Employee Benefits & Compensation Updates: Vizcaino v. Microsoft Corporation

BACKGROUND

Recently, the Ninth Circuit generally reaffirmed a panel decision holding that certain Microsoft workers who were originally hired as independent contractors were entitled to benefits under Microsoft's 401(k) plan (the "Savings Plus Plan" or SPP) and Employee Stock Purchase Plan (ESPP).

After these workers were reclassified as employees by the Internal Revenue Service (IRS), they asserted that they were eligible for benefits under Microsoft's SPP and ESPP. Microsoft denied their request for benefits and the workers sued. They lost at the District Court level and appealed. On October 3, 1996 a Ninth Circuit three judge panel found that the workers were entitled to benefits. However, Microsoft requested the Ninth Circuit to review the case "en banc." Microsoft wanted to present the case before the full 11-judge court. The Ninth Circuit agreed and rendered its decision on July 24, 1997.

DISCUSSION

Independent Contractor Agreements:

The court first looked at the agreements the workers signed, stating that they were independent contractors and responsible for paying all of their own benefits. The court concluded that the contracts did not control the outcome of the case. The contracts were formed on the basis of a mutual mistake -- that the workers were independent contractors. Because the terms of the contracts hinged upon the workers' independent contractor status, they did not apply to any aspect of the workers' employment relationship with Microsoft, a relationship Microsoft conceded existed for the purposes of this lawsuit.

SPP:

With regard to the SPP plan, the court determined that the plan administrator's original denial of benefits was arbitrary and capricious since it was based either (i) on the workers status as independent contractors, or (ii) on the workers' signed agreements, which included benefits waivers. The court remanded the issue to the SPP administrator and asked the administrator to determine whether the workers were "on the United States payroll of the employer" as required to be eligible under the SPP. The three judge panel construed this language against Microsoft and determined that all employees paid from Microsoft's United States accounts were eligible to participate. The en banc court refused to make this determination but stated that "no doubt the plan administrator should pay careful attention to what was said [by the Ninth Circuit panel]."

ESPP:

The court then turned its attention to the ESPP. The court determined that the ESPP was an offer to all employees which the workers accepted, even without knowing its exact terms, by working for Microsoft. Thus, the workers were eligible to participate in the ESPP. The court remanded the determination of the appropriate remedies to the District Court.

CONCLUSION:

Employers who took heed of the lessons that the October 1996 three judge panel decision taught should not be alarmed by this decision. The en banc decision, in large part, reaffirmed the findings of the panel. As we have continually emphasized, to prevent a reclassification of its workers, employers should review their worker classifications to determine whether the workers they are hiring as independent contractors really are independent contractors. In addition, employers should review the eligibility provisions of their benefit plans to determine whether the plans properly exclude those workers to whom the employer does not wish to provide benefits.

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