Messenger Courier Ass'n of Americas v. California Unemployment Insurance Appeals Board

Opinion

We review a trial court judgment denying declaratory relief to plaintiffs and appellants Messenger Courier Association of the Americas and California Delivery Association (plaintiff). Plaintiff sought declaratory relief that would have invalidated a precedential decision by the California Unemployment Insurance Appeals Board (the Board). Plaintiff argued the Board erroneously assessed unemployment insurance employer contributions and penalties against a particular employer (a courier service that is not a party to this action), and should not have designated its decision as precedent. (NCM Direct Delivery v. Employment Development Dept. (May 8,

In opposition, counsel for the Board stated that the reason for inquiring whether individuals were employees or independent contractors must be taken into account for purposes of examining the independent contractor agreements and for choosing the correct tests in a given factual context. Specifically, the Board has a duty to seek to implement the proper purposes of the relevant code provisions, i.e., worker protection legislation. Counsel argued that the Board had correctly applied Borello, supra, 48 Cal.3d 341 , to utilize both common law and the multifactor tests that had been developed to supplement the common law, because the facts before the Board required such a comprehensive approach. The Board therefore had not deviated from statutory law, as plaintiff argued.

In its statement of decision, the superior court declined to accept plaintiff’s position that the challenged Board decision was incorrectly designated as precedent. The court ruled that the decision in Air Couriers, supra, 150 Cal.App.4th 923 , was on point. The Board obtained a judgment of dismissal pursuant to the legal rulings and plaintiff appeals. The parties have stipulated that the superior court file may serve as the record on appeal.

DISCUSSION

Section 621, subdivision (b) defines an employee for purposes of applying the Unemployment Insurance Code as, among other criteria, “[a]ny individual who, under the usual common law rules applicable in determining the employer-employee relationship, has the status of an employee.” (Italics added.) According to plaintiff, the Board’s precedent tax decision in this case erroneously interpreted the authority of Borello, supra, 48 Cal.3d 341 , which considered the employee definition used in workers’ compensation law. Plaintiff argues that the Board’s decision in this case went far beyond the usual common law rules, by adopting and applying the secondary criteria for distinguishing between employees and independent contractors, as established by case law, incorporating the principles of the Restatement of Agency (both Rest.2d & Rest.3d).

We first outline the principles for adjudicating and reviewing declaratory relief in this factual context, and then apply them to this administrative precedential tax decision.

A. Rules of Review

In Pacific Legal Foundation, supra, 29 Cal.3d 101 , 109, our Supreme Court set forth the procedures to be applied when an appellate court must assess the validity of a precedent benefit or tax decision under section 409.2. “Precedent decisions are akin to agency rulemaking and, therefore, judicial recourse is available under section 409.2 to persons affected by the precedent similar to recourse generally available against regulations. [Citation.] Since the board’s precedent decisions simply interpret controlling statutes and regulations, their correctness as precedent relates to law and policy rather than to factual resolutions.” (American Federation of Labor v. Unemployment Ins. Appeals Bd. (1994) 23 Cal.App.4th 51 , 57-58 [ 28 Cal.Rptr.2d 210 ] (AFL-CIO).)

“The burden of establishing an independent contractor relationship is upon the party attacking the determination of employment. [Citations.]” (Santa Cruz Transportation, supra, 235 Cal.App.3d at p. 1367.) Here, the employer and plaintiff sought to establish independent contractor status. We address the facts as resolved by the Board and evaluate the legal issues stemming from them on a de novo basis. (Borello, supra, 48 Cal.3d 341 , 349.) In such a “ ‘third-party declaratory action under section 409.2 the courts may only determine whether the board decision accords with the law that would govern were the rule announced articulated as a regulation. There should be no review of the underlying record or new evidence to discover whether the board correctly resolved disputes on adjudicative facts. The board’s version of those facts may not be disturbed unless it lacks substantial support on the face of the decision.’ ” (AFL-CIO, supra, 23 Cal.App.4th 51 , 58, quoting Pacific Legal Foundation, supra, 29 Cal.3d at p. 111.) “However, even though a court will give great weight to the agency’s view of a statute or regulation, the reviewing court construes the statutes as a matter of law and will reject administrative interpretations where they are contrary to statutory intent. [Citations.]” (AFL-CIO, supra, at p. 58.)

These legal issues of interpretation of employer contribution obligations require de novo review, as outlined in Hunt Building Corp. v. Bernick (2000) 79 Cal.App.4th 213 , 217 [ 93 Cal.Rptr.2d 883 ] (Hunt): “The interpretation and application of taxing statutes to undisputed facts presents a pure question of law subject to independent review. [Citation.]” The principles guiding statutory construction are likewise well established: “ ‘ “In construing

B. Procedural Points

We apply the rules summarized above to determine the correctness of the Board’s application of legal rules to the established facts, in terms of its statutory interpretation and statement of precedent. First, however, some preliminary issues require discussion. To some extent, the parties dispute the permissible scope of review on appeal of the precedential effect of the Board’s decision. Under Government Code section 11425.60, subdivision (b), an administrative agency such as the Board “may designate as a precedent decision a decision [or part] that contains a significant legal or policy determination of general application that is likely to recur.” It is somewhat confusingly provided under Government Code section 11425.60, subdivision (b), that such a designation as precedent “is not subject to judicial review.”

Government Code section 11425.10 et seq. comprise the Administrative Adjudication Bill of Rights (enacted in 1995), and set forth the governing procedures for adjudicative proceedings by administrative agencies. The Law Revision Commission comments to Government Code section 11425.60 refer to Unemployment Insurance Code section 409 (enacted in 1953) as an example of existing administrative practices for creating precedential decisions (Cal. Law Revision Com. com., 32D West’s Ann. Gov. Code (2005 ed.) foil. § 11425.60, pp. 306-307), and therefore section 409.2 (enacted in 1975) expressly allows declaratory relief as a means of evaluating the validity of precedential decisions. Thus, section 410 provides for finality of a decision of the appeals board, “except for such action as may be taken by a judicial tribunal as permitted or required by law.”

These sections should be interpreted to allow, under the specific provisions of section 409.2, limited judicial inquiry on a declaratory relief basis into the underlying legal or policy determinations made by the Board, regardless of any restrictions on review of a designation of precedent. (Gov. Code, § 11425.60, subd. (b); Unemp. Ins. Code, § 410.) The soundness of the legal points made must be subject to judicial correction, for precedential purposes,

The superior court declined to take judicial notice as requested by plaintiff of various legislative history materials and precedential decisions. Plaintiff renews this request on appeal. A reviewing court may take optional judicial notice according to the specifications of Evidence Code sections 452 and 459, subdivision (a). (1 Witkin, Cal. Evidence (4th ed. 2000) Judicial Notice, § 46, p. 138.) That is a discretionary power. (Ibid.)

The issues on appeal require us to make a de novo determination of whether the Board’s decision was in accordance with the applicable statutes and other governing principles in this substantive area. Those declaratory relief questions are susceptible of resolution without resort to legislative history or other precedential decisions of the Board. The Board’s field manual is mainly a collection of other such authorities, and likewise unhelpful to the statutory interpretation questions presented. We accordingly deny the judicial notice request.

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ISSUES PRESENTED AND APPLICABLE LEGAL DOCTRINES

According to plaintiff, the plain language of section 621, subdivision (b) required the Board to apply only common law legal standards for worker classification, so that the Board erred when it applied the additional criteria set forth in Borello, supra, 48 Cal.3d 341 , including consideration of social policies promoted by employee protective legislation (such as the Unemp. Ins. Code). Plaintiff would restrict the reasoning of Borello only to workers’ compensation cases, or at most, to benefits determinations under the Unemployment Insurance Code, under the theory that such statutory policies have no place in a common law analysis of tax-related issues, such as employer contributions.

To address those arguments, we first set forth basic precepts for such common law analysis,.and then inquire into the statutory purposes and how they operate here.

The current version of the Restatement, the Restatement Third of Agency, Introduction, Common Law and Statutes, page 6, provides another explanation of how common law principles of agency and statutory provisions about employment should relate to one another. The main subject of the Restatement Third of Agency is identified by the authors as the common law of agency, but nevertheless, “many references are made to statutory material. Modern common-law doctrines operate in the context of statutes. Increasingly, statutes influence common-law development, as explained more fully below. However, despite the significance of all sorts of statutes, the common law of agency retains coherence in two respects. Its basic concepts and doctrines apply in diverse contexts, including those affected by statutes. Agency has also retained structural coherence, despite statutory developments, in large measure because many statutes make implicit or explicit reference to common law or presuppose a background that includes basic common-law doctrines.” (Ibid., italics added.)

Consistently with the above theories, the Supreme Court in both Borello, supra, 48 Cal.3d 341 , and Empire Star, supra, 28 Cal.2d 33 , considered not only the common law employment criteria of the right to control the manner and means of accomplishing the result desired, and the right to discharge at will, but also other factors: “(a) whether or not the one performing services is engaged in a distinct occupation or business; (b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision; (c) the skill required in the particular occupation; (d) whether the principal or the workman supplies the instrumentalities, tools, and the place of work for the person doing the work; (e) the length of time for which the services are to be performed; (f) the method of payment, whether by the time or by the job; (g) whether or not the work is a part of the regular business of the principal; and (h) whether or not the parties believe they are creating the relationship of employer-employee. [Citations.]” (Empire Star, supra, 28 Cal.2d 33 , 43-44, cited in Borello, supra, 48 Cal.3d at p. 351; see Tieberg, supra, 2 Cal.3d 943 at p. 949.)

Likewise, the appellate court in Santa Cruz Transportation, supra, 235 Cal.App.3d 1363 , 1371-1372, applied both common law rules and

From these authorities, we glean that our Supreme Court’s and other courts’ applications of both primary and secondary criteria of employment determinations are in the process of becoming part of the common law of this state, as expressed in judicial decisions such as Empire Star, supra, 28 Cal.2d 33 , and Borello, supra, 48 Cal.3d 341 . The purpose of making employment status determinations will vary according to the factual contexts in which the question is presented: “Relationships of agency usually contemplate three parties—the agent, the principal, and third parties with whom the agent interacts in some manner.” (Rest.3d Agency, Introduction, p. 3.) In common law tort doctrine, the reason for making an employment determination was to assess whether an employer should be held liable for injury caused by the employee. (Borello, supra, at p. 352.) In benefits cases, the reason for making this employment status determination is to evaluate entitlement to the remedial provisions of the statute, to assist those who have become unemployed through no fault of their own. (§ 100.) In part IIB., post, we explain that in tax assessment cases, an important reason for making an employment status determination is to ensure fair assessments of tax liability are made against employers, not against those who hire independent contractors. Each of those purposes is consistent not only with the operation of the above stated agency rules under common law, but also as they have been interpreted in the context of employee protective legislation, including unemployment insurance provisions.

We accordingly reject plaintiff’s basic premise that the primary or common law test for employment status, regarding the right to control, must operate completely exclusively from the secondary factors that have been identified in other factual contexts as useful for determining employment status. There is nothing in the historical development of the common law to justify confining the statutory terminology in section 621, subdivision (b), to

B. Statutory Purposes

Plaintiff appears to contend that the taxation and contribution portions of the unemployment insurance statutory scheme cannot reflect any protective purposes that would appropriately make any difference in an employment status determination. In plaintiff’s view, no statutory policy considerations should be allowed in or added to a common law control test for employment.

To define those terms, we refer to the description of the protective purposes of unemployment insurance legislation in Hunt, supra, 79 Cal.App.4th 213 , 218-219 (a case involving federal preemption issues in the context of challenges to unemployment insurance tax assessments). Section 100 et seq. outline the statutory purpose as providing benefits to persons who are unemployed through no fault of their own, “thereby reducing the suffering caused by involuntary unemployment. [Citations.] The Unemployment Insurance Code also provides disability benefits to compensate eligible persons for unemployment caused by injury or sickness. [Citation.] [][] To finance state unemployment and disability benefits, California requires contributions from both employers and employees. Generally, employers must annually contribute to the unemployment fund based on wages paid to their employees. [Citation.] Employees contribute to the disability fund based on wages received; however, employers must withhold the employees’ contributions from their wages. [Citations.]” (Hunt, supra, at pp. 218-219, fn. omitted.)

Plaintiff contends that an employer’s liability for contributions or assessments should not depend upon an employment status determination that in any way takes into account the overall statutory purposes of the Unemployment Insurance Code. In particular, plaintiff criticizes those references in Borello, supra, 48 Cal.3d 341 , that support a determination of a worker’s employment status in light of secondary criteria such as the economic dependence of the worker, or the integral nature of the work with regard to the business of the employer. Those secondary criteria are sometimes referred to as the “economic reality” test. (JKH, supra, 142 Cal.App.4th 1046 , 1054; Eggleston et al., Labor and Employment in Cal.; A Guide to Employment Laws, Regulations, and Practices (2d ed. 2009) Independent Contractors, § 15-5 [referencing the Borello case as adding an “economic reality test” to the

Plaintiff chiefly relies on language in Empire Star to the effect that “[t]he taxing sections of the [Unemployment Insurance Code] are entirely separate from those concerning benefits, and ... the provisions fixing liability for payments to the fund are to be considered accordingly.” (Empire Star, supra, 28 Cal.2d at p. 43.) However, those words must be read in context. The Supreme Court was rejecting a broad contention by the employment commission that merely because the Unemployment Insurance Act is social legislation, as distinguished from a taxing statute, it must always be liberally construed, even where the facts would not be supportive of a finding of employment, as opposed to independent contractor status. (28 Cal.2d at pp. 43-47.)

Thus, in Empire Star, the Supreme Court upheld the trial court’s finding of independent contractor status of certain mine leasers, based on the facts presented about the lack of control exerted over them. The high court acknowledged, “The objects and purposes of the Unemployment Insurance Act are not limited to the raising of revenue. It is a remedial statute and the provisions as to benefits must be liberally construed for the purpose of accomplishing its objects. [Citation.] But there is no basis for the attorney general’s contention that because the legislation confers benefits and also imposes taxes, the two parts of the law are inextricably connected. The taxing sections of the legislation are entirely separate from those concerning benefits, and although the benefits are paid from the amount collected as taxes imposed by the act, the provisions fixing liability for payments to the fund are to be considered accordingly.” (Empire Star, supra, 28 Cal.2d at p. 43.)

Remedial legislation should be liberally construed to afford all relief which the Legislature intended to grant, but such an interpretation should not exceed the limits of the statutory intent. (California Emp. Com. v. Kovacevich (1946) 27 Cal.2d 546 , 549-550 [ 165 P.2d 917 ], relying on Cal. Emp. Com. v. Butte County etc. Assn. (1944) 25 Cal.2d 624 , 630 [ 154 R2d 892 ].) Even where legislation is remedial in character and subject to a liberal construction to effectuate its purpose, the qualifying requirements of the legislation must still be enforced. (California Emp. etc. Com. v. Hansen (1945) 69 Cal.App.2d 767 , 771-772 [ 160 P.2d 173 ].) Thus, “the principle of liberal construction cannot be used as a pretext to create a liability against a person where none exists or appears to have been intended. In construing a remedial statute ‘reason must have its just proportion.’ [Citation.]” (Id. at p. 772.)

There is nothing in this record or in the Board’s decision suggesting that there is not a proper basis under Unemployment Insurance Code provisions for liability for employer assessments, independent of any liberal construction of the code regarding benefits, nor that there was any undue focus here upon employee protection, as opposed to employer rights. (See also 58 Cal.Jur.3d, supra, Statutes, § 165, pp. 593-595 [remedial statutes].) It is well accepted that statutes creating a new right of action or increasing existing liabilities should be strictly construed in favor of the persons subject to their operation. (Id., § 166, p. 595.) However, plaintiff cannot show why a strict construction of the employer contributions statutes, restricting them to the common law “control of details” test for employment status determinations, should be necessary or proper for the purpose of protecting an employer from liability, merely because those statutes serve to raise revenue for the system as a whole.

The Department’s administrative regulation is consistent with the Board’s reading of section 621, subdivision (b) in light of the Borello reasoning, because it also serves to promote an accurate and fair determination of employment status, by allowing a comprehensive analysis of all the relevant facts. Specifically, California Code of Regulations, title 22, section

Assuming that a necessary showing of an employer-employee relationship can be made in a given case, and that any challenges to it by the employer should be denied, can it nevertheless be said that the Unemployment Insurance Code has protective purposes that are not focused solely upon employee benefits? We think that since contributions or assessments from employers to the Department completely fund the unemployment insurance program (§ 976), it would be anomalous to treat employee benefits determinations one way and employer assessments another, for purposes of establishing a test for employment status. Wherever possible, courts will harmonize the portions of a statutory scheme to give effect to all. (Dyna-Med, Inc. v. Fair Employment & Housing Com. (1987) 43 Cal.3d 1379 , 1386-1387 [ 241 Cal.Rptr. 67 , 743 P.2d 1323 ].) A comprehensive employment status determination is required under the Unemployment Insurance Code to ensure that only accurate assessments are made against those properly made liable for employer contributions, i.e., those with employees. Independent contractor work situations are simply not covered by the act. This is not a controversial point and plaintiff has provided no persuasive reason to fault the Board’s reasoning in clarifying that both the primary and secondary Borello tests have application to unemployment insurance determinations under section 621, subdivision (b), because the secondary criteria have been incorporated into the “usual common law rules” mentioned in that subdivision.

C. Air Couriers Is Persuasive Authority

Plaintiff has raised the same basic arguments as were advanced by the employer in Air Couriers, supra, 150 Cal.App.4th 923 , 932, to challenge the applicability of Borello’’ s reasoning to unemployment insurance assessment decisions. Air Couriers was issued in April 2007, shortly before the Board adopted this NCM decision as precedent, and the trial court in this case found that the reasoning of Air Couriers was persuasive.

Accordingly, the court in Air Couriers rejected the employer’s claim that “Empire Star stands for the proposition that the deferential public policy standard described in Borello only applies in a case concerning benefits and does not apply to a taxation analysis.” (Air Couriers, supra, 150 Cal.App.4th at p. 936.) Rather, the correct view is that “Empire Star did not hold that employment determinations in tax cases are to be treated differently than determinations in benefit cases.” (Ibid.) We agree. For all of the above reasons, we conclude that the superior court correctly denied the requested declaratory relief to remove the precedential status of the Board’s assessment decision in NCM, supra, Dec. No. P-T-495.

The judgment of the superior court upholding the validity of NCM Direct Delivery v. Employment Development Department, supra, Dec. No. P-T-495, is affirmed. The request for judicial notice is denied. Respondent Board shall recover its costs on appeal.

McDonald, J., and O’Rourke, J., concurred.

Appellants’ petition for review by the Supreme Court was denied October 28, 2009, S175707.