The Contingent Workforce - independent contractors or temporary workers

Internal Auditor, April, 2001 by William G. Mister, Diana M. Rose, Beverly J. Rowe, Sally K. Widener

Microsoft and Misclassification

From 1987 to 1990 Microsoft employed approximately 1,000 workers who were classified as independent contractors. The workers signed employment agreements stating that they were independent contractors and were not entitled to any benefits.

The IRS audited Microsoft for the 1989-1990 tax year and determined that the workers were misclassified as independent contractors and that they were actually common law employees for tax purposes because Microsoft exercised or retained rights to exercise direction over the services the workers performed. Microsoft agreed with this Letter Ruling and complied by paying employment taxes (FICA and FUTA). Microsoft issued new W-2 forms enabling the misclassified workers to recover FICA taxes they had paid. Microsoft then offered some of the reclassified workers permanent positions and others the option of quitting or continuing in their positions by working for Microsoft through temporary agencies.

When a group of reclassified workers demanded the benefits they would have received for the period that they were not treated as employees, Microsoft's benefit plan administrator denied the claims. He based the decision on his interpretation that the misclassified workers waived their right to participate in the plans when they signed contracts agreeing they were independent contractors.

Eight of the misclassified employees then filed a lawsuit against Microsoft (Vizcaino v. Microsoft) for the right to participate in the benefit plans and to obtain class certification. Ultimately the courts ruled in favor of the plaintiffs. In July 1993, the class was certified to include "all persons employed by Microsoft in the United States who are denied employee benefits because they are considered independent contractors or employees of third-party employment agencies, but who meet the definition of employees of Microsoft Corporation under common law."

In October 1996, the plaintiffs were granted summary judgment in favor of their eligibility to participate in the company's Savings Plan Plus program and Employee Stock Purchase Plan, based on their common law status. It was estimated that this ruling would cost Microsoft several million dollars.

Microsoft's attempts to reverse this decision have been unsuccessful. In 1997, the U.S. Court of Appeals ruled once again in favor of the plaintiffs. In addition, requests made in 1998 and 2000 to the Supreme Court for a review of the ruling were denied. Efforts by Microsoft to reduce its liability have also been stymied by the court's refusal to limit class size.

In December 2000, Microsoft agreed to settle this suit for $97 million.