Controlling Potential Exposure: What Employers Should Do, Post-Microsoft

On July 24, 1997, the Ninth Circuit issued its long-awaited, enbanc decision in Vizcaino v. Microsoft Corporation, holding that certain employee benefits might have to be provided to individuals whom Microsoft had misclassified as independent contractors. The majority's logic was quite simple:

• The benefit plans covered common law employees.

• The plaintiffs were common law employees.

• Hence, the plaintiffs were eligible or potentially eligible for plan benefits.

Three dissenting judges adopted the view our firm had espoused in its amicus brief on behalf of four major employer associations -- that the plaintiffs were not entitled to benefits because they had agreed to work without benefits and Microsoft had not intended to provide benefits to them.

Although the holding in Microsoft is fact-specific (and, therefore, possibly of limited precedential value), the message of the case is unmistakably clear, at least to employers in the Ninth Circuit: Do not expect a benefit exclusion premised on an employment status misclassification to be upheld.

Because the Microsoft case has received a great deal of media attention, employers should expect a plethora of Microsoft-type claims to be asserted over the next few years. These claims could involve every category of contingent worker and every category of benefit or compensation program.

The irony of Microsoft is that Microsoft could have avoided most of plaintiffs' claims if it had drafted its benefit plans to exclude persons whom it regarded to be contingent workers, even if mistakenly. Therefore, employers that have not already done so should minimize or eliminate their prospective exposure to Microsoft-type claims by promptly adding well-crafted exclusionary provisions to all benefit plans and other compensation policies (such as vacation, severance, sick leave, health insurance, 401(k), and retirement plans or policies), such as our model provision set forth in this client alert.

In addition, employers should (1) be cautious in admitting liability in settling worker classification tax audits; and (2) take appropriate steps to minimize worker misclassification, which is endemic. Concerned over the myriad risks it poses, some of the largest companies in this country in recent years have launched major efforts to eliminate worker misclassification. The stakes are now much higher, post-Microsoft.