Contractors as employees - Microsoft contractors ruled employees - Law At Work

Monthly Labor Review, Oct, 1997 by Brinton E. Bohling

In a recent ninth-circuit case, the court expanded an Internal Revenue Service (IRS) decision based on the common-law definition of the term "employee"(9) that required Microsoft to treat a group of contractors as employees for tax purposes. Once designated as employees, Donna Vizcaino and seven other contractors sought the same coverage under the Microsoft retirement funds as all the company's common-law employees. When they were denied coverage, the eight sued Microsoft.

The issue arose when the IRs audited Microsoft; the Agency noted that sometime before 1990, Microsoft hired several contractors, including Vizcaino and colleagues, to perform services often exceeding 2 years. These contractors were hired to work on specific projects and performed a number of different functions, such as production editing, proofreading, formatting, indexing, and testing. Microsoft fully integrated the contractors into its work force: they often worked on teams along with regular employees, sharing the same supervisors, performing identical functions, and working the same core hours. However, they were not paid for their services through the payroll department; instead, they submitted invoices to, and were paid through, the accounts payable department. Microsoft did not withhold income or Federal Insurance Contribution Act (FICA) taxes from the contractors' wages, nor did the company pay the employer's share of the FICA taxes. Additionally, Microsoft did not allow the contractors to participate in the company's two retirement funds: the Savings Plus Plan and the Employee Stock Purchase Plan. At the time, the contractors did not complain about Microsoft's treatment of them.

However, in 1989, the IRS started examining Microsoft's records and decided that it should have been withholding and paying its portion of the "contractors"' taxes because, as a matter of law, these workers were not in fact independent contractors, but actual Microsoft employees. The IRS made that determination by applying common-law principles. Microsoft agreed with the IRS and made the necessary corrections by issuing W-2 forms to the workers and by paying the employer's share of FICA taxes to the Government.

Microsoft also realized that, because, in accordance with the law, these workers were now deemed employees, at least for tax purposes, the company had to change its accounting system. It made no sense anymore to have employees paid through the accounts payable department, so those who remained in essentially the same relationship as before were tendered offers to become acknowledged employees. Others had to discontinue working for Microsoft, but did have the opportunity to go to work for a temporary employment agency, which would supply workers to Microsoft on an as-needed basis. Some took advantage of that opportunity, but Vizcaino and colleagues did not.

Vizcaino and colleagues then asserted that they were employees of Microsoft and should have had the opportunity to participate in the Savings Plus Plan and the Employee Stock Purchase Plan, because those plans were available to all employees who met certain qualifications. Microsoft disagreed, and Vizcaino and colleagues asked the Savings Plus Plan administrator to exercise his authority to declare them eligible for benefits. The plan administrator, however, ruled that they were not entitled to any benefits from either fund. In essence, he took the position that Vizcaino and colleagues had agreed that they were independent contractors and therefore waived their right to participate in the benefit plans.

Originally, the district court granted summary judgment against Vizcaino and colleagues, and they appealed the determination. The ninth circuit then reversed the district court's decision. The circuit court ruled that the workers were indeed common-law employees who could not be excluded from participation in the plans.

Judge Ferdinand Fernandez delivered the ninth circuit's opinion. Two other ninth-circuit judges, Betty Fletcher and Diarmuid O'Scannlain, submitted opinions, both partially concurring and partially dissenting.

Judge Fernandez's opinion decided two separate issues: Vizcaino and colleagues' disposition to participate in the Employee Stock Purchase Plan was remanded to the district court, whereas their participation in the Savings Plus Plan was remanded to the plan administrator. The circuit court acknowledged that there was no longer any question that these workers were employees of Microsoft, and not independent contractors; the IRS had clearly determined that they were employees. It might be argued that the IRS'S decision was for tax purposes only, under a limited meaning of the term "employee." However, the IRS had made its determination on the basis of a list of factors that is generally used to decide whether a person is an independent contractor or an employee.(10)

The circuit court construed Microsoft's treatment of Vizcaino and colleagues as simply mistaking their true common-law employment status. Therefore, because the Employee Stock Purchase Plan is a stock purchase program that extends coverage to "employees," it should have been extended to these workers as well. Fernandez referenced a Washington State case which holds that a contract can be accepted, even when the employee does not know its precise terms.(11)