Beware who you don't hire.

Publication: Employee Relations Law Journal

Publication Date: 22-JUN-06

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COPYRIGHT 2006 Aspen Publishers, Inc.

This article examines some of the recent court and administrative decisions about temporary workers, suggesting that these rulings may affect the ability of private businesses to remain profitable and the ability of public entities to deliver necessary government services within the confines of taxpayer budgets.

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Who are my employees? A simple question that often times does not have a simple answer. It is a question, however, that every employer in the private and public sectors needs to ask itself (regularly) if it wants to use temporary or contract workers but does not want to get into legal trouble for such practice. (1)

Precisely because laws governing employment taxes, employee benefits (such as ERISA or the California PERL), workers' compensation, and anti-discrimination (such as the FLSA) focus, in part, upon whether a worker is an "employee" rather than an independent contractor, employers asleep at the switch could find themselves with an enormous and unexpected tax bill or, worse, on the wrong side of a jury verdict. All employers must be vigilant of developments in this area of the law, which may affect whether they use, and how they structure relationships with, temporary or contract workers.

Despite growing numbers of lawsuits, statistical evidence shows that the use of temporary workers has changed very little in the past decade. (2) That being the case, evolving case law and administrative decisions about temporary workers may have a profound impact upon the ability of private businesses to remain profitable and on the ability of public entities to deliver necessary government services within the confines of taxpayer budgets.

This article examines some of the recent trends in this area.

THE MICROSOFT CASE (3)

'This is going to be the next wave of employment litigation[.]' 'The Microsoft case sounds a siren of alarm. Employers should be very careful because, later on, if their contractors or temps are reclassified as employees, they may be eligible for very expensive retroactive benefits.' (4)

In Vizcaino, one of the largest and most high profile companies in America got tagged by the Internal Revenue Service, and then in court, for its use of temporary employees. The theory in Vizcaino was simple. The plaintiffs--a class of so-called "freelancers" or independent contractors--sued the software giant on the theory that, because they met the definition of employee under the "common law" test, they were not independent contractors but rather "mislabeled" Microsoft employees entitled to the same benefits as officially recognized Microsoft employees. After years of litigation, the contractors won and Microsoft settled--for nearly $100 million.

To save money in the late 1980s, Microsoft began using "freelancers" or independent contractors to supplement its official workforce. (5) Over time, many of the freelancers became integrated into Microsoft's operations. (6) The freelancers worked side-by-side with official employees; worked the same hours; shared the same supervisors; and performed the same tasks. (7) The freelancers received Microsoft admittance card keys, office equipment, and supplies. (8) Unlike with its official employees, however, Microsoft did not provide the contractors with the accoutrements that came with official employment, such as employee benefits. (9)

In fact, when hired, Microsoft told the freelancers that they would not be eligible for Microsoft employee benefits, including under the Microsoft Employee Stock Purchase Plan (ESPP) and the Microsoft Savings Plus Plan (SPP). (10) Microsoft also required the freelancers to execute contractor agreements, which provided, in part, that:

1. The freelancers were "responsible for all federal and state taxes, withholding, Social Security, insurance and other benefits"; and

2. The freelancers were "self-employed" and "responsible to pay all [their] own insurance and benefits." (11)

In 1989 and 1990, the Internal Revenue Service audited Microsoft. (12) The IRS concluded, after applying common-law principles, that Microsoft's freelancers were not independent contractors but employees of Microsoft for employment tax purposes. (13) The IRS required Microsoft to pay withholding taxes and the employer's portion of the Federal Insurance Contribution Act (FICA) tax. (14)

In response to the IRS rulings, Microsoft paid overdue employer withholding taxes, and issued retroactive W-2 forms to allow the contractors to recover Microsoft's share of FICA taxes. (15) Microsoft also agreed to pay the contractors retroactively for any overtime they may have worked. (16) Microsoft also tendered offers to some contractors to become permanent employees. (17) And, Microsoft gave others the option of terminating their employment relationship with Microsoft completely or continuing to work at the company but in the capacity of employees of a temporary employment agency (which would provide payroll services, withhold federal taxes, and pay the employer's portion of FICA taxes). (18) Most contractors who were not hired as...

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