The Misfortunes of Misclassifying Workers

In January, the United States Supreme Court refused to consider Microsoft

Corporation's appeal of a lower court decision requiring Microsoft to pay

damages to a substantial class of "non-permanent" workers whom

Microsoft had denied employee stock option benefits. Vizcaino v. Microsoft

Corp., 97 F.3d 1187 (9th Cir. 1995)(Vizcaino I), aff'd, 120 F.3d 1006 (9th

Cir. 1997)(en banc)(Vizcaino II), Vizcaino v. Microsoft Corp., 173

F.3d 713 (1999)(Vizcaino III), cert. denied, 120 S. Ct 844 (January 10,

2000). The clear message of the Vizcaino rulings, and similar rulings in

other cases against ExxonMobil Corporation and ABC-Capital Cities, is that

employers must exercise great care in classifying workers as independent

contractors, freelancers, contingent workers, temporary workers or some other

type of non-employee.

The dispute between Microsoft and its "freelancers" first arose

after the Internal Review Service (IRS) determined that Microsoft was required

to pay back withholding taxes for the freelancers because they were deemed

"common law employees" for withholding and employment tax purposes. In

response to the IRS ruling, Microsoft changed the way it dealt with the

freelancers by converting some into permanent employees and offering others the

option of terminating their employment or continuing to work at Microsoft as

employees of an independently owned and operated temporary staffing agency.

Those workers who elected to become temporary employees through the staffing

agency continued to work the same hours, on the same projects, and under the

same supervisors as they did when they held freelance positions before the IRS

ruling.

After the IRS's determination, several workers who had been classified by

Microsoft as freelancers sought certain benefits that Microsoft provided to its

regular employees, including the right to participate in Microsoft's

tax-qualified Employee Stock Purchase Plan (ESPP). The workers asserted that

they met the eligibility requirements under the subject benefit plans, because

the workers met the definition of common law employees. Microsoft denied their

claims, and the workers filed a class action lawsuit.

The United States Court of Appeals for the Ninth Circuit agreed with the

former freelancers that they were eligible to receive benefits. The Ninth

Circuit held that the class of plaintiffs entitled to seek damages must be

defined broadly to include any Microsoft worker who worked 20 hours per week or

more for at...