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Lessons Learned About Microsoft ‘Independent’ Contractors
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Business New Haven
4/6/1998
By: Debra A. Drexler
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Microsoft's recent court battle with some former “independent contractors” involved the issue of what constitutes an “employee” for purposes of various benefits which must, under federal and state law, be offered to such workers.
While much opinion has been reported since the January 26 refusal by the U.S. Supreme Court to hear Microsoft's appeal (of a ruling by the U.S. Court of Appeals for the 9th Circuit filed on July 24, 1997), the dire predictions of the company, as well as the various trade groups which supported Microsoft's position, may not have broad implications for Connecticut or any other employer outside of the state of Washington. In fact, the Supreme Court denied certiorari without opinion. In English, this means that they refused to hear the case and, by so doing, let the decision of the 9th Circuit stand.
The class-action lawsuit, Vizcaino, et.al. v. Microsoft, followed a 1990 IRS ruling which determined - using the (in)famous 20-factor test - that plaintiffs were employees and not independent contractors. The workers in question were all hired between 1987 and 1990 and signed employment agreements stating that, in essence, they were independent contractors and not employees, and therefore not entitled to the same benefits as employees. After the IRS ruling, Microsoft revamped its dealing with this class of workers.
In the case before the 9th Circuit Court of Appeals, the company conceded that: 1) the plaintiffs were employees under the common law of the state of Washington; and 2) the signing of the employment agreements did not waive those workers' rights for all benefits required for employees.
The only benefits which were in question before the 9th Circuit were the company's “Savings Plus Plan” (SPP, a 401[k] plan) and its very lucrative “Employee Stock Purchase Plan” (ESPP). The ESPP, in pertinent part, offered Microsoft employees the opportunity to purchase Microsoft stock at very advantageous prices. Given that Microsoft stock has proven an excellent investment vehicle, it would be hard to imagine an individual with today's knowledge failing to take advantage of this opportunity.
In light of the incredible sums of money implicated for Microsoft, why should every employer everywhere not immediately file for bankruptcy protection? The answer is found in the 9th Circuit's decision, which states that the factual determination of whether any individual would actually have participated in the ESPP must be proved in court. According to Patrick McHale, a partner with the labor and employment practice of law firm Shipman & Goodwin LLC, “[T]his is a factual determination that the 9th Circuit has left up to the Seattle federal district court. After further proceedings, it could still be decided in Microsoft's favor. In essence, the district court will have to reinvent history to figure out which employees would have purchased what amount of stock at the time of each offering, without the benefit of today's knowledge. This is at best a difficult task.”
Most importantly, because the case was decided applying Washington state common law, the eventual outcome will be relevant to Microsoft stockholders in Connecticut, but not necessarily employers here. According to McHale, it will be “meaningless for Connecticut employers. However,” he warns, “it does point out the extreme difficulty that Connecticut employers have in determining whether an individual is an independent contractor or an employee. There are numerous definitions, in as many different areas of law, of the word, and no single factor of any definition is controlling.
“The lesson to be learned from the reasoning of the 9th Circuit in the Microsoft case,” adds McHale, “is that all employers must examine their relationships with non-employee workers, regardless of the terms of any written contracts between the parties and without respect to what such individuals are entitled.”
Remember folks, if it walks like a duck and talks like a duck, gets treated like a duck and hangs out with other ducks....
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