Who is Entitled to Company Benefits?

Most companies structure employee benefit plans to provide benefits to employees of the company other than those who may be statutorily excluded, namely employees covered by collective bargaining agreements, nonresident aliens, and leased employees. However, in recent years determining whom within an organization is an employee has become more and more difficult because of the increased use of independent contractors, leased employees and temporary workers in many industries. Last year's Ninth Circuit decision in Vizcaino et al v. Microsoft Corporation, 120 F.3d 1006, (9th Cir. 1997), cert. denied, 139 L.Ed. 2d 884 (1998) added another layer of complexity in the classification of workers. Microsoft ultimately lost a bid to exclude what it termed "independent contractors" and "freelancers" from all of its employee benefit plans and arrangements.

In that case, the "independent contractors" and "freelancers" conceded in writing that they were classified as such, that they agreed to such a designation, and that they were aware of the adverse consequences of such a designation under Microsoft's various employee benefit plans. These so called independent contractors were hired on a "for project" basis, but many worked on successive projects and some for as many as six years. In addition, these individuals worked in the same locations, same hours and under the same supervision as "regular" employees of Microsoft. The Ninth Circuit concluded that despite contracts between the "freelancers" and Microsoft which stated that the individuals would not be entitled to benefits provided by Microsoft, these individuals were entitled to benefits under, among other things, Microsoft's stock purchase and 401(k) savings plans.

It should be noted that the case was apparently triggered by the Internal Revenue Service's examination of Microsoft's employment and independent contractor engagement records. The investigation eventually determined that the "freelancers" and "independent contractors" should have been treated as employees for withholding and employment tax purposes. Microsoft agreed to, among other things, pay the overdue withholding and payroll taxes and to issue retroactive W-2 forms to allow the "freelancers" to recover Microsoft's share of FICA taxes which they had been required to pay as "self-employed" individuals. The plaintiffs in Microsoft then brought suit for vacation pay, sick leave, holidays, short term disability coverage, group health and life insurance, and benefits under both the 401(k) and stock purchase plans. The Ninth Circuit held that these individuals were employees eligible to participate in Microsoft's various employee benefit programs.

In the wake of the Microsoft decision, careful plan design is required to avoid retroactive reclassification and inclusion of individuals who are not employees of a particular organization. In addition, the Cincinnati District Office of the IRS apparently has taken a hard line position with respect to the definition of employee for retirement plan purposes in reviewing plans submitted for determination letters. Accordingly, if your plan currently broadly excludes "freelance workers," "independent contractors," or "special project workers," your plan should be reviewed in light of the combined effects of the Microsoft decision and the IRS' unofficial ruling position.