Microsoft Independent Contractor Lawsuit
-
Microsoft I occurred because the IRS audited Microsoft for the 1989 and 1990 open taxation years. Using its twenty-factor test, the IRS told Microsoft that a large portion of its “temporary workers” were actual employees, even though Microsoft called them “freelancers” and treated them as independent contractors for tax purposes (no W-2, no FICA contribution, no withholding tax). In fact, each so-called freelancer signed an agreement stating that they were “an independent contractor and nothing in the agreement should be construed as creating an employer-employee relationship.” The agreement also stipulated that the freelancer agreed to be responsible for all of his own federal and state taxes, withholding taxes, social security, insurance, and other benefits. Finally, the freelancer expressly admitted in a separate document that Microsoft had informed him that he was responsible for his own insurance and services. “I hope Microsoft doesn`t think this will end the problem,” said Philip Gaines, who worked as a web indexer at Microsoft for more than a year until June. “They always hire entrepreneurs. They still think they can have entrepreneurs with fewer benefits. In Microsoft III, this result is achieved independently of a so-called independent contractor agreement between the company and the employee. Like many software companies, Microsoft has added a pool of workers classified as independent “freelancers” to its regular core of employees and paid them cash compensation (sometimes more than its employees), but none of the benefits available to employees. At least theoretically, these workers were hired to work on specific projects and perform functions such as production editing, proofreading, formatting, indexing, and software testing. Microsoft Corp and a law firm representing more than 8,000 people who held temporary jobs at the software provider today announced a class action settlement in which Microsoft will pay workers and their lawyers a total of $97 million. The complainant filed a class action lawsuit against the employer, alleging that he had the right to participate in certain employer pension and social plans. The workers provided documentation showing that they were independent contractors and were not entitled to the services offered by the employer.
However, the IRS determined that they were employees and used them as a basis for participating in benefit plans. The district issued a summary judgment in favour of the employer. The workers appealed. Microsoft had its employees sign agreements stating that they were independent contractors or “CIs” (non-employees) and that they were not eligible to participate in Microsoft`s benefit plans. Microsoft has not withheld or paid any Social Security taxes or other payroll taxes on them. You might ask, “Who cares?” Until recently, the answer was, “The Internal Revenue Service cares.” Clearly, an employer`s report on an employee`s income is presumed to be more accurate than an employee`s individual performance (if any). In addition, employer withholding creates a more stable cash flow for the government than the employee`s annual performance, even if estimated quarterly payments are made. More recently, however, the answer has been, “Poorly ranked employees care and so do their lawyers.” Indeed, due to misclassification, so-called independent contractors are deprived of lucrative benefits enjoyed by the company`s recognized “employees.” The court held that the agreements signed by the workers on their status as independent contractors did not constitute a waiver of their entitlement to benefits once it had been determined that they were indeed employees. The court referred the District Court to pre-trial detention to resolve any remaining issues relating to the rights of certain plaintiffs in a non-ERISA plan and referred the regime administrator to pre-trial detention to decide the same issues with respect to an ERISA plan.
The case began with two lawsuits in 1992 accusing Microsoft of offering potential employees temporary work identical to the work of “Blue Badge” employees in permanent positions. Speaking of lucrative, the plaintiff`s labor attorney`s office hopes that class actions based on such misclassification will be just that. Presumably, the plaintiffs` lawyers will be compensated with a certain percentage of the services denied. And depending on the statute of limitations in the state where the employment takes place, liability for benefits can extend over a significant number of years, provided that the so-called independent contractors were de facto employees during the period. The use of independent contractors is not a panacea for all employment problems. Used correctly, they are administratively practical, economically and economically reasonable. However, this is not an automatic exclusion. Your plan MUST have the right language to implement the planned exclusion, otherwise you will lose it, i.e. You must make the benefits available to “temporary” and part-time employees, as well as to all so-called independent contractors who are in fact designated as your common law employees.
The danger is to mischaracterize a true employer-employee relationship. Poor characterization can have negative consequences on tax and performance obligation. Therefore, one must know the factors necessary to create a true independent entrepreneur relationship and pay attention to them. What is the moral of this story for employers? First of all, it shows once again that simply signing an agreement that an employee is a CI will not make him a CI in the eyes of the law. .