Suppose your company, Incredible, Inc. (“Incredible”) maintains “contract” workers for long-term projects, and has done so steadily for the last three years. Since Incredible does not see these workers as “employees”, it does not offer them benefits of any kind. One day, however, you a nice note from the IRS stating that Incredible has misclassified these workers, that a) they are actually common law employees entitled to the same benefits you offer your “regular” employees, b) among other things, you are liable for any taxes associated with these benefits you should have offered; c) that you now have to offer these workers benefits going forward. While you may not be able to do anything about the back benefits, prospectively, you have a plan. You will tell these workers if they can only continue to work for you through Sensational Staffing. Now they are Sensational’s employees, and all payroll, tax and benefit issues are Sensational’s problem, not yours, right? That is more or less what Microsoft thought in the 1990’s. What can you do to avoid being another (mini?) Microsoft? The Emplawyerologist will wade through these waters after the jump…
In all fairness, Microsoft was not the only one to make this mistake; it is simply the most publicized example, and, at $97 million, probably the largest settlement. SmithKline Beacham in 2004 paid $5.2 million to settle a similar claim brought by temporary employees provided by Kelly Services; King County, in Washington State, in a case involving public employees payrolled through staffing agencies settled for $18m. Many companies have set certain policies in reaction to Vizcaino v. Microsoft; some of those practices reflect a less than clear understanding of the issues. What was the real issue with Microsoft?
In 1989, the IRS found that Microsoft had misclassified a number of long-term workers as “contractors” or temporary employees. These workers, according to the IRS were really common law employees. The workers initially referred to in this IRS ruling were not supplied through staffing agencies or any other third party. Since these workers were in fact employees, they were entitled to the same fringe benefits (e.g. retirement, stock options, health care, sick time, vacation) as those deemed by Microsoft to be “regular” employees, either after one year or after the qualification standard set in the benefits plan for regular employees. What does this have to do with staffing agency employees? The IRS definition of a common law employee rests on who actually controls the employee’s work. As stated in IRS Publication 15A, “An individual who is actually a common law employee of the recipient (the worksite company) will not become an employee of another entity merely because the recipient enters into a formal “leasing agreement” with another entity” . On this basis, the Ninth Circuit Court of Appeals in May, 1999 decided that long-term employees supplied by staffing agencies could join a class action lawsuit started by “independent contractors” for benefits, both retroactive and prospective– and the US Supreme Court declined to hear Microsoft’s appeal of this matter. So, if Incredible has the right to control the work performed by its “independent contractors”, then those individuals are common law employees–even if they are subsequently supplied through a Sensation or another staffing agency–and, if Incredible is not careful, they will be entitled to all fringe benefits it offers to its “regular” employees.
Is Incredible required to provide all contingent workers the same benefits it provides its “regular”, direct employees? If so, why use a staffing agency? Short of not using a staffing agency, or contractors, is there anything Incredible can do to avoid being the next Microsoft? Yes there is! The key lies in Incredible’s benefits plan. Incredible should first review its benefits plan and see whether it a) specifies who is eligible for what benefits, and b) perhaps more importantly, who is not eligible for which benefits. Benefits plans are governed by the federal Employee Retirement and Income Security Act (ERISA), which generally allows for certain exclusions, as long as they do not violate anti-discrimination laws. A federal appeals court confirmed this point in Bronk v. Mountain States Telephone and Telegraph Co. Nos. 97-1069, 97-1078 (10th Circuit 1998).Therefore, Incredible can exclude staffing agency employees, common law employees, and similar groups of people from its plan — but the plan itself must clearly say so, and must not violate federal anti-discrimination laws. Incredible therefore cannot exclude individuals over a certain age, or belonging to certain ethnic groups. (Incredible should also consult with an attorney versed in ERISA laws to be sure its plan does not violate any other ERISA provisions.) This is a relatively easy step–one that could have saved Microsoft, SmithKline Beacham, and County, among others a lot of grief, and money in back benefits, and attorney fees.
In reaction to these types of cases, some companies have set arbitrary limits on assignment lengths. So, for example, a staffing company employee might work at a company for one year and then be subject to a 90-day break in service, after which time s/he can return. What prompted these break-in-service rules? The Microsoft court cited the length of the workers’ tenure as one of several factors determining whether one is a common law employee. Is this an effective strategy? In my humble opinion, no. If hour benefits plan does not exclude common law employees, then such workers, in all likelihood will still have a valid claim for benefits.
What about waivers, disclaimers or similar contractual provisions? Many companies and many staffing agencies contain language stating that “temps” are not entitled to benefits. Many “temps” are required to sign agreements containing such language. Will that work? Again, the key is the language contained in the benefits plan. The IRS and the courts do not care what you call your workers. If you assert control over their work and/or their environment you are likely an employer, though you may share it with another person or entity) That responsibility could include offering benefits. Remember, also, that broadly worded provisions stating that “temps” are never an employee and that you never have any employer responsibility toward them could also cause you problems with the Department of Labor, the EEOC and similar agencies. (Click here , here , here, here and here for review.) Should you forget about waivers or similar provisions? Not necessarily, as they do let contingent workers know your intentions up front. Just don’t rely on them exclusively for avoiding benefits claims.
Join The Emplawyerologist next week for the final leg of its excursion to the wonderful word of co-employment, when it explores co-employment and the FMLA. See you then!
Disclaimer: This post’s contents are for informational purposes only, are not legal advice and do not create an attorney-client relationship. Always consult with competent local employment counsel on any issues discussed here.
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