HR Management & Compliance

Hiring Temps And Independent Contractors: Employers Brace For Fallout From New Microsoft Ruling; How To Avoid Owing Benefits

The federal appeals court covering California ruled several years ago that software giant Microsoft Corp. had to pay certain retroactive employee benefits to workers improperly classified as independent contractors. Now, the same court has made clear that its earlier ruling will require Microsoft to provide millions of dollars in stock-purchase rights not only to contractors, but also to temporary employees hired through staffing agencies.The decision comes on the heels of a ruling involving PG&E’s leased and temporary workers that we reported on last December, signaling it’s more crucial than ever to review your benefit plans to make sure you’ve taken precautions to minimize your liability.

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Freelancers Sue For Benefits

The Microsoft case began when the IRS determined many of the company’s independent contractors were really employees. Although the workers had signed agreements stating they were self-employed and would receive no benefits, they generally sat side-by-side with Microsoft employees, doing the same work for extended periods of time.

After the IRS ruling, several of the freelancers filed a class action lawsuit claiming that, as newly classified employees, they were retroactively entitled to the same benefits Microsoft offered regular workers. The Ninth Circuit Court of Appeal agreed (see CEA November 1996) and instructed the lower court to determine exactly which workers were entitled to benefits.

Temporary Employees Claim Entitlement

While the lawsuit was pending, Microsoft had converted most of the freelancers to temps paid by a staffing agency. It also hired more workers through various temp firms. The temps claimed they too were entitled to the extremely valuable benefits of Microsoft’s stock purchase plan. The lower court concluded that Microsoft only had to offer the stock options to a narrow class of several hundred workers. But the Ninth Circuit in its latest ruling expanded the group to as many as 10,000 temps and contractors.

20-Factor ‘Employee’ Test

Microsoft’s stock purchase plan allowed ’employees’ to participate, except those who worked fewer than five months a year or 20 hours a week. To determine whether someone qualifies as an employee under a stock option plan such as Microsoft’s, the IRS uses a ‘common-law employee’ test.This test looks at 20 factors including how much control you retain over their work, who provides their equipment and how much discretion they have over their hours and time of work. In the vast majority of cases, temps will be employees under this test, even though they are hired and paid by a temp agency.

Review Your Plans

More employers will likely face benefit claims by temporary employees and improperly classified independent contractors, and the potential cost is enormous. Now is the time to immediately do the following:


  • Review benefit programs and contracts. In some cases, it’s legal to exclude temps and contract workers from benefit plans, but you must define who is and isn’t covered very precisely. However, your retirement programs can lose their favorable tax status if you exclude certain classes of employees, and stock purchase plans have special exclusion rules, so talk to an expert. Also, although its enforceability isn’t clear, be sure temps and independent contractors sign written waivers of the right to receive benefits if they ever are determined to be employees.


  • Monitor eligibility. The IRS permits certain restrictions such as Microsoft’s limiting participation to employees who worked a certain number of hours per week for a defined period of time. The key, though, is to make sure that temps and contractors don’t exceed these limits.

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