[W]orkers who are outside an employer’s ‘core’ workforce, such as those whose jobs are structured to last only a limited period of time, are sporadic, or differ in any way from the norm of full-time, long-term employment.

Three basic categories of workers are usually included in the definition of contingent workforce:

• Part-time, seasonal and/or casual employees.
   
• Independent contractors.
   
• Temporary and leased employees.

From a legal standpoint, these categories present different issues.

• Part-time and seasonal/casual -- Although part-time and seasonal workers are usually included in concept of contingent work force, they are clearly employees of the company that pays them. There is no question who is their employer and legal issues are fairly obvious and well defined.
   
• Part-time employees -- Company employs them directly, often on long-term basis, but they work reduced hours and often do not receive same benefits as regular, full-time employees.
   
• Casual/seasonal employees -- Company hires and employs them directly, but only on temporary or as-needed basis. Like part-time employees, they usually do not receive same benefits as regular, full-time employees.
   
• Independent contractors: As discussed above, primary issue typically is whether worker is truly an independent contractor, or merely an employee company is improperly classifying as such.
   
• Temporary and leased employees -- The contingent workforce where  the most novel legal issues arise involves temporary and leased employees who perform services for one company and are paid by another company.
   
  • The primary legal issue is the concept of "joint employer" or "co-employer." When violation of an employment law is alleged, there is a question as to which company is the employer for liability purposes.
  • The specific nature of these relationships is quite varied.
  • They may be described by many different terms, often not particularly consistent or helpful in resolving legal issues.
  • To avoid confusion, the following terminology will be used: "worker," "supplier company," and "client company."
     
• Some of the typical temporary and leased employee variations include:
   
  • Employees provided by temporary agencies.
     
    • Typically temporary help firms assign workers on short-term basis to satisfy temporary needs of client companies, such as employee absences, temporary skill shortages, seasonal workloads, and special projects.
    • Increasingly length of many of these assignments has grown to point it is difficult to truly call them "temporary."
    • Usually supplier company recruits, screens, and hires the workers. Increasingly it also provides training.
    • Such arrangements are often used for "temporary to permanent" placements, in which client company uses temporary employment as "trial period," ultimately hiring some of its temporaries.
    • Typically client company controls worker’s working conditions, supervises worker, and determines length of assignment.
    • Client company pays supplier company, not worker.
    • Supplier company is responsible for worker’s pay and benefits.
    • Supplier company withholds and pays taxes and provides workers’ compensation coverage.
       
  • Leased employees.
     
    • Leased employee is worker employed by supplier company, and leased to client company to work in its business.
    • In most leasing situations, workers were originally hired by client company as its regular employees. Client company terminates them and supplier company hires them and leases them back to client company.
    • In other leasing situations, leasing company recruits and hires employees and leases them to client.
    • Typically worker’s assignment to client company is long-term, not temporary. In many leasing situations, this is most significant difference from use of employees provided by temporary agencies.
    • Typically client company controls worker’s working conditions, and supervises worker.
    • Supplier company charges client company for use of worker, and supplier company pays leased worker’s wages and benefits.
    • Supplier company withholds and pays taxes and provides workers’ compensation coverage.
       
  • Payroll services.
     
    • Payrolling closely resembles employee leasing.
    • Usually client company recruits and selects worker, and then requests supplier company to hire employee to perform services for it.
    • Main difference between payrolling and usual leasing arrangement is that worker was never on client company’s payroll. Therefore, there was no need to terminate or transfer employee’s employment to supplier company.
       
  • "Outsourcing" to managed staffing services.
     
    • Supplier company typically specializes in specific business, which is discrete function of client company, such as security, landscaping, or janitorial services.
    • Rather than merely providing workers, often supplier company also provides management and supervisors, as well as supplies and equipment, under its contract with client company.
    • This may in some respects resemble leasing arrangement if supplier company hires same workers client company previously used to perform work.
       
  •  Consultants.
     
    • "Consultant" is one of the vaguest terms referring to contingent arrangements. It may refer to a number of the above contingent arrangements, and generally indicates work is of highly skilled or professional nature and is on project basis.
    • "Consultants" may be independent contractors, permanent employees of businesses providing specialized services, employees of temporary staffing company, or leased or payrolled employees.
       
  • Others.
     
    • As one author has observed, "there may be many other contingent workforce variations. One can never underestimate the creativity or specialized needs of employers or the personnel industry."

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Statistical Profile of Contingent Workforce

Contingent workers are a large and growing segment of the work force. Various statistics can be quoted, but the following numbers provide some indication of the scope of their use:

• According to one temporary services industry source, "90 percent of companies use temporary help services."
   

• The same industry source boasts that one million new jobs have been created by staffing companies over the last eight years, and average daily employment for temporary help services has increased an average of 10 percent per year over the last seven years.
   

• However, facts from the Bureau of Labor Statistics (which may be more accurate) indicate this supposedly dramatic increase in contingent employment may be overstated. The Bureau reports that between 1997 and 1999, the percentage of workers operating as independent contractors declined, while the percentages employed on an on-call basis by temporary help agencies and by contract firms were little changed. In the previous two-year period, the percentages in all four categories had been little changed.
   

• Contingent work arrangements are found in all sectors of the economy, and at all levels of skill and education.
   

  • Recently, the fastest growth has been in professional and technical occupations. As a result, compared to employees with more permanent work arrangements, a higher percentage of temporary employees (39 percent) are college graduates. On the other hand, because much temporary work is still low-skilled, a higher percentage of temporaries are also high school dropouts (12 percent).
     

• According to the American Staffing Association, eighty percent of temporary employees work full-time, about the same as the rest of the workforce.
   

• However, a more reliable source, the Bureau of Labor Statistics, found in its February 2001 survey that only 51 to 58 percent of contingent workers were employed full-time, compared to 83 percent of other workers. The substantial difference may be due to different definitions of contingent employment. The American Staffing Association likely only counts employees working through temporary agencies; the Bureau’s definition focuses exclusively on duration of work relationship, thus including many casual, seasonal, and on-call employees not hired through such agencies.
   

• Seventeen percent of non-temporary employees work part-time, making this the largest category of contingent workers.
   

• 2.2 percent of all workers, including independent contractors, have temporary employment in that they expect their employment or client assignment to only last for an additional year or less.
   

• 6.4 percent of all workers are independent contractors, independent consultants, or free-lance workers.
   

• 1.5 percent of all workers are employed on an on-call basis.
   

• 0.9 percent of all workers work for temporary help agencies.
   

• 0.5 percent of all workers work for contract firms, under leasing, payrolling, or contract service arrangements.
   

• Pay and benefits for contingent workers vary widely. Temporary workers are much less likely to receive health and pension benefits. Independent contractors and contract company workers earn more than traditional workers, while temporary agency workers and on-call workers earn less. Workers employed by contract companies had the highest rate of health insurance coverage (80 percent, almost the same as all other workers).

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Reasons for Increase in Contingent Workers

Use of contingent workers is driven by variety of advantages for both client companies and workers, including:

• Client company benefits from increased flexibility -- 81 percent of companies cite labor force flexibility as primary reason.
   

• Client company achieves wage and/or benefits savings.
   

• Client company can obtain specialized services it needs only for limited time, such as computer programmers needed only to design and implement custom application.
   

• Client company achieves savings on workers compensation costs.
   

• Client company is able to concentrate on core business, with supplier company providing expertise in recruiting and hiring, human resources administration and/or managing specialized non-core aspects of client company’s operations.
   

• Client company reduces exposure to liability under employment laws.
   

• Many contingent workers may also prefer flexibility, for a variety of reasons.
   

• Both client company and contingent workers can evaluate each other for possibile transition to regular employment.

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Employment Law Issues Raised by Use of Contingent Workers

Employment Discrimination Laws

• Title VII of the Civil Rights Act of 1964 ("Title VII"), prohibiting discrimination based on race, color, religion, sex (including pregnancy), and national origin.
   

• Age Discrimination in Employment Act ("ADEA"), prohibiting discrimination based on age against individuals at least 40 years old.
   

• Americans with Disabilities Act ("ADA"), prohibiting discrimination against qualified individuals with disabilities and requiring reasonable accommodation of such individuals.
   

• Equal Pay Act ("EPA"), prohibiting wage differences based on sex in jobs requiring equal skill, effort, and responsibility, performed under similar working conditions.
   

• State employment discrimination statutes, e.g. Missouri Human Rights Act, generally paralleling above federal statutes.

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Other Employment Laws

• Fair Labor Standards Act ("FLSA"), requiring payment of minimum wage and overtime, and regulating employment of minors.
   

• Family and Medical Leave Act ("FMLA"), granting covered employees up to 12 weeks’ leave per year for specified family and medical purposes.
   

• Employee Retirement Income Security Act ("ERISA"), governing pension and profit-sharing plans, employer-provided health insurance, and other employee benefit plans.
   

• National Labor Relations Act ("NLRA"), establishing procedures for union representation and collective bargaining, and prohibiting union and employer unfair labor practices.
   

• Occupational Safety and Health Act ("OSHA"), providing workplace health and safety standards, enforced through inspections and penalties, and requiring record-keeping as to employee injuries.

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Recurrent Legal Issues in Applying These Laws to Contingent Workers

• Whether worker is employee covered by these laws, or independent contractor not covered by them.
   

• Whether worker is counted as employee of supplier company, client company, or both, for purposes of whether each company is subject to these laws. This is significant because coverage under these laws is typically determined by how many employees company has.
   

• Whether supplier company, and client company, or both, can be held liable for violation of these laws, even if unlawful conduct was engaged in by other one.

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Title VII, ADEA, ADA, and EPA -- EEOC Enforcement Guidance

Allegations of discrimination by or against employee of labor supplier during employee’s service to client company raise some very difficult issues. EEOC has issued an Enforcement Guidance on Contingent Workers dealing with these issues in considerable detail.

EEOC’s basic position is:

• "Staffing firms may assume that they are not responsible for any discrimination or harassment that their workers confront at the clients’ work sites. Similarly, some clients of staffing firms may assume that they are not the employers of temporary or contract workers assigned to them, and that they therefore have no EEO obligations toward these workers. However, . . . both staffing firms and their clients share EEO responsibilities toward these workers" (emphasis added).

• A worker is an employee of supplier company or client company, or both, depending on extent to which each company meets right to control test of employment, taking into account same factors as described above in connection with independent contractor/employee determination.

• This applies both to counting worker as employee for statutory coverage and to direct liability.

• Frequently, both companies are "joint employers" because they share control.

• EEOC states supplier company generally is employer of workers it provides to clients because:

[It] typically hires the worker, determines when and where the worker should report to work, pays the wages, is itself in business, withholds taxes and Social Security, provides workers’ compensation coverage, and has the right to discharge the worker. The worker generally receives wages by the hour or week rather than by the job and often has a continuing relationship with the staffing firm. Furthermore, the intent of the parties typically is to establish an employer-employee relationship.

• However, EEOC acknowledges sometimes supplier company might not be employer of workers it provides to clients. Example would be employee leasing situation in which "client puts its employees on the staffing firm’s payroll solely in order to transfer the responsibility of administering wages and insurance benefits."
   
• EEOC also states client company typically is employer of workers provided by supplier company because it "usually exercises significant supervisory control" over them. In addition to direct supervision, client often supplies work space, equipment, and supplies, and has right to control details of the work, to make or change assignments, and to terminate relationship.
   
• On the other hand, EEOC also recognizes that in some circumstances, such as some consulting arrangements, and arrangements described above as "outsourcing to managed staffing services," client company may not be worker’s employer because supervisors provided by supplier company, not client company, may have exclusive right to control details of work, make or change assignments, and terminate worker.

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Alternative Grounds for Liability

EEOC Guidance provides that supplier company or client company may be liable for discrimination even if it is not deemed employer of worker, and/or it does not directly engage in the discrimination.

• If supplier company is considered "employment agency," it is independently prohibited from discriminating against worker, such as by:
   

  • Refusing to hire or assign worker, or terminating worker, based on protected characteristic.

  • Honoring facially discriminatory staffing request from client company.
     

• EEOC takes position that supplier company may be liable for discriminating against client’s employee, and vice versa, because statutes "do not limit their protections to employer’s own employees, but rather protect an 'individual' from discrimination" by an employer. EEOC states statutes thus "prohibit an employer from interfering with an individual’s employment opportunities with another employer."
   

  • For example, even if supplier is not employer of worker due to lack of control, if it honors client’s discriminatory request to terminate or reassign worker, it can be liable, along with client.

  • Likewise, even if client is not employer of worker due to lack of control, if it makes discriminatory request to terminate or reassign the worker, it can be liable, along with supplier.

  • Either company may be liable if it knows or should have known of discrimination by other, but fails to take appropriate corrective action within its control.

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Allocation of Damages Between Supplier and Client

• If both companies are liable under any of above approaches, they are jointly and severally liable for back pay, front pay and other compensatory damages. Worker can collect 100% from either, or some lesser percentage from each.

• Punitive and liquidated damages are assessed in accordance with each company’s respective degree of malicious or reckless misconduct, and each company is solely responsible for amount assessed against it.

Illustrative Case – Joint Employer under Discrimination Laws and FMLA:  Astrowsky v. First Portland Mortgage Corp., Inc., 887 F.Supp. 332 (D. Me. 1995)

In case involving alleged violations of the ADEA, Title VII, and FMLA, district court granted summary judgment because client company using leased employees did not have enough employees for statutory coverage, and leasing company was not joint employer and thus was not plaintiff’s employer.

• Plaintiff had been working for client company as loan officer for several years when IRS concluded it had improperly classified him as independent contractor. Client responded by converting him and other loan officers into leased employees.
   

• Client had only nine or 10 regular employees. Thus, to qualify for statutory coverage, plaintiff had to establish client and leasing company were joint employers (or at least leasing company was his employer).
   

• In footnote, court observed plaintiff did not claim leasing company was an "employment agency," which might have been way for him to establish coverage.
   

• District Court held companies were not joint employers because leasing company did not exercise sufficient control over plaintiff to be considered his "employer."
   

• Leasing company’s numerous employees therefore were not counted towards statutory minimum. Court relied on following facts:

  • Plaintiff was already working for client when he was required to sign up with leasing company.

  • Client used leasing company solely to obtain payroll and benefits services.

  • Leasing company processed plaintiff’s commission checks and made income tax withholdings, but essentially did nothing else, taking no employment actions with respect to plaintiff after putting him on payroll.

  • All terms and conditions of plaintiff’s employment were set out in his contract with client, including commission rate, daily work schedule, and vacation benefits.

  • He was supervised by employees of client.

  • He was not a temporary employee, but was leased to client company for long term and was, in essence, its permanent employee.

Fair Labor Standards Act (Wage-hour Law)

• Joint employer standard is liberal because FLSA defines "employ" as to "suffer or permit to work," and "employer" as anyone "acting directly or indirectly in the interest of an employer."
   

• Supplier companies have primary responsibility for FLSA recordkeeping and payment of wages, including overtime.
   

• Supplier companies and client companies may be held jointly responsible for failure to pay overtime.

Illustrative Case –Joint Employer Under FLSA: Baystate Alternative Staffing, Inc. v. Herman, 163 F.3d 668 (1st Cir. 1998)

Temporary agency held liable for FLSA overtime violations. In determining whether agency was "employer" under FLSA, court considered whether it:

• Had power to hire and fire the employees.
   

• Supervised and controlled their work schedules.
   

• Determined rate and method of payment.
   

• Maintained employment records.

Agency did not exercise direct, on-the-job supervision of workers at client companies. Court nevertheless found even if client company was also an employer, agency was an employer within meaning of FLSA because it:

• Was solely responsible for hiring temporary workers.
   

• Screened workers for minimum qualifications.
   

• Assigned workers to particular job sites.
   

• Had power to refuse to send worker back to job site where he or she had performed unsatisfactorily.
   

• Exercised "indirect supervisory oversight" of workers by communicating with clients about unsatisfactory performance, occasionally removing workers in middle of work assignment.
   

• Determined hourly wage rates.
   

• Required workers to submit timesheets to it.
   

• Issued paychecks.
   

• Maintained employment records.
   

• Controlled employee work schedules.
   

• Forbade workers from directly contacting client company about potential job opportunities.
   

• Instructed workers about appropriate dress and work habits.

Family and Medical Leave Act (FMLA)

FMLA incorporates FLSA's liberal definition of "employ" and "employer."

It defines joint employment to include situation "where one employer acts directly or indirectly in the interest of the other employer in relation to the employee," and states, "joint employment will ordinarily be found. . . when a temporary or leasing agency supplies employees to a second employer."

Coverage issues are particularly important under FMLA because it covers fewer employers and employees than discrimination laws, since:

• Employer is covered only if it has 50 or more employees.
   

• Employee is covered only if employer has 50 or more employees within 75 miles of worksite where he or she works.

Employees jointly employed by two employers must be counted as being employed by both employers to determine both employer coverage and employee eligibility.

• However, in such joint employment relationships, only primary employer is responsible for giving required notices, providing FMLA leave, and maintaining employee health benefits.

"Factors considered in determining which is the ‘primary employer’ include authority/responsibility to hire and fire, assign/place the employee, make payroll, and provide employment benefits."

• Thus, typically with temporary or leasing agencies, supplier company would be primary employer.

FMLA is inapplicable to many temporary and/or part-time employees because it applies only to employees who:

• Have been employed by employer for at least twelve months.
   

• Have worked at least 1250 hours for employer during previous twelve months.

Occupational Safety and Health Act (OSHA)

OSHA is not "particularly concerned with unraveling the nature of the employment relationships in the workplace," but has sought "to assign responsibility to the employers that are best situated to control the work environment and to rectify the hazardous conditions facing employees."

• OSHA will rely on identifying "who has control over the work environment such that abatement of the hazards can be obtained," "who is responsible for controlling the employee’s activities, who has the power to control the employee, and who has the power to fire the employee or to modify the employee’s employment condition." Greater weight is given to employer’s ability to control employee than to its ability to control workplace.
   

• Under these standards, supplier company and client company may be considered joint employers, and both held responsible for employee’s exposure to hazardous conditions. Alternatively, only one of the companies may be held liable.
   

  • Supplier company is more likely to be held solely liable if it provided special expertise and/or equipment as well as workers.

  • Client company is more likely to be held solely liable if it both controlled the workplace and exercised extensive supervisory authority over workers.

Illustrative Cases –OSHA

Lidstrom, Inc., 4 OSHC [BNA] 1041 (Rev. Comm’n 1976)

Supplier company held liable where it provided crane and crane operator, based in part on fact client company was entitled to rely on operator’s expertise, and therefore acted reasonably in not supervising crane’s operation.

Manpower Temporary Services, 5 OSHC [BNA] 1803 (Rev. Comm’n 1977)

Temporary agency that provided casual laborers to clean a ship not held responsible for temporary employee’s exposure to fall hazards on ship because:

• Hazard was created by ship’s management.
   

• Ship’s foreman retained all supervisory control.
   

• Ship’s owner was in best position to control hazardous condition.
   

• It would be "economically infeasible for a temporary service like the employer’s to satisfy the safety requirements of every work situation in which it got involved."

ERISA and Tax Law

Employee benefit cost savings are potentially a significant advantage of using contingent workers. However, particularly where they work side-by-side with regular employees receiving more favorable benefits provided by client company, contingent workers and their attorneys are increasingly challenging their benefits status using a variety of creative legal theories.

ERISA does not require that an employer offer any employee benefit plans or that every employee be entitled to participate in any plan an employer decides to offer. Therefore, various types of contingent employees can be excluded from coverage.

• However, ERISA requires that each employee benefit plan be in writing, and be administered in accordance with its written terms. Therefore, employer’s intent to exclude some or all contingent workers may be unenforceable unless written plan document specifically contains intended exclusion.
   

• This was the worst mistake Microsoft made in its famous benefits case. In fact, Microsoft was relying on an agreement disclaiming entitlement of contingent workers to benefits, but its plan expressly made all common law employees on its U.S. payroll eligible if they were 18 or older and employed for six months.
   

• Ambiguities in such exclusions may be construed against the client company, under the doctrine of contra proferentem. Therefore, new plan language must be carefully crafted, and existing language closely reviewed.
   

• Because most contingent workers, and indeed many so-called "leased workers," are not "leased employees" as defined in Internal Revenue Code, a plan that simply excludes leased employees as so defined may have the unintended effect of not excluding other contingent or leased workers.
   

• Although, as the Microsoft case illustrates, contractual disclaimers or waivers of entitlement to benefits are not always effective, they should be part of any contingent worker agreement (unless client company intends to provide benefits).

While contingent workers may be excluded from plan eligibility, this may have serious consequences for whether plan meets nondiscrimination and minimum coverage standards for plan qualification.

• ERISA §401(a)(4) conditions tax qualification of a pension plan on its not discriminating, in either contributions or benefits, in favor of highly compensated employees, and §410(b) prescribes nondiscrimination tests.
   

• Depending on numbers of workers involved, including contingent employees in nondiscrimination and minimum coverage testing, while excluding them from participation, can make a difference in whether plan satisfies the applicable tests and therefore is qualified.
   

• Failure to satisfy any of the Code’s conditions for tax qualification does not make plan unlawful; it simply limits availability of tax advantages. This can have enormous financial consequences.
   

• Internal Revenue Code §414(n)(3) requires plans to count some leased workers as "employees" for nondiscrimination testing.

  • For such purposes, leased employee is person who performs services for client company pursuant to agreement with leasing organization, does so on substantially full-time basis for at least a year, and is under primary direction or control of client company. Internal Revenue Code §414(n)(2).
     

• Additionally, worker found to be a common law employee of client company may have to be included in nondiscrimination and minimum coverage testing.
   

• Nondiscrimination rules are also applicable to some types of welfare plans, but tests vary and do not apply to all types of welfare plans. Code §414(n) requires that leased employees be counted as employees of service recipient in applying some of these rules.

Another aspect of ERISA and tax code that has potentially serious consequences for contingent worker arrangements is requirement that to be a qualified plan for tax purposes, benefit plan must be maintained for exclusive benefit of employees.

• Inclusion of independent contractors or contingent workers not determined to be common law employees of client company could disqualify plan maintained by client company.
   

• On the other hand, inclusion of contingent workers in plan maintained by supplier company could be challenged if supplier fails to exercise sufficient control to render workers its common law employees.

Section 510 of ERISA prevents employers from discriminating against employees for purpose of "interfering with the attainment of any right to which [a] participant may become entitled under the plan."

• Some commentators interpret statements by the Supreme Court in Inter-Modal Rail Employees Ass’n v. A, T & SF Ry Co., 117 S. Ct. 1513 (1997) to suggest that amendment or termination of existing plan may violate §510 if purpose is to exclude employees already covered by plan.

•  Thus, amending plan to exclude contingent workers or switching existing employees entitled to benefits to contingent worker arrangement not providing such benefits may be subject to challenge under §510.

Other tax issues with leasing and other contingent arrangements

While client company can contract for supplier company to perform certain administrative functions, it nevertheless may ultimately be liable for payment of employment taxes.

• Generally, IRS views supplier company as employer for payroll tax purposes if it has control over payment of wages. At least one court, however, has held client company liable for payroll taxes, even though supplier had contractually assumed the liability.
   

• IRS has established "market segment study" of "employee leasing" industry and is questioning whether in certain types of contingent employment arrangements supplier employer should be regarded as not being "employer" for employment tax and employee benefit plan purposes. IRS reclassified leased employees performing services for 92 companies as regular employees of client companies, rather than the leasing organization that hired them.

Illustrative Cases –ERISA

Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. en banc 1998) (the Microsoft case -- first Ninth Circuit opinion)

Microsoft held obligated to provide benefits to workers found to be employees, although treated as independent contractors.

• Many individuals worked for Microsoft pursuant to independent contractor agreement expressly stating they would receive no benefits.

  • They submitted invoices for their time, paid through accounts payable system rather than as payroll.

  • However, they worked for Microsoft for long periods of time, worked side-by-side with “regular” employees, were supervised by same people who supervised “regular” employees, and were given their tools, materials and supplies by Microsoft.
     

• IRS audited Microsoft and determined they were not independent contractors for tax purposes. Microsoft had to retroactively pay FICA taxes and overtime on them.
   

• Microsoft responded by restructuring its relationship with these workers, hiring some directly on its payroll, and placing others on payroll of temporary agency.

  • Those who elected "temporary employee status" noticed little change in terms or conditions of employment; they continued working same hours on same projects under same supervisors.

  • Apparently Microsoft assumed because these workers technically were employed by agency and not on its payroll, it had no benefits liability to them.
     

• Subsequently, class action was filed on behalf of misclassified workers, claiming they should have been allowed to participate in several Microsoft employee benefit plans, including stock purchase plan (of substantial value, given tremendous increases in value of Microsoft stock).
   

• 401(k) plan provided that "[e]ach employee who is 18 years of age or older and who has been employed for six months shall be eligible to participate in this Plan," and defined "employee" to mean "any common-law employee who receives remuneration for personal services rendered to the employer and who is on the United States payroll of the employer."
   

• IRS having found common-law employee status, only issue before court was whether workers were "on the United States payroll of the employer."

  • Microsoft contended this phrase referred to employees paid through its payroll department, and that plaintiffs were ineligible because paid through accounts receivable department.

  • Plaintiffs asserted phrase referred to "Microsoft employees who are paid from United States sources," excluding only "nonresident alien employees of foreign subsidiaries."
     

• Ninth Circuit found language ambiguous, so it looked at extrinsic evidence. Microsoft argued such evidence demonstrated intent not to provide workers with employee benefits.

  • Court agreed Microsoft intended to deny benefits if workers were in fact independent contractors, but found it unclear whether Microsoft intended to deny benefits to workers who were actually common-law employees.

  • Therefore, court concluded, "the correct meaning of the terms in question, given the record and the agreed upon facts in this case, cannot be determined by resort to the extrinsic evidence."

  • Court therefore applied the rule of contra proferentem to construe ambiguity against plan’s drafter, Microsoft.

  • With respect to stock purchase plan, claim governed by Washington law, court agreed with plaintiffs’ contention that plan, through incorporation of § 423 of Internal Revenue Code, extended eligibility to all common-law employees. Code § 423 provides that "options are to be granted to all employees of any corporation whose employees are granted any of such options . . . ," and term "employees" in § 423 is construed to refer to "common-law employees."

  • Finally, court rejected contention that agreements and documents signed by plaintiffs rendered them ineligible, in part because if they were so construed to exclude plaintiffs, this would conflict with plan’s express incorporation of § 423. Although Microsoft may have generally intended to exclude individuals who were in fact independent contractors, exclusion of common-law employees would have defeated purpose of including § 423 in the plan, because it would have resulted in loss of plan’s tax qualification.

  • Case remanded for "determination of any questions of individual eligibility for benefits that may remain . . ." and for calculation of damages or benefits due.

Vizcaino v. U.S. Dist. Ct., 173 F.3d 713 (9th Cir. 1999) (the Microsoft case -- second Ninth Circuit opinion)

On remand, district court and then Ninth Circuit considered status of workers who, after IRS audit, continued to perform work for Microsoft while on temporary agency’s payroll, and those subsequently hired by agency.

• After District Court revised class certification to exclude subsequently hired workers, Ninth Circuit held they should have been included in class action.
   

• Ninth Circuit reasoned that "even if for some purposes a worker is considered an employee of the agency, that would not preclude his status as common law employee of Microsoft," bringing him within coverage of plans, as interpreted in first Microsoft decision.
   

• In determining whether worker nominally employed by temporary agency was common law employee of Microsoft, court looked to factors used in determining if someone is independent contractor or employee.

Burrey v. Pacific Gas & Electric Co., 159 F.3d 388 (9th Cir. 1998)

Ninth Circuit held workers on payroll of supplier company had standing to assert certain claims for benefits against client company’s benefit plans.

• Retirement and savings plans were available to "employees," but not to "leased employees, as defined by Section 414(n) of the Internal Revenue Code." Health and severance plans did not expressly exclude leased employees.

• District court concluded workers were expressly excluded from plans' coverage and therefore had no colorable claim to vested benefits and lacked standing. Conclusion was premised on finding that plaintiffs satisfied definition of "leased employees" in Section 414(n).

  • During time in question, §414(n) defined "leased employee" as:

  any person who is not an employee of the recipient and who provides services to the recipient if--
  (A) such services are provided pursuant to an agreement between the recipient and any other person (in this subsection referred to as the “leasing organization”),
  (B) such person has performed such services for the recipient ... on a substantially full-time basis for a period of at least 1 year, and
  (C) such services are of a type historically performed, in the business field of the recipient, by employees.

  • In 1996, Congress amended §414(n) by replacing "historically performed" language of subsection (C) with "such services are performed under primary direction or control by the recipient."
     
  •  Neither version of §414(n) nor the Internal Revenue Code defines "employee."
     
• Court concluded common-law definition of "employee" should be used. Following this analysis, court said:

  [A] leased employee is any person who: (1) is not a common-law employee of the recipient, and (2) satisfies the three enumerated requirements. In other words, a common-law employee of the recipient cannot qualify as a leased employee under § 414(n).

  Therefore, "the district court erred by not considering whether the plaintiffs qualified as common-law employees as a threshold determination of whether the plaintiffs were leased employees under § 414(n)."
   

• Thus, court frustrated efforts of client company to exclude leased employees by holding that if client company exercised sufficient control to make workers its common-law employees, they would not be considered leased employees and would be included within benefit plan.
   
• Regarding employer’s health plan, which provided employees were automatically enrolled upon commencement of employment, court similarly held if plaintiffs qualified as common- law employees, they would have standing to sue for benefits.
   
• Finally, plaintiffs asserted an interesting claim under ERISA Section 510 -- that in entering into a new leasing contract which gave supplier company more control over workers, client company was discriminating against them for purposes of interfering with benefits to which they were previously entitled.
   
  • Court did not reach merits of this claim, affirming district court’s dismissal of it on statute of limitations grounds.

  Capital Cities/ABC, Inc. v. Ratcliff, 141 F.3d 1405 (10th Cir. 1998)

Workers designated as independent contractors who delivered newspapers held not entitled to benefits although determined by IRS to be employees.

• By signing agreements expressly disclaiming all employee benefits, workers expressly rejected any offer of benefits, regardless of whether they later were determined to be common-law employees. Agreements did not constitute waiver of right to benefits, "because that right never accrued."
   
• Court also found terms of each of employee benefit plans excluded them from participation. The four ERISA plans defined eligible employees in the following ways:
   
  • Savings Plan excluded from definition of employee "an individual who is hired by the Company pursuant to an employment agreement or a personal services agreement if such agreement provides that such individual shall not be eligible to participate in the Plan."
  • Pension Plan defined participant as "an Employee who is eligible to be and becomes a participant."
  • Insurance Plan provided benefits to full-time or part- time employees who elected to participate in it.
  • Spending Account Program provided benefits to eligible employees who elected to participate.
     
• Court concluded workers were clearly excluded from entitlement to benefits under pension plan language, having signed agreements expressly providing they were not eligible. Although language of remaining three plans was not as specific, court found use of the term "eligible employee" indicated an intent to exclude them.
   
• Court distinguished Microsoft case as follows:

The . . . employee benefit plans in the instant action are clearly distinguishable from those at issue in [Microsoft]. The Star’s plans neither incorporate nor adopt the common law definition of an employee in delineating the scope of their coverage. To the contrary, The Star’s plans impose eligibility requirements evincing an unequivocal intent to exclude the [workers] from participation. The [Microsoft] majority, in fact, readily acknowledged that employers are free to draft employee benefit plans discriminating against certain groups of workers.

Abraham v. Exxon Corp., 85 F.3d 1126 (5th Cir. 1996)

Fifth Circuit upheld Exxon’s exclusion of leased (or "special agreement") workers from participation in pension plan, although they were its common law employees. Exclusion was supported by express pension plan language.

• Court first said ERISA does not prevent exclusion of common law employees "on a basis other than age or length of service."
   
• Court then held that even if exclusion discriminated in favor of highly paid employees, this only affected whether plan was qualified plan, and did not give excluded employees right to benefits.

Bronk v. Mountain States Telephone and Telegraph, Inc., 140 F.3d 1335 (10th Cir. 1998)

In ERISA action by leased employees alleging wrongful denial of participation in benefit plans, Tenth Circuit held employer was not required to include leased employees in pension plans, even if they were its common law employees.

• Tenth Circuit rejected district court’s conclusion that regardless of plan language, minimum participation, vesting, and funding requirements of ERISA required client company to cover leased employees in its plans if they met definition of common law employee. It stated:

It is well established that ERISA does not prohibit an employer from distinguishing between groups or categories of employees, providing benefits for some but not for others. . . . It simply may not make such distinctions based upon age or length of service. Accordingly, an employer need not include in its pension plans all employees who meet the test of common law employees.

• Court distinguished issue of whether plan is a qualified plan under tax law. While acknowledging failure to meet certain requirements could result in loss of beneficial tax status, it stated such failure "does not permit a court to rewrite the plan to include additional employees."

Wolf v. Coca-Cola Co., 200 F.3d 1337 (11th Cir. 2000)

Computer programmer who did work for Coca-Cola on long-term basis under contracts between staffing company and Coca-Cola held not entitled to benefits under Coca-Cola’s ERISA plan because as leased employee she was specifically excluded from eligibility by its terms.

• Programmer’s only employment contract was with staffing company; it provided she was independent contractor.
   

• Plan excluded from eligibility temporary employees and "leased employees," defined as "individuals who perform services for the Company under an agreement with a leasing organization."
   

• Court held:
   

  • To assert an ERISA claim , plaintiff must be either a "participant" or a "beneficiary" of the plan.

  • To be a participant, plaintiff must be an employee, and eligible to receive a benefit according to plan language.

  • Although programmer may have had legitimate argument she was common law employee of Coca-Cola, ERISA claim failed because she was specifically excluded from eligibility by plan terms.
     

• She cited Vizcaino v. Microsoft Corp., supra, and Burrey v. Pacific Gas & Electric Co., supra, as standing for proposition all common law employees are entitled to ERISA benefits. Court found those cases distinguishable because they turned on plan language rendering plaintiffs eligible.

Professional & Executive Leasing, Inc., v. IRS, 862 F.2d 751 (9th Cir. 1988)

Ninth Circuit affirmed Tax Court’s determination that leasing company’s retirement plans were not qualified plans under Internal Revenue Code §401.

• Plans did not qualify because they were not exclusively for benefit of leasing company’s employees. This followed from determination that leased workers included in plans were not actually employees of leasing company under right to control standard. Relevant facts included:
   

  • Leased workers were management personnel, consultants, and licensed professionals such as attorneys, accountants, dentists, and engineers.

  • Leasing company prepared their paychecks, withheld federal and state income taxes, and paid Social Security and unemployment taxes.

  • Leasing company paid workmen’s compensation premiums.

  • Almost all the leased workers had pre-existing ownership or equity interest in recipient to which they were leased.

  • Only review of leased worker qualifications conducted by leasing company was determination of whether they were licensed to practice professions.

  • Under contract, leasing company retained right to terminate or reassign worker, but had only terminated one worker, and not reassigned any.

  • Contract allowed leasing company, client company, or worker to increase or decrease worker’s salary and/or monthly lease payments at any time.

  • Equipment, tools, and office space were provided by client company.

  • Contract required client company to provide malpractice insurance in appropriate cases.

  • Contract provided leasing company could not infringe on worker’s exercise of professional judgment.

  • Workers controlled details of their own performance.

  • Either leasing company or worker could terminate contract at any time.

Central States, Southeast and Southwest Areas Pension Fund v. Kroger Co., Nos. 99-2257, 99-3014 (7th Cir. September 15, 2000)

• Employer owed contributions to multiemployer pension plan for "part-time" employees pursuant to collective bargaining agreement because employees could not be viewed as "casual employees," only classification excluded from employer’s contribution obligation.
   

• Seventh Circuit determined term "part-time" was ambiguous, and therefore looked at extrinsic evidence, much of which was conflicting. Key question was whether employer and union intended "part-time" to be synonymous with "casual," defined in master collective bargaining agreement as hired on "short term basis" and "employed from time to time."
   

• Seventh Circuit agreed with district court’s conclusion that "casual" employees would be people "who come and go, people whose employment is interrupted, people who might be absent for long periods of time," rather than people "who are on hand continuously to work part-time as needed."
   

• Employer argued they must have been casuals because employment was marked by characteristics of “casual” employment, citing following facts:
   

  • They were not given set schedules.

  • They had no weekly salary guarantees.

  • They served as fill-ins for regular employees.

  • After they worked first 30 days, status did not change, and most of them never became regular employees.

  • 85 percent of them worked less than 12 weeks.

  • Until they obtained a bid position, they were not entitled to job benefits like progressive discipline, jury duty, and holidays--all benefits regular employees enjoyed.
     

• However, Seventh Circuit found sufficient evidence in record to support district court’s conclusion they were not "hired on a short term basis" and "employed from time to time." They therefore were in effect probationary part-time employees, not casuals. Court cited following facts in support of this conclusion:
   

  • Employee handbooks and employer’s "training and nurture" of new hires properly persuaded district court employees were not casuals. For example, one of handbooks welcomed them to "Kroger team" and instructed them to use handbook "as a training tool and guide during your first several weeks at Kroger."

  • Regardless of whether employees stayed with employer for long time, it hired them with intention they would remain with company and eventually become "regular" employees.

  • Even though employer had high turnover rate, there was also evidence eventually new hire that stayed with company either had to bid for permanent position or, failing that, was fired.

  • Ability to bid on permanent jobs was entirely at odds with concept of casual employment, defined in contract as short and indefinite, especially because it took six to nine months to get to top of “part-time” seniority list.
     

• Employer attempted to rely on past practice, frequently used to interpret ambiguous language in collective bargaining agreements, but Seventh Circuit stated practice could not "thwart the unambiguous definition of casu