Seattle Delivery Service Hit With $1 Million in Workers’ Comp Premiums, Penalties and Interest

Two weeks ago I wrote about Amazon’s new “last-mile” delivery service. In that post, I pointed out that Amazon had carefully crafted the business model to assure that the delivery drivers would be characterized as employees—not its employees, mind you—but rather employees of hundreds of newly-formed (and to be formed) intermediaries known as “Delivery Service Partners.” I noted that in adopting that business model, Amazon would likely avoid many of the employment issues that have plagued Uber and Lyft in recent years (i.e., whether Uber/Lyft drivers are independent contractors or employees). A recent decision from Amazon’s back yard illustrates what can happen under the Uber/Lyft model. In Delivery Express, Inc. v. Department of Labor & Indus., 2019 Wash. App. LEXIS 1465 (June 10, 2019), a Washington appellate court affirmed a ruling by the state’s Department of Labor & Industries that had assessed almost $1 million in workers’ compensation premiums, penalties, and interest against a firm operating a Seattle delivery service that maintained its drivers were not employees, but rather independent contractors not subject to the workers’ compensation law.

Background

Operating somewhat like Uber and Lyft, albeit package delivery instead of riders, Delivery Express, Inc. (DEI) provides same-day, next-day, and next-week Seattle delivery service. Founded in 1996, it initially operated as an intrastate common carrier, purchasing vehicles and hiring drivers for whom it paid workers’ compensation premiums.

In 2000, it changed its business model. It began contracting with drivers who provided their own vehicles. It utilized an independent contractor agreement, under which it “leased” the vehicle and driver and, in return, paid the driver a commission for each completed delivery. DEI contracted with drivers of 24-foot box trucks, passenger cars, and “everything in between.”

Under the terms of the agreements, the drivers were deemed independent contractors providing transportation services to DEI customers. Each driver was required to furnish and operate a vehicle, pay the cost of operating and maintaining the vehicle, and refrain from competing with DEI for any customer whose freight the driver transported under a bill of lading issued by DEI. The agreements identified the vehicle the driver intended to use, but did not mandate any size, make, or model.

Current Business Model: Package Delivery via Uber-like “App”

More recently, DEI tweaked its business model again, this time using a dispatcher “app”—not unlike that designed by Uber—to notify drivers of available work. While some drivers have specific routes they drive on a daily basis, most are “on demand,” meaning once they download DEI’s app onto their handheld device, they can log in and wait for a delivery assignment. During the relevant periods reflected in this dispute, the cargo delivered ranged from small items—such as escrow documents and other paperwork, blood samples or medical specimens, T-shirts, and computer hardware—to larger items—such as lumber, raw materials, and non-inventory stock for grocery and department stores.

When DEI changed its business model to utilize the dispatcher “app,” it asked its drivers to execute new “broker-carrier agreements,” in which there was no mention of “leasing” any vehicles. Instead, the agreements identified DEI as the “broker” and the driver/independent contractor as the “motor carrier.” As with the earlier contractor agreement, the drivers were paid a commission of each invoice DEI issued to its customers. The covenant not to compete with DEI also remained the same.

Department of Labor & Industries Audits—$1 Million in Premiums, Penalties, and Interest

Pursuant to notices sent to DEI, the Department of Labor & Industries performed two separate audits and determined that the DEI drivers were covered workers. It assessed $841,639 in workers’ compensation premiums, penalties, and interest. The Department also imposed a penalty of $127,500 for failing to maintain adequate records under RCW 51.48.030 and a penalty of $50,000 for knowingly and intentionally evading paying workers’ compensation insurance.

DEI appealed and the matter was referred to an Industrial Appeals Judge (IAJ) for an evidentiary hearing. Following such a hearing, the IAJ found that except for three drivers who qualified for an exception, the remaining drivers were not exempt under RCW 51.08.180 or 51.08.195. The IAJ reversed the misrepresentation penalty, but affirmed the penalty for failing to maintain adequate records. Because the Department’s premium calculation included three drivers whom the IAJ determined should be excluded, the IAJ remanded the matter to the Department for a recalculation of the premiums DEI owed. The Board adopted the IAJ’s decision and order as its own.

DEI Contended the Drivers Are Not “Workers”

DEI appealed. The appellate court initially noted that under RCW 51.08.180, an independent contractor is nevertheless a “worker” for purposes of workers’ compensation law if the “essence of the contract” relates to his or her personal labor for an employer. There is an important exception, however. A person is not a worker with respect to his or her activities attendant to operating a truck which he or she owns, and which is leased to a common or contract carrier [emphasis added].

DEI contended that (a) the essence of the contract with the independent contractors did not relate to their personal labor and (b) the drivers fell within the so-called “leased-truck exemption.”

Appellate Court Disagreed with DEI—No Specialized Equipment

The appellate court disagreed. Citing earlier decisions, the court stressed that a courier service company’s independent contracting drivers were workers under RCW 51.08.180 because the vehicles they used to deliver packages were not specialized equipment needed to perform the contracted work. Neither the contractor agreements nor the broker-carrier agreements specified that the drivers had to provide any particular type of vehicle. In fact, the majority of drivers used small passenger cars, such as Toyota Yaris, Corolla, Scion and Prius, Honda Fit, Ford Focus, and the like.

The contractor agreements imposed appearance and conduct requirements on the drivers. The court said those appearance and behavior provisions were evidence that DEI placed more emphasis on how the drivers interacted with its customers than it did on the equipment the drivers used.

Leased-Truck Exception Did not Apply

The court added that the leased-truck exception was not applicable. First of all, the drivers didn’t actually lease their vehicle to DEI. Moreover, as noted above, with the exception of two drivers, none of the vehicles were trucks. The court rejected DEI’s argument for a broad definition of “truck,” because it ignored the ordinary meaning of truck. DEI’s definition would take the word “truck” out of the context in which the legislature used it. DEI’s argument, said the court, was illogical and would lead to an absurd result.

Leased-Truck Exemption Not Constitutionally Vague

Finally, the court rather summarily disposed of DEI’s argument that the leased-truck exemption was unconstitutionally vague.

The court concluded that the record supported the Board’s finding that the essence of the driver’s contracts with DEI was their personal labor. DEI failed to establish that any of these drivers, with the exception of two, operated trucks and failed to establish that these two drivers leased their vehicles to DEI. Thus, the leased-truck exemption was not applicable. DEI was liable for the premiums, penalties and interest.