Temporary Twilight Zone


Independent contractors, temporary employees and part-time employees account for almost twenty-five percent of the total U.S. workforce. Collectively, these groups of workers have been termed the "contingent workforce," and have been the subject of a whole new set of rules by businesses. Perhaps most significantly, contingent workers usually agree to work without company-sponsored employee benefits in exchange for higher pay or more flexibility in their work schedules. Over the course of the past few years, American business has greatly expanded the use of contingent workers. Businesses contend that a greater utilization of the contingent workforce lowers business costs and provides flexible staffing alternatives. Judging by the number of workers who wish.or are at least willing.to engage in this alternative working relationship, workers value something about the arrangement as well.

Both the Employee Retirement Income Security Act of 1974 ("ERISA") and the Internal Revenue Code generally permit employers to exclude contingent workers from participation in employee benefit plans. Unfortunately for employers, however, the legal status and the rights of contingent workers.particularly in connection with exclusion from employee benefit programs.are in a state of flux.

On October 20, 1998, the Ninth Circuit Court of Appeals decided that Florette Burrey and twelve other plaintiffs, although employees of an employment agency, had crossed the invisible dividing line between temporary employee (nonemployee benefit) status and the promised land of common-law employee status (and full employee benefit plan coverage). In Burrey v. Pacific Gas & Electric, et al., _____ F.3d _____, 98 D.A.R. 10924 (9th Cir. 1998), the Ninth Circuit concluded that employees of temporary agencies working at an unrelated employer's place of business, unless specifically excluded from employee benefit plan coverage, were to be treated as the recipient employer's common-law employees for employee benefit plan purposes. This decision turns the conventional thinking about excluding temporary employees from benefit plans on its head. Any employer who employs contingent workers is now exposed to potentially debilitating financial liabilities. The Court has ruled, in essence, that unless an employee benefit plan has a perfectly written exclusion from participation, all contingent workers (temporary employees and potentially independent contractors) will be entitled to plan benefits.

In late October, the U.S. Department of Labor climbed aboard this same bandwagon. The Department of Labor has sued Time Warner, Inc., alleging that Time Warner deliberately misclassified as many as 1,000 of its 40,000 workers in order to save the costs of providing these employees with employee benefits. The case is titled Herman v. Time Warner, Inc., Case No. 98-7589, and is filed in the United States District Court for the Southern District of New York. The Department of Labor is seeking to compensate these temporary writers, temporary photographers and temporary graphic designers by allowing them to retroactively receive employee benefits from Time Warner's plans.

Ms. Burrey's case is more than just the "Son of Microsoft." As you may recall, in Vizcaino v. Microsoft, 120 F.3d 1006 (9th Cir. 1997), the Ninth Circuit ruled that independent contractors may be entitled to employee benefits, even though the independent contractors had signed written agreements waiving their rights to employee benefits. The Ninth Circuit found that once Microsoft conceded these independent contractors were common-law employees for employment tax purposes (due to an IRS audit), they then must be treated as employees for employee benefit plan purposes. The Ninth Circuit has pushed the envelope of employee benefit law beyond protecting misclassified independent contractors to now encompass the ocean of all temporary employees.

The Facts

The plaintiffs in Burrey had originally worked for PG&E at its Marketing Processing Center ("Center") which serviced PG&E's energy conservation programs. Beginning in 1983, the former PG&E temporary employees were transferred to Volt Energy Services, an employment agency. In 1988, PG&E awarded the temporary services agreement to Pacific Coast Clericals ("PCC"). The employees were informed by PG&E that they could continue to work at the Center as PCC employees.

Between 1982 and 1994, the plaintiffs continued to work at the Center. The plaintiffs were trained by and worked with PG&E employees, used PG&E's computer system, telephones and e-mail. PG&E sent the Center employees, including the plaintiffs, to classes and seminars regarding debt collection, customer service, and general office skills. The plaintiffs were required to attend PG&E's programs regarding sex harassment and emergency response training. PG&E gave the plaintiffs PG&E business cards and PG&E letterhead and, on occasion, use of PG&E company cars. The plaintiffs' work-related expenses, including travel expenses, were reimbursed directly by PG&E.

This cozy relationship ended on January 1, 1994, when PG&E and its new outside temporary agency, Stafco (the successor to PCC), entered into a new and different contract. Under the new contract, PG&E no longer allowed the Center employees to use PG&E business cards, PG&E letterhead, attend PG&E training classes, receive reimbursement from PG&E for work-related expenses or were permitted to use PG&E cars.

PG&E provided a wide range of employee benefits to its common law employees, including a retirement plan, a savings plan, a health plan and a severance plan. The retirement and savings plans were, by their terms, available to "employees" but not to "leased employees, as defined by section 414(n) of the Internal Revenue Code." Under PG&E's health plan, an employee was automatically enrolled on the first day of work in a medical plan without dependent coverage.

The Decision

The Ninth Circuit observed that, ordinarily, it would defer to the decision of the administrator concerning a participant's eligibility for employee benefits. The PG&E pension and retirement plans had granted the plan administrator the authority to "make such computations, interpretations, and decisions as may be necessary or desirable for the proper administration of the plan." However, the Court decided that, because the definition of who was to be excluded from the retirement and pension plans turned on a legal definition, no deference would be given to the administrator's decision.

The Ninth Circuit then turned to whether the plaintiffs had standing to bring a claim for pension and retirement plans. The Court explained that the PG&E pension and retirement plans excluded "leased employees" as defined in section 414(n)(2) of the Code from participation. Code section 414(n) provides:

The term 'leased employee' means any person who is not an employee of the recipient and who provides services to the recipient .

  1. Such services are provided pursuant to an agreement between the recipient and any other person.
  2. Such person has performed such services for the recipient . . . on a substantially full-time basis for a period of at least one year, and
  3. Such services are of a type historically performed, in the business field of the recipient, by employees.
    Therefore, under the plan meaning of section 414(n), a leased employee is any person who: (1) is not a common-law employee of the recipient, and (2) satisfies the three enumerated requirements. In other words, a common-law employee of the recipient cannot qualify as a leased employee under section 414(n).

(Emphasis supplied.)

The Ninth Circuit concluded that if Florette Burrey was a common law employee of PG&E (after working at PG&E as a "temp" for over ten years) she could not by definition be simultaneously a leased employee of PG&E. (The Tax Code says a "leased employee" (a temporary employee) is a person who is not an employee . . .") The question of whether or not Florette Burrey was a "common-law employee" was sent back to the trial court with instructions that the determination of Florette's employment status should be determined using the twenty-factor (employee versus independent contractor) test described by the IRS in Revenue Ruling 87-41 and adopted by the U.S. Supreme Court in Darden v. Nationwide Insurance.

The Ninth Circuit strongly inferred that Florette Burrey and the other temporary employee plaintiffs were automatically entitled to the PG&E health plan benefits they had been denied. The Ninth Circuit explained:

The plaintiffs are not asserting that they are entitled to health benefits for medical expenses incurred after their period of employment. Instead, the plaintiffs contend that as common-law employees of PG&E, they had been automatically enrolled in the medical plan and therefore entitled to reimbursement for medical expenses the plaintiffs incurred during their employment at the Center, the same as the regular PG&E employees received. In a more general sense, then, the plaintiffs are claiming a right to a benefit, i.e., reimbursement for medical expenses incurred as employees enrolled under the plan, to which any PG&E employee enrolled in the plan would be entitled.

Under the terms of the Basic Health Plan, if the plaintiffs qualify as common-law employees, then they were automatically enrolled in the plan upon commencement of their employment, and thus participants in the health plan.

The Court of Appeals did, however, reject the plaintiffs' claims to severance benefits, reasoning that since the severance plan's conditioned entitlement to benefits upon the timely completion of a release agreement, and since these temporary employees did not ever execute a release agreement, they could not be entitled to severance benefits.

Does a Florette Burrey work for you? Do "temporary" agency employees work for you for years? What should you do to correct this potential liability? Employers should immediately review the eligibility language in all of their employee benefit plans to determine whether or not temporary employees have been properly excluded. If not, these former temporary employees may be entitled to file a claim for employee benefits.

What can an employer do to prevent this problem from occurring? Obviously, all temporary employment agencies should be engaged pursuant to a written agreement. Temporary employees should not be allowed to participate in any company employee benefit programs. If temporary agency employees are required to perform services on the company's premises, a procedure should be adopted to make sure that they are not treated as "de facto" company employees. Consideration should be given to not entering into "exclusive" arrangements with temporary employment agencies. Employers should try to limit the duration temporary employees work for them. Temporary employees who are engaged for longer than one year are, according to the court in Burrey, presumptively common-law employees potentially entitled to employee benefits. Company employees who are responsible for actively supervising temporary employees should receive special training to make sure a temporary employee's status is not compromised. Finally, it is of paramount importance that someone carefully review and, if appropriate, rewrite the eligibility provisions for each of the company's employee benefit plans with an eye to the fact that, sooner or later, a temporary employee will probably attempt to claim that he or she is not really a temporary but has, through the shackles of time and inadvertence, become your employee and a retroactive participant in all of your employee benefit plans.

ASAPTM is published by Littler Mendelson in order to review the latest developments in employment law. ASAPTM is designed to provide accurate and informative information and should not be considered legal advice. ©1998-1999 Littler Mendelson, P.C. All Rights Reserved.