Independent Contractor Developments

The Microsoft Case

By Nancy E. Joerg, Esq.

Firms that use independent contractors should pay special heed to a recent landmark lawsuit involving the giant Microsoft Corporation. In this history–making suit, a group of independent contractor "freelancers" used by Microsoft won the right to participate in the company’s employee stock ownership plan and to receive matching 401(k) plan contributions from the company.

The Micr osoft freelancers were required to sign an agreement acknowledging they were independent contractors and responsible for paying all of their own benefits. However, the freelancers worked alongside Microsoft employees on various teams, had the same supervisors as Microsoft employees, worked the same core hours as Microsoft employees and performed identical functions.

Not surprisingly, the Internal Revenue Service decided that the freelancers were "common law" employees since Microsoft either exercised or retained the right to exercise direction over the freelancers’ services. The freelancers then sued for the right to participate in the ESOP and 401(k) plans.

The court did not accept Microsoft’s contention that the freelancers were ineligible to participate in the ESOP because they had signed agreements stating they were independent contractors not entitled to benefits. The court ruled that the designation of "independent contractor" in the agreements did not control their employment status. Further, the court found that since the agreements provided that the freelancers were responsible to pay for their own benefits, and the ESOP participants pay for the stock they purchase under the plan, the freelancers were "responsible" for paying for this benefit.

With regard to the 401(k) plan, Microsoft argued that the freelancers were ineligible because they were paid through the company’s accounts receivable department and the plan language stated that participants must be "on the United States payroll of the employer." The court decided that this phrase could apply to anyone paid from the company’s U.S. accounts, and since the freelancers were paid from a company U.S. account, they were eligible to receive the 401(k) matching contributions.

Some of the lessons of this case are:

• The control exercised by the company over the contingent worker is a central issue. And, courts and government agencies place more weight on the actual independent contractor relationship than any written agreement.
• Make sure that benefit plan language and agreements with contingent workers make clear that these workers either are ineligible to participate and/or waive any right to participate in company benefit plans.

Posted 3/15/1997