargo, which is

loaded into containers shipped through ports. MP transloads the cargo between different modes of conveyance.

For example, MP primarily trans-loads freight from

trailers and railcars into steamship line containers. See

Declaration of Stivala in Support of Employers’ Motion

for Summary Judgment on Federal Preemption (“Decl.

of Stivala”) ¶ 3.

Secondarily, MP engages in the drayage business so

as to better serve its customers. The drayage business

uses trucking equipment to handle container pickup from

points designed by the customers, and then deliver the

containers to where the cargo will be loaded, and finally

deliver the containers to their destinations such as port

terminals. MP enters into equipment lease agreements

with owner-operators who will provide trucking equipment

and driving services to support MP’s drayage business.

See Decl. of Stivala ¶ 4.

32a

Appendix B

As discussed above, the Department conducted an

audit of MP for various quarters in 2009, 2010, and 2011;

and, subsequently, reclassified the owner-operators

as employees of MP and deemed their wages to be

reportable for unemployment insurance tax purposes.

MP moved the OAH for summary judgment on federal

preemption ground, essentially arguing that it is entitled

to judgment as a matter of law because RCW 50.04.100

and RCW 50.04.140 as applied to motor carriers of the

trucking industry in Washington is preempted by the

Federal Aviation Administration Authorization Act of

1994 (“FAAAA”). The crux of MP’s argument is that the

Department’s efforts in applying RCW 50.04.100 and

RCW 50.04.140 to the trucking industry will eliminate

the use of owner-operators from the trucking industry

and effectively restructure that industry, resulting in a

substantial impact on its prices, routes, and services. The

Department responded by arguing. that the Washington’s

leading case, W. Port, has rejected the argument that the

state employment security law is preempted by federal

motor carrier law; and that preemption should not apply

because any impact its application of RCW 50.04.100 and

RCW 50.04.140 may have on motor carriers is far too

tenuous, remote, or peripheral to be preempted.

Federal preemption is based on the United States

Constitution’s mandate that the “Laws of the United

States… shall be the supreme Law of the Land; and

the Judges in every State shall be bound thereby.” See

U.S. CONST., art. VI, cl. 2; see also Ameriquest Mortg.

Co. v. Washington State Office of Atty. Gen., 170 Wn.2d

418, 439, 241 P.3d 1245 (2010) (federal law may preempt

33a

Appendix B

state law by force of the Supremacy Clause of the United

States Constitution). A state law that conflicts with federal

law is said to be preempted and is “ without effect.” See

Cipollone v. Liggett Group, Inc., 505 U.S. 504, 516, 112

S. Ct. 2608 (1992). Federal law may preempt state law in

any of the three ways: (1) expressly by the federal law’s

terms; (2) impliedly by Congress’ intent to occupy an

entire field of regulation; or (3) by the state law’s direct

conflict with the federal law. See Michigan Canners &

Freezers Assoc. v. Agric. Mktg & Bargaining Bd., 467

U.S. 461, 469, 104 S. Ct. 2518 (1984). There are “two

cornerstones” of federal preemption jurisprudence: First,

the purpose of Congress is the ultimate touchstone in

every preemption case; second, where Congress has

legislated in a field traditionally occupied by states, there

is a presumption against preemption. See Wyeth v. Levine,

555 U.S. 555, 565, 129 S. Ct 1187 (2009). Where Congress

has superseded state legislation by statute, the courts’

task is to identify the domain expressly preempted. To do

so, the courts must first focus on the statutory language,

which necessarily contains the best evidence of Congress’

preemptive intent. See Dan’s City Used Cars. Inc. v.

Pelkey, 133 S. Ct. 1769, 1778 (2013) (internal citations and

quotation marks omitted).

Congress enacted the Airline Deregulation Act

(“ADA”) in 1978 with the purpose of furthering “efficiency,

innovation, and low prices” in the airline industry through

“maximum reliance on competitive market forces.” See

49 U.S.C. §§ 40101(a)(6) & (a)(12)(A). The ADA included a

preemption provision that Congress enacted to “ensure

that the States would not undo federal deregulation with

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Appendix B

regulation of their own.” See Rowe v. New Hampshire

Motor Transport Ass’n, 552 U.S. 364, 368, 128 S. Ct. 989

(2008) (quoting Morales v. Trans World Airlines, 504 U.S.

374, 378, 112 S. Ct. 2031 (1992)). The provision specifically

provides that “a State . . . may not enact or enforce a law,

regulation, or other provision having the force and effect

of law related to a price, route, or service of an air carrier.

... “See 49 U.S.C. § 41713(b)(1).

In 1980, Congress deregulated the trucking industry.

See Rowe, 552 U.S. at 368 (citing Motor Carrier Act of

1980, 94 Stat. 793). Then, a little over a decade later, in

1994, Congress borrowed the preemption language from

the ADA to preempt state trucking regulation and thereby

ensure that the states would not undo the deregulation

of trucking. Id. (citing FAAAA, 108 Stat. 1569, 1605-06).

The FAAAA preemption provision states:

... [A] State ... may not enact or enforce a law,

regulation, or other provision having the force

and effect of law related to a price, route, or

service of any motor carrier ... with respect to

the transportation of property.

See 49 U.S.C. § 14501(c)(1). Consistent with its text and

history, the U.S. Supreme Court (“Court”) has instructed

that, in interpreting the preemption language of the

FAAAA, courts should follow decisions interpreting the

similar language in the ADA. See Rowe, 552 U.S. at 370.

In Morales, the Court first encountered the identical

preemption provision under the ADA; and the Court

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Appendix B

adopted its construction of the term ‘’related to” from

its preemption jurisprudence under the Employee

Retirement Income Security Act of 1974, defining the

term broadly as “having a connection with or reference to

airline rates, routes, or services.” See Morales, 504 U.S. at

384. The Court, however, reserved the question of whether

some state actions may affect airline fares in “too tenuous,

remote, or peripheral a manner” to trigger preemption,

giving as examples state laws prohibiting gambling and

prostitution as applied to airlines. Id. at 390. Over a

decade later, in Rowe, the Court examined whether the

FAAAA preempted a state’s tobacco delivery regulation,

which imposed several requirements on drivers of tobacco

products. See Rowe, 552 U.S. at 369. In holding that the

state’s statute was preempted by FAAAA, the Court

essentially adopted its reasoning in Morales, because ADA

and FAAAA consisted of identical preemption language

and further because “when judicial interpretations have

settled the meaning of an existing statutory provision,

repetition of the same language in a new statute indicates,

as a general matter, the intent to incorporate its judicial

interpretations as well.” Id. at 370 (quoting Merrill Lvnch,

Pierce, Fenner & Smith Inc. v. Dabit, 547 U.S. 71, 85, 126

S. Ct. 1503 (2006)). In reaffirming Morales, the Court in

Rowe explained:

. . . (1) that “[s]tate enforcement actions having

a connection with, or reference to,” carrier

“rates, routes, or services’ are pre-empted”; (2)

that such pre-emption may occur even if a state

law’s effect on rates, routes, or services “is only

indirect”; (3) that, in respect to preemption,

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Appendix B

it makes no difference whether a state law

is “consistent” or “inconsistent” with federal

regulation; and (4) that preemption occurs

at least where state laws have a “significant

impact” related to Congress’ deregulatory and

pre-emption-related objectives.

Id. (internal citations omitted). Subsequently, the Court

cautioned that the breath of the words “related to” did not

mean the sky was the limit and that the addition of the

words “with respect to the transportation of property”

massively limited the scope of preemption ordered by the

FAAAA. See Pelkey, 133 S. Ct. at 1778 (FAAAA did not

preempt state-law claims for damages against a towing

company regarding the company’s post-towing disposal

of the vehicle) (internal quotation marks omitted). Finally,

in Am. Trucking Ass’n, Inc. v. City of Los Angeles, 133

S. Ct. 2096 (2013), the Court addressed another aspect

of the FAAAA preemption - the “force and effect of law”

language, drawing a distinction between a government’s

exercise of regulatory authority and its own contract-based

participation in the market. The Court held that, when the

government employed the “hammer of the criminal law”

to achieve its intended goals, it acted with the force and

effect of law and thus the concession agreement’s placard

and parking provisions were preempted by the FAAAA

because such provisions had the “force and effect of law.”

Id. at 2102-04.

In the meantime, the Ninth Circuit Court of Appeals

has on several occasions spoken on the FAAAA’s preemptive

effects on state law. For example, in Californians for

37a

Appendix B

Safe & Competitive Dump Truck Transp. v. Mendonca,

152 F.3d 1184, 1189 (1998), the Ninth Circuit held that

California’s prevailing wage law, a state law dealing with

matters traditionally within a state’s police powers, had

no more than an indirect, remote, and tenuous effect on

and, thus, was not “related to” the motor carriers’ prices,

routes, and services within the meaning of the FAAAA’s

preemption clause. Most recently, the Ninth Circuit, in

holding that California’s meal and rest break laws were

not preempted by FAAAA, reasoned that:

[The meal and break laws] do not set prices,

mandate or prohibit certain routes, or tell

motor carriers what services they may or may

not provide, either directly or indirectly. They

are “broad law[s] applying to hundreds of

different industries” with no other “forbidden

connection with prices[, routes,] and services.”

They are normal background rules for almost

all employers doing business in the state of

California, And while motor carriers may have

to take into account the meal and rest break

requirements when allocating resources and

scheduling routes—just as they must take

into account state wage laws or speed limits

and weight restrictions, the laws do not “bind”

motor carriers to specific prices, routes, or

services. Nor do they “freeze into place”

prices, routes, or services or “determin[e] (to

a significant degree) the [prices, routes, or]

services that motor carriers will provide.”

Further, applying California’s meal and

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Appendix B

rest break laws to motor carriers would not

contribute to an impermissible “patchwork”

of state-specific laws, defeating Congress’

deregulatory objectives.

See Dilts v. Penske Logistics. LLC, 769 F.3d 637, 647

(2014), cert. denied, 135 S. Ct. 2049 (2015) (internal

citations omitted).

It is against the backdrop of the U.S. Supreme Court’s

decisions in Morales, Rowe, Pelkey as well as the Ninth

Circuit’s decisions in Mendonca and Dilts, that we now

confront MP’s federal preemption argument. MP contends

that the FAAAA preempts the Washington’s Employment

Security Act as applied to the trucking industry because

it directly affects and, therefore, is “related to” the prices,

routes, and services of its motor carrier business. MP

introduced three declarations in its motion for summary

judgment to support its contention: (1) a declaration by

Larry Pursley, Executive Vice President of Washington

Trucking Association; (2) a declaration by Joe Rajkovacz,

Director of Governmental Affairs & Communications for

the California Construction Trucking Association; and (3)

a declaration by Steve Stivala, President of MP. According

to Pursley, the assessments imposed by the Department

on motor carriers will fundamentally change the business

models of both motor carriers and owner-operators

throughout Washington, because the Department will

effectively eliminate a historical cornerstone of the

trucking. industry. The effect of this material change will

dictate the employment relationship that motor carriers

must use in their operations going forward, which will

39a

Appendix B

impact their prices, routes, and services. See Declaration

of Pursley in Support of Employers’ Motion for Summary

Judgment on Federal Preemption (“Decl. of Pursley”),

¶ 10. Pursley asserts that the assessments will impact

services because the carriers will be forced to provide

trucking services only through employees and to purchase

expensive trucks and trailers and hire drivers to operate

the equipment, which in turn will severely curtail the

carriers’ operational flexibility. See Decl. of Pursley¶ 11.

The Department’s restructuring of the trucking industry

will also require carriers to alter their routes to avoid

liability under Washington’s Employment Security Act

and will thus prevent carriers from making their own

decisions about where to deliver cargo. See Decl. of Pursley

¶ 12. Finally, Pursley asserts that the assessments Will

likely have a significant impact on prices because of the

additional employment-related taxes such as state and

federal social security, taxes and unemployment insurance

taxes, which will Undoubtedly have to be recouped by

raising prices. See Decl. of Pursley ¶ 13. According to

Stivala, reclassifying the owner-operators as employees

will increase the amounts paid to the owner-operators

including unemployment insurance taxes; and it will

also require a huge capital outlay to purchase equipment

for reclassified employees to operate, around 65 trucks,

which will directly affect the prices that would have to be

charged for drayage services. In light of the attendant

costs of carrying owner-operators as employees, Stivala

asserts that it would not make economical sense for MP to

continue to offer drayage services. See Decl. of Stivala ¶ 5.

40a

Appendix B

Additionally, MP requests us to depart from our state’s

appellate decision in W. Ports. which held that federal

transportation law did not preempt state employment

security law. See W. Ports. 110 Wn. App. at 454-57. MP

argues that W. Ports court never analyzed the FAAAA

preemption clause under 49 U.S.C. § 14501(c)(1) and that

W. Ports court’s two bases for rejecting the preemption

argument are no longer valid in light of the subsequent

U.S. Supreme Court’s decision in Rowe. See MP’s Petition

for Review at 3.

While MP’s arguments are appealing and we are

tempted to address the merits of the federal preemption

issue, we must be mindful of our limited authority as

a quasi-judicial body. As a general proposition, the

Commissioner’s Review Office, being an office within

the executive branch of the state government, lacks the

authority or jurisdiction to determine whether the laws

it administers are constitutional; only the courts have

that power. See RCW 50.12.010; RCW 50.12.020; Bare v.

Gorton, 84 Wn.2d 380, 383, 526 P.2d 379 (1974); In re Kellas,

Empl. Sec. Comm’r Dec.2d 825 (1991) (Commissioner’s

Review Office is part of an administrative agency in

the executive branch of government and is thus without

power to rule on constitutionality of a legislation; that

function is reserved to judicia1 branch of government);

In re Bremerton Christian Schools, Empl. Sec. Comm’r

Dec.2d 809 (1989); In re Ringhofer, Empl. Sec. Comm’r

Dec.2d 145 (1975). On the other hand, the superior court,

on judicial review of a final agency order issued by the

Commissioner’s Review Office, may hear arguments and

rule on the constitutionality of the Department’s order.

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Appendix B

See RCW 34.05.570(3)(a) (the court shall grant relief

from an agency order in an adjudicative proceeding if the

order, or the statute or rule on which the order is based,

is in violation of constitutional provisions on its face or

as applied). Consequently, in keeping with the authority

of the highest tribunals of Washington State and federal

jurisprudence, we are of the view that, to the extent the

Washington’s Employment Security Act as applied to

motor carriers of the trucking industry implicates the

Supremacy Clause of the United States Constitution (on

the basis that the Department’s enforcement effort is

allegedly preempted by the FAAAA), the Commissioner’s

Review Office, as an executive branch administrative

office, is not the appropriate forum to decide such a

constitutional issue.

Despite the general prohibition on administrative

agencies from deciding constitutional issues, but with an

eye toward assuring that the constitutional issue in this

case has been properly addressed at the administrative

level, we have reviewed the entire record developed by

the OAH below and are satisfied that MP was allowed

to present all evidence (via three declarations in support

of its summary judgment motion) it deemed relevant to

the federal preemption issue. Consequently, we are of

the opinion that the OAH and the parties have developed

a substantial and sufficient record from which a court

can make an informed and equitable decision on the

constitutional front.

Finally, the Commissioner’s Review Office, as the

final decision-maker of an executive agency, is bound

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Appendix B

by the state appellate court’s decisions; and MP has not

supplied any authorities for us to do otherwise. As such, to

the extent that the W. Port court already considered and

rejected the argument that federal transportation laws

preempted state employment security law, see W. Ports,

110 Wn. App. at 454-57, we concur with the OAH that

the Washington’s Employment Security Act as applied

to motor carriers of trucking industry is not preempted

by the FAAAA preemption clause. Consequently, we will

adopt the OAH’s analysis in its Order Denying Employers’

Motion for Summary Judgment on Federal Preemption

issued in this matter on January 29, 2014.

Void Assessment

In its Petition for Review, MP contends that the OAH

erred in denying its motion to dismiss void assessment in

this case. MP essentially argues that the Department’s

assessment should be voided because it was issued without

statutory authority and was the result of unlawful,

arbitrary, or capricious actions. MP relies upon the fact

that the Department knowingly included equipment rental

(which is not subject to taxation) in the assessment and

the fact that the Department did not comply with its own

internal audit manuals (i.e. Tax Audit Manual and Status

Manual) when conducting the audit. Having carefully

reviewed the underlying record, we are satisfied that the

various arguments advanced by MP in its Petition for

Review have been properly addressed and resolved in the

administrative law judge’s decision. Accordingly, we will

adopt the OAH’s analysis in its Order Denying Amended

Employers’ Motion to Dismiss Void Assessments issued

in this matter on January 29, 2014.

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Appendix B

Employment

In its Petition for Review, MP further contends that

the OAH erred in granting the Department’s motion

for partial summary judgment, thereby finding that the

owner-operators were in “employment” of MP pursuant to

RCW 50.04.100 and that their services were not excluded

from coverage pursuant to the “independent contractor”

exemption under RCW 50.04.140. MP’s arguments on

these two issues are not persuasive.

MP is liable for contributions, penalties, and interest

as set forth in the Order and Notice of Assessment if,

during the period at issue, the owner-operators are in

“employment” of MP as defined in RCW 50.04.100. See

RCW 50.04.080; RCW 50.24.010. If the owner-operators’

employment is not established, MP is not liable for the

assessed items. If employment is established, MP is

liable unless the services in question are exempted from

coverage.

We consider the issue of whether an individual is

in employment subject to this overarching principle:

The purpose of the Employment Security Act, Title 50

RCW, is to mitigate the negative effects of involuntary

unemployment. This goal can be achieved only by

application of the insurance principle of sharing the

risks, and by the systematic accumulation of funds during

periods of employment. To accomplish this goal, the Act

is to be liberally construed to the end that unemployment

benefits are paid to those who are entitled to them. See

RCW 50.01.010; Warmington v. Emp’t Sec. Dep’t, 12 Wn.

44a

Appendix B

App. 364, 368, 529 P.2d 1142 (1974). This principle has

been applied so as to generally find the existence of an

employment relationship. See, e.g., All-State Constr. Co.,

70 Wn.2d at 665; Penick, 82 Wn. App. at 36.

“Employment,” subject only to the other provisions

of the Act, means personal service of whatever nature,

unlimited by the relationship of master and servant as

known to the common law or any other legal relationship,

including service in interstate commerce, performed for

wages or under any contract calling for the performance

of personal services, written or oral, express or implied.

RCW 50.04.100. To determine whether a work situation

satisfies the definition of “employment” in RCW 50.04.100,

we must determine (1) whether the worker performs

personal services for the alleged employer; and (2)

whether the employer pays wages for those services. See

Skrivanich, 29 Wn.2d at 157. The test for personal service

is whether the services in question were clearly for the

entity sought to be taxed or for its benefit· See Daily

Herald, 91 Wn.2d at 564. In applying this test, we look for a

clear and direct connection between the personal. services

provided and the benefit received by the entity sought to

be taxed. See Cascade Nursing, 71 Wn. App. at 31.

In this case, MP primarily serves as a container

freight station for international cargo import and export.

To support its core business, MP also engages in providing

drayage services to its customers under authority

granted by the federal government. See Declaration

of Ilao in Support of Department’s Cross-Motion for

Partial Summary Judgment (“Decl. of Ilao”), Exhibit C,

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Appendix B

p. 1. MP contracts with the owner-operators to provide

the transportation or drayage services. See Decl. of Ilao

¶5. Here, the owner-operators performed truck-driving

services to support MP’s drayage business, which is a key

component of MP’s import and export business. As such

the owner operators’ personal services directly benefited

MP’s business operation. Moreover, it is beyond dispute

that MP paid wages for the services provided by the

owner-operators. See Decl. of Ilao, Exhibit C, Appendix

B—Schedule of Rates. Consequently, the administrative

law judge correctly concluded that the owner-operators

were in employment of MP pursuant to RCW 50.04.100.

See, e.g., Penick, 82 Wn. App. at 40 (as transportation of

goods necessarily required services of truck drivers, it

was clear that the carrier directly used and benefited

from the drivers’ services).

Independent Contractor Exemption

The services performed by the owner-operators are

taxable to MP unless they can be excluded pursuant to

some other provisions of Title 50 RCW. See Skrivanich,

29 Wn.2d at 157. The provisions of the Act that exclude

certain services from the definition of employment

are found at RCW 50.04.140 through RCW 50.04.240,

RCW 50.04.255, RCW 50.04.270, and RCW 50.04.275.

The burden of proof rests upon the party alleging the

exemption. See All-State Constr., 70 Wn.2d at 665. Just as

RCW 50.04.100 is to be liberally construed to the end that

benefits be paid to claimants who are entitled to them, the

provisions of Title 50 RCW that exclude certain services

from the definition of employment are strictly construed

46a

Appendix B

in favor of coverage. See, e.g., In re Fors Farms, Inc., 75

Wn.2d 383, 387, 450 P.2d 973 (1969); All-State Constr., 70

Wn.2d at 665. Because the Act is intended for the benefit of

a group that society seeks to aid, any exemption available

through the application of these tests must be scrutinized

even more closely than an exemption to a tax levied purely

for revenue-raising purposes. See Schuffenhauer, 86

Wn.2d at239.

In this case, the only exception that concerns us is

found at RCW 50.04.140(1) and (2). The truck-driving

services performed by the owner-operators are excepted

from employment only if all of the requirements of either

section are met See All-State Constr., 70 Wn.2d at 663.

Here, the agreements between MP and the owneroperators referred to the owner-operators as lessors.

See Decl. of Ilao, Exhibit C. This contractual language,

however, is not dispositive of the issue of whether the

services at issue were rendered in employment for

purposes of the Act. Instead, we consider all the facts

related to the work situation. Penick, 82 Wn. App. at 39.

RCW 50.04.140(1) and (2) provide two alternative

tests in determining whether an individual hired by

an alleged employer to perform personal services is an

‘’independent contactor” for unemployment insurance

tax purposes. The first three criteria in each test are

essentially identical in all aspects that are relevant to this

case. The employer is required to prove that an individual

meets all of the criteria in one of the tests in order to

qualify that individual for this exemption. Therefore, if

an individual fails to meet any single criterion, he or she

47a

Appendix B

will not be considered an “independent contractor” and

the employer is liable for contributions based on wages

paid to the individual pursuant to RCW 50.24.010.

The first criterion under RCW 50.04.140(1)(a) and

(2)(a) is freedom from control or direction. The key

issue here is not whether the alleged employer actually

controls; rather, the issue is whether the alleged employer

has the right to control the methods and details of the

performance, as opposed to the end result of the work.

Existence of this right is decisive of the issue as to whether

an individual is an employee or independent contractor.

See Jerome, 69 Wn. App. at 816.

In this case, MP entered into standard equipment

lease agreements with the owner operators-governing

the relationship between the parties. See, e.g., Decl. of

Ilao, Exhibit C. On the one hand, the owner-operators

enjoy some autonomy with regard to the performance

of their truck-driving services. For example, the owneroperators may operate the trucking equipment themselves

or they are free to hire their own employees to operate

the equipment. MP does not control the work hours of

the owner-operators except that the owner-operators are

expected to work day shift when port terminals are open

for business (in order to obtain or ship cargo from the

terminals). See Decl. of Stivala ¶ 4. The owner-operators

are not required to work fulltime. See Supplemental

Declaration of Stivala in Support of Employer’s Opposition

to Department’s Cross-Motion for Summary Judgment

(“Supp. Decl. of Stivala”) ¶ 5. Although MP dispatches the

owner operators to locations designated by the customers,

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Appendix B

it has no control over the routes that the owner-operators

take to pick up and deliver a load. Nor does MP control

the order in which the owner operators complete the

deliveries. See Supp. Decl. of Stivala ¶ 3. Moreover, the

owner-operators pay all costs associated with operation

of the leased equipment, such as maintenance, repairs,

fuels, lubricants, and tires. See Decl. of Ilao, Exhibit C, ¶

9A. The owner-operators are also responsible for licenses,

permits, and taxes necessary for the operation of the

leased equipment. See Decl. of Ilao, Exhibit C, ¶ 9B. The

owner-operators are responsible for claims arising out of

damage to cargo, trailers, dollies, or other equipment. See

Decl. of Ilao, Exhibit C, ¶ 21.

On the other hand, MP exerts extensive controls

over the methods and details of how the driving services

are to be performed by the owner-operators. Under the

terms of the agreements, MP has full possession and

control of the leased equipment during the entire period

of the lease. The leased equipment must be marked with

decals/placards displaying MP’s name, motor carrier

number, and USDOT’s identification number. See Decl. of

Ilao, Exhibit C, ¶ 7. The owner-operators are required to

remove all markings and decals/placards upon termination

of the lease. See Decl. of llao, Exhibit C, ¶ 15. During the

term of the lease, MP prohibits the owner-operators

from hauling freight for any other carriers unless MP

gives prior written consent. See Decl. of llao, Exhibit C,

¶ 18. The owner-operators are required to immediately

report any accidents and to further follow MP’s written

procedures as outlined in its vehicle safety policy. See

Decl. of llao, Exhibit C, ¶ 20. The owner-operators must

49a

Appendix B

also immediately report to MP all violations resulting in

citation issued by federal, state, or local authorities. See

Decl. of llao, Exhibit C, Appendix C, ¶ 5. If the owneroperators refuse to deliver cargo or withhold delivery of

consigned goods, MP may take possession of the cargo or

goods in order to complete the delivery and recover all

expenses incurred in so doing. See Decl. of llao, Exhibit

C, ¶ 24. MP also requires the owner-operators to install

two-way radio equipment or cellular phones to maintain

direct contact with MP’s dispatch department. See Decl.

of llao, Exhibit C, ¶ 27. The owner-operators are required

to submit various records to MP, including record of hours

on duty, driving, and off duty; record of daily inspection of

the leased equipment; record of vehicle tonnage; daily log

sheets along with equipment interchange receipts, proofs

of delivery, scale tickets, and fuel receipts; and monthly

maintenance record. See Decl. of llao, Exhibit C, Appendix

C, ¶¶ 1, 2, & 4. MP requires the owner-operators to report

for duty by 7:30 a.m. daily and with adequate fuel supplies

to operate a full day. The owner-operators must notify

MP by 7:00 a.m. of any leased equipment that will not be

available for use. The owner-operators are expected to

provide two week advance notice if any truck will not be

available for dispatch for two or more consecutive days.

If the owner-operators refuse to perform a dispatch,

such refusal constitutes a material breach of the lease,

and MP has the right to discontinue the

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