In a decision that will give stock purchase rights retroactively to thousands of workers, the Ninth Circuit Court of Appeals has handed contingent workers (independent contractors and temporary agency employees) their third straight victory in the continuing class action litigation over Microsoft's legal obligation to allow such workers to participate in its benefit plans. Vizcaino v. United States District Court (Microsoft Corporation), 173 F. 3d 713 (9th Cir. May 12, 1999) (We'll call it Microsoft Release 3.0.) The court set aside the district court's modified definition of the class that had drastically limited the number of workers entitled to participate in Microsoft's stock purchase plan. The court's decision will cost Microsoft millions of dollars because it will entitle several thousand workers (rather than a few hundred) to receive stock options.
Over the past decade, employers have relied more heavily on a contingent workforce to fulfill business needs for specialized skills, efficiency (workers are paid only for the hours actually worked) and flexibility in scheduling. Typically, a contingent worker agrees to forgo fringe benefits, including participation in employer-sponsored benefit plans, in exchange for a more flexible work schedule and/or a higher hourly pay rate. Employers have long assumed that they could exclude contingent workers from participation in their benefit plans through the use of boilerplate exclusionary language. Indeed, both the Employee Retirement Income Security Act ("ERISA") and the Internal Revenue Code generally allow plans to exclude such contingent workers.
Increasingly, however, contingent workers have gone to court claiming the right to participate in the benefit plans of employers for whom they perform services. The Ninth Circuit's original Microsoft decision in 1996 (Microsoft 1.0) was the first judicial recognition of the right of contingent workers to participate in employer-sponsored benefit plans-notwithstanding contractual arrangements making them ineligible for benefits. Then late last year the Ninth Circuit ruled that employees of a temporary agency who worked at PG&E's marketing processing center (some of them for over 10 years) could be common-law employees entitled to benefits under the company's pension and health plans. In that case, Burrey v. Pacific Gas & Electric Company, 159 F.3d 388 (9th Cir. 1998), the court ruled that the plan's exclusion of "leased employees" did not exclude temporary workers who qualified as common law employees because under the Tax Code a "leased employee" is not an employee. Therefore, if the plaintiffs were actually common law employees they could not simultaneously be leased employees excluded from the plan. The court sent the case back to the district court to decide the issue of whether the plaintiffs were common law employees of PG&E, using the 20-factor test adopted by the IRS in Revenue Ruling 87-41 and by the U. S. Supreme Court in Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992). In May of this year the district court ruled that the Burrey plaintiffs were not common law employees of PG&E and therefore were not entitled to benefits.
Meanwhile a class action lawsuit has been filed against Pacific Telesis on behalf of 1,700 temporary agency employees and contract agency workers alleging that they were wrongfully excluded from the company's benefit plans. The case is Castilo v. Pacific Bell, No. C 99-2282 VRW (N.D. Cal.) In another case, the Department of Labor filed suit last October against Time Warner and fiduciaries of its benefits plans alleging that the company misclassified common law employees as independent contractors and temporary employees, causing them to be excluded from the company's benefit plans. Herman v. Time Warner, Inc., Case No. 98-7589 (S.D. N.Y.).
So far there have been no court decisions outside the Ninth Circuit recognizing contingent workers' rights to participate in employee benefit plans. However, the status and rights of contingent workers are in flux, and more legal challenges to such workers' exclusion from benefit plans can be expected.
THE MICROSOFT 3.0 DECISION
In Microsoft 3.0, the Ninth Circuit Court of Appeals held that workers who qualified as common law employees of Microsoft and met the plan's service requirements were entitled to participate retroactively in Microsoft's tax-qualified stock purchase plan. In Microsoft 1.0 and 2.0, the Ninth Circuit had already ruled that so-called "freelancers," classified as independent contractors by Microsoft, were entitled to participate in Microsoft's 401(k) and employee stock purchase plans. Vizcaino v. Microsoft (Microsoft 1.0), 97 F. 3d 1187 (9th Cir. 1996); Vizcaino v. Microsoft (Microsoft 2.0), 120 F.3d 1006 (9th Cir. 1997). Microsoft conceded that these independent contractors were actually common-law employees.
After Microsoft 1.0 and 2.0, the Ninth Circuit sent the case back to the district court to rule on any remaining eligibility issues affecting individual workers. The district court then revised its definition of the class of eligible workers. The court had previously certified a class that included not only independent contractors but also employees of outside employment agencies who qualified as common law employees of Microsoft. The district court changed the class definition to include only individuals who worked for Microsoft as independent contractors in 1987-1990. The new definition excluded temporary agency workers hired into positions previously held by independent contractors. In 1990, after an IRS audit determined that the independent contractors were misclassified, Microsoft had moved many of the contractor positions onto the payroll of a temporary employment agency, but the relationship of these workers with Microsoft remained essentially the same. The court's revised class definition reduced the size of the class from several thousand to several hundred.
When the Ninth Circuit got the case again in Microsoft 3.0, it ruled that the district court could not change the definition of the class after issues in the case had already been decided. The court also held that the district court incorrectly assumed that employees of an outside employment agency could not be common law employees of Microsoft and on that basis incorrectly excluded them from the class. The court explained that a worker could be an employee of an agency for some purposes and simultaneously a common law employee of Microsoft. "The two are not mutually exclusive." The court concluded that whether the temporary workers were Microsoft's common law employees depended not on whether they were also employees of another employer but rather on application of the Darden factors to their relationship with Microsoft.
The court's decision in Microsoft 3.0 means that all common law employees of Microsoft who worked at least 20 hours a week and for over five months in a plan year may participate in Microsoft's stock purchase plan retroactively to 1987. An important limiting factor in this decision, however, is the type of benefit plan involved. The Ninth Circuit explained in Microsoft 1.0 and 2.0 that Microsoft designed its stock purchase plan to enjoy the benefits of tax qualification. In exchange for these benefits, Section 423 of the Tax Code requires that a stock purchase plan be offered to all common law employees of the corporation.
The terms of an employer's benefit plans describe who is eligible to participate and who is not. The Microsoft cases underscore how important it is that employers make sure that their plans really exclude the workers the employer intends to exclude. Otherwise, the employer may be footing the bill to provide retroactive benefits for the next temporary workers who demand the right to participate in the employer's plans.
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