For class discussion, read for identifying legal terms and issues that can arise from an employment relationship, rather than for substantive law

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For class discussion, read for identifying legal terms and issues that can arise from an employment relationship, rather than for substantive law.

Employee or independent contractor? Vizcaino v. Microsoft Corporation

Article Abstract:

A presumption that workers are governed by the employer-employee relationship rather than the independent contractor relationship was reaffirmed by the 9th Circuit Court of Appeals in Vizcaino v. Microsoft Corp. The Internal Revenue Service had previously ruled that workers that Microsoft had classified as freelancers or independent contractors should be considered employees for tax purposes. The plaintiffs argued that they should obtain benefits for the period when they were misclassified as independent contractors, and the court upheld the presumption in favor of the employer-employee relationship.

Vizcaino v. Microsoft Corporation; a labor and employment lawyer's perspective

Article Abstract:

Many employers are hiring temporary employees or independent contractors to reduce benefits and salary costs by eliminating the traditional employer-employee relationship. However, Microsoft Corp discovered that classification without significant differences in treatment can result in severe penalities when the IRS reclassified 483,000 workers, allowing the workers to sue for benefits. A $751 million fine was also assessed. Therefore, employers need to avoid making contingent workers into common law employees when attempting to avoid legal responsibilities of employers.

Vizcaino v. Microsoft.
May 12, 1999.
U.S. Court of Appeals for the Ninth Circuit.

SCHWARZER, Senior District Judge:

In our prior opinions in this litigation, we held that, as common law employees, the members of a class certified by the district court were entitled to participate in Microsoft's tax-qualified Employee Stock Purchase Plan ("ESPP") even though they had been told when hired that they were ineligible for such benefits and had signed contracts disclaiming them.  See 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"). The certified class had been defined by the district court to include "[a]ll persons employed by Microsoft Corporation . . . who are denied employee benefits because they are considered independent contractors or employees of third-party employment [begin page 3] agencies, but who meet the definition of employees of Microsoft Corporation under the common law." Vizcaino I, 97 F.3d at 1190 n.1. We reversed the district court's judgment for Microsoft and remanded for determination of "[a]ny remaining issues regarding the rights of a particular worker." Vizcaino II, 120 F.3d at 1015. On remand, the district court revised its prior class definition to limit the class to workers who worked for Microsoft as independent contractors between 1987 and 1990 either in positions that the Internal Revenue Service (IRS) had reclassified as in fact being common law employee positions, or in positions that Microsoft contemporaneously had voluntarily converted to temporary agency employees. It held those workers to be eligible for employee benefits for work done while independent contractors and for work subsequently performed by them in the same position as temporary employees hired through a temporary employment agency. The district court's revised class definition excludes (1) all other temporary employees hired into a position subsequent to its reclassification or conversion, and (2) all other persons who worked for Microsoft as common law employees. We must decide whether the district court's order fails to carry out this court's mandate.


The relevant facts are set forth in detail in our prior opinions.  We summarize them here only to the extent necessary for this disposition.

Microsoft, in addition to having regular employees, has [begin page 4] utilized the services of other workers whom it classified as independent contractors (sometimes called freelancers) or temporary agency employees (also called temps). Following a federal employment tax examination in 1990, the IRS determined that Microsoft had misclassified workers in various positions occupied by independent contractors and that services performed by workers in the specified positions constituted an employer- employee relationship. In response to the IRS ruling, Microsoft offered some of the workers in reclassified positions jobs as regular employees. Most of the workers, however, were given the option to "convert" to temps or lose their working relationship with Microsoft. In addition, Microsoft voluntarily "converted" independent contractors in other positions to temps. The temporary employment agency "payrolled" these workers but in other respects the workers' relationship with Microsoft remained essentially unchanged. In the years following the reclassification and conversion, Microsoft utilized the services of numerous temps.

Plaintiffs, who were formerly independent contractors, brought this action on behalf of a class of persons employed by Microsoft who met the definition of employees under the common law but who were denied employment benefits because Microsoft considered them independent contractors or employees of third- party employment agencies. Of the various employee benefits sought by plaintiffs, only the ESPP remains at issue. Microsoft denied liability because each of the workers--though conceded to [begin page 5] be common law employees--had signed an Independent Contractor Agreement which expressly provided that each independent contractor was responsible for his or her own benefits. The district court granted Microsoft's motion for summary judgment on two grounds: First, because the terms of the agreement barred the claim, and, second, because the terms of the ESPP had not been communicated to the workers and therefore could not have become a part of their contract.

We reversed, holding that through its express incorporation of S 423 of the Internal Revenue Code, see 26 U.S.C. S 423 (1994), which requires that qualifying stock purchase plans permit all common law employees to participate, Microsoft's ESPP extended eligibility to all common law employees. See Vizcaino I, 97 F.3d at 1197. The plaintiff class was therefore afforded the same options to acquire stock as all other employees.  See id.  We remanded for "the determination of any questions of individual eligibility for benefits that may remain following issuance of this opinion and for calculation of the damages or benefits due the various class members." Id. at 1200; see also Vizcaino II, 120 F.3d at 1015 ("Any remaining issues regarding the rights of a particular worker in the ESPP and his available remedies must be decided by the district court upon remand.").

On remand, the district court, on February 13, 1998, issued its "Order Regarding Scope of Remand." It denied Microsoft's motion for clarification of the composition of the class, rejecting its contention that the class definition excluded those [begin page 6] plaintiffs who were temps and whose claims arose post-conversion (some but not all of whom had worked as independent contractors pre-conversion). The court concluded that "the plaintiff class will remain as defined in its original certification order [of July 21, 1993] until the issue of whether post-conversion plaintiffs are common law employees is presented."

Following the February 13 order, Microsoft renewed its motion to amend the class certification, asking the court to "certify subclasses for the question of who is a common law employee." By order of July 15, 1998, the district court denied Microsoft's motion but "clarified" the class definition, limiting the class to

all Microsoft workers who, like all the named plaintiffs, worked as independent contractors between 1987 and 1990 and whose positions were reclassified as employee positions after the IRS reviewed them. This . . . includes the claims brought by the same workers for their work after 1990, when many of them, including four named plaintiffs, were transferred to temporary employment agencies. This is the scope of the plaintiff class.

The court explained that the class had to be clarified because it could only include "the named plaintiffs and those similarly situated, both before and after conversion to temporary employment." The new definition excluded from the class other groups of potential claimants who were not reclassified by the IRS or converted by Microsoft, i.e., temps hired post-conversion into reclassified or converted positions, and all other common law employees not treated as such by Microsoft.

The July order also granted partial summary judgment for [begin page 7] plaintiffs (it is unclear whether the order included only named plaintiffs or also the members of the redefined class).  Based on Microsoft's concession, the court found these plaintiffs to have been common law employees while working as independent contractors in positions later reclassified by the IRS. In addition, it found that most plaintiffs who had subsequently been converted into temps were also common law employees entitled to ESPP participation during their time as temps. The court reasoned that the issue is "not whether a worker is an employee or an independent contractor; the question is which company is the workers' employer (Microsoft or a temporary agency)." Using a five-factor test it had devised (considering recruitment, training, duration of employment, right to assign additional work, and control over the relationship between worker and agency) the court found that Microsoft, not the temporary agency, employed these workers.

* * * * * * *

We conclude, therefore, that the determination of whether temps were Microsoft's common law employees turns not on whether they were also employees of an agency but rather on application of the Darden factors to their relationship with Microsoft. That, however, need not entangle the district court and the parties in interminable proceedings resolving the issue on a worker-by-worker basis.  As the Supreme Court pointed out in Darden, "application [of the factors] generally turns on factual variables within an employer's knowledge, thus permitting categorical judgments about the `employee' status of claimants with similar job descriptions." 503 U.S. at 327 (emphasis added).

The facts of this case confirm the validity of the Court's observation in Darden.  The IRS made its determination of employee status with reference to specific positions. In a series of letters, the IRS advised Microsoft that "we have determined that services performed for Microsoft by an individual in the position commonly referred to as [here followed the titles of various positions such as computer based training, proof reader, formatter, etc.] constitutes an employer-employee relationship . . . It is our conclusion that Microsoft either exercised, or retained the right to exercise, direction over the services performed. This control establishes an employer- employee relationship." Vizcaino I, 97 F.3d at 1190 n.2. The [begin page 24] IRS determinations allow no exception for individuals in these positions on the ground that they may be on the payroll of employment agencies. Presumptively, therefore, any individual occupying an IRS reclassified position and otherwise qualified under the ESPP is an eligible common law employee--regardless of whether he or she had been personally converted from independent contractor to temp as a result of the IRS determination. The plan, by its terms, excludes short-term workers who work less than five months per year or less than half-time. There may, of course, be special circumstances affecting the rights of particular workers. The relevant facts would be within Microsoft's knowledge.  The burden should therefore be on Microsoft to show why any particular worker serving in a reclassified position who meets the ESPP service requirements is not entitled to participate.

We reach the same conclusion with respect to workers in positions voluntarily converted by Microsoft. The district court found that workers who had previously been independent contractors but were voluntarily converted by Microsoft to temporary agencies contemporaneous with the IRS reclassification should also be considered common law employees. The record does not disclose whether the voluntary conversions were of positions, in a fashion analogous to the IRS reclassification, i.e., whether Microsoft determined with reference to particular positions that services performed constitute an employer-employee relationship. If that is the case, the conclusion would be the same as in the [begin page 25] case of the IRS reclassifications: Presumptively, any individual occupying a converted position and otherwise qualified under the ESPP is an eligible common law employee--regardless of whether he or she had been personally converted from independent contractor to temp as a result of Microsoft's conversion. If, on the other hand, Microsoft merely changed the treatment of particular individuals qua individuals, that would not inure to the benefit of other individuals hired as temps.We assume that the evidence illuminating the nature and effect of these conversions is readily available from Microsoft and will enable the district court to make the appropriate determination.

The record does not disclose whether there are in addition workers who served neither in reclassified nor converted positions but who may nevertheless be common law employees eligible to participate in the ESPP but denied benefits. The determination whether a worker was or is a Microsoft common law employee will be governed by the Darden factors. We leave it to the district court to determine the appropriate procedure for dealing with any such claims

* * * * * * * *


We held in Vizcaino I and II that all common law employees of Microsoft are entitled to participate in Microsoft's ESPP, subject to the exceptions specified in the plan. The members of the certified class share a common claim to past and, in certain cases, current and future participation. They are entitled to press their claim in this action under the procedure we have [begin page 26] outlined.


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Update on Viscaino v. Microsoft: Temps, Stocks, and the Latest Round in the Ninth Circuit

June 1998

Update on Viscaino v. Microsoft: Temps, Stocks, and the Latest Round in the Ninth Circuit

As first reported in Morrison & Foerster’s October 1998 Employment Law Commentary ('Are Your Independent Contractors Really Independent Contractors?'), Vizcaino v. Microsoft Corp. -- now in its 7th year in federal court -- illustrates the importance of properly classifying employees. Recently, the parties finished their third trip to the Ninth Circuit (99 C.D.O.S. 3474 -- May 12, 1999). As described in our October 1998 commentary, Microsoft’s first trip to the Ninth Circuit Court of Appeals in Vizcaino resulted in a finding that the company had improperly labeled as 'independent contractors' or 'temporary employees' workers who were in fact common law employees of Microsoft under the multi-factor analysis of Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318 (1992). See Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir. 1996) (Vizcaino I). In Microsoft’s second trip to the Ninth Circuit, the court, en banc, largely affirmed its decision in Vizcaino I. See Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th Cir. 1997) (en banc) (Vizcaino II).

Although at its inception the Vizcaino class sought the panoply of benefits offered to Microsoft’s regular employees, the latest Ninth Circuit opinion is focused on whether workers classified as temporary employees are entitled to participate in the software giant’s Employee Stock Purchase Plan ('ESPP'). Following the Ninth Circuit’s May 12, 1999 decision, Microsoft may owe a class of up to 10,000 temporary employees between $15-20 million in Microsoft stock that they could have purchased had they been permitted to participate in the ESPP.

The Latest Ninth Circuit Opinion

In this increasingly bitter and costly litigation, the parties in Vizcaino have appeared before the Ninth Circuit several times. Most recently, the court’s May 12, 1999 decision clarified the scope of the Vizcaino class following the district court’s October 1998 order limiting the class to former independent contractors reclassified by Microsoft as temporary employees following a 1990 IRS audit. A three-judge panel of the Ninth Circuit disagreed with the district court’s narrowing of the subject class, and broadened it to include all temporary employees occupying an IRS-reclassified position, regardless of whether they were formerly classified as independent contractors. This distinction is significant, because it greatly expands the potential class – from about 500 workers to up to 10,000 workers. Moreover, on remand, the Ninth Circuit placed the burden on Microsoft to 'show why any particular worker serving in a reclassified position who meets the ESPP service requirements is not entitled to participate' in the stock program.

The Ninth Circuit has agreed to reconsider its May 12, 1999 decision en banc upon Microsoft’s petition for rehearing.

Lessons from Vizcaino -- Stock Incentive Programs

With stock becoming more valuable than salary in an employee’s total compensation package, it is no surprise that the parties in Vizcaino are heavily litigating whether temporary workers are entitled to participate in a stock incentive program that has only been made available to Microsoft’s regular employees. Given the potentially high cost of providing stock to employees, employers may seek ways to prevent temporary employees or independent contractors from suing to obtain the benefits of a stock program intended only for regular employees. Vizcaino provides employers with some guidance in drafting and implementing stock incentive programs that apply only to regular employees. By learning from Microsoft’s mistakes, employers can take steps to restrict the types of employees eligible to participate in stock purchase programs.

Draft Stock Incentive Programs Carefully. Under Microsoft’s ESPP plan, eligible employees are given the opportunity to purchase Microsoft stock at 85% of the lower of the fair market value on the first or last day of each six-month offering period, through payroll deductions of 2 to 10 percent. In both Vizcaino I and II, the Ninth Circuit found that based largely on the language of the ESPP, participation in the program was available to all common law employees, regardless of their classification. The ESPP itself is set up under, and expressly incorporates, Section 423 of the Internal Revenue Code. It provides that Microsoft intended 'to have the plan qualify' under Section 423 and that its provisions 'shall accordingly, be construed to extend and limit participation in a manner consistent with [Section 423].' When first established in 1986, Microsoft’s plan stated that the ESPP was available to 'any employee of the Company,' but this language was later changed to 'permanent employee' (in 1987) and then 'regular employee' (in 1989).

Section 423 provides that 'options are to be granted to all employees of any corporation whose employees are granted any of such options by reason of their employment by such corporation.' The IRS has interpreted the phrase 'all employees' to refer to common law employees. Section 423, however, allows employers to exclude four employee classifications: (a) employees employed less than 2 years; (b) part-time (20 or fewer hours per week) employees; (c) employees customarily employed for no longer than 5 months in any calendar year; and (d) highly compensated employees. Microsoft’s ESPP refers only to exceptions (b) and (c). In Vizcaino I and II, the Ninth Circuit found that by Microsoft’s express incorporation of Section 423 in the ESPP, the Vizcaino class members were eligible to participate in the ESPP and had been improperly denied the opportunity to do so. Although analyzed in the lower court, the Ninth Circuit did not discuss and apparently found unpersuasive Microsoft’s use of the phrases 'permanent' and 'regular' employee in the ESPP, resting its opinion on Microsoft’s incorporation of Section 423 into the plan.

With this in mind, employers should examine their existing stock purchase programs to determine which employees are covered under the express language of the program. Employers with Section 423 stock purchase programs will be unable to include language in their plan that categorically excludes temporary employees from participation. Nevertheless, where a stock incentive program is governed by Section 423, employers should be sure to take full advantage of the four specified exclusions discussed above. Such language is helpful to courts which may be called upon to interpret the plan. For example, in their latest Vizcaino opinion, the Ninth Circuit limited class members, in part, to those who are 'qualified under the ESPP' to participate in the program, noting that the plan 'by its terms, excludes short-term workers who work less than five months per year or less than half-time.' Whether drafting a new stock incentive program or revising an existing one, employers should include clear language that expressly excludes particular classifications of employees (within the confines of the type of stock purchase program at issue) and bona fide independent contractors from participation in the company’s stock purchase program.

Explicitly Exclude Stock Program Participation in Employee-Signed Documents. In finding that class members were eligible to participate in the ESPP, the Ninth Circuit (in VizcainoI and II) also rejected Microsoft’s argument that statements made in the company’s non-disclosure agreements and other information documents signed by class members rendered them ineligible to participate. These employment documents included statements that the employee is 'responsible for . . . other benefits' or 'responsible to pay all [his] own insurance and benefits.' The court found that these statements referred to health and welfare benefits or similar employee protection policies paid for by the employee himself if his employer does not provide the benefit. Under this rationale, the court reasoned that such statements were consistent with permitting class members to participate in the ESPP because under the plan, the employee himself, not Microsoft, makes the actual payment for the benefit (i.e., the stock).

With this in mind, employers should take steps, within the confines of their company’s stock purchase program (i.e., Section 423’s limitations), to explicitly reference and exclude participation in stock incentive programs in any documents that describe or refer to the benefits available to temporary workers or bona fide independent contractors. In particular, employers should make such exclusions clear in any document that will be signed by the temporary worker or independent contractor, including, for example, proprietary information and non-disclosure agreements, employment agreements or independent contractor agreements, and employee handbook provisions describing or relating to employee benefits.

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