"Non-employee" Benefits
The National Law Journal, April 3, 2000

By Michael Starr and Jordan Lippner

Faced with increased global competition and cost-containment pressures, employers are expanding their use of the so-called "contingent" workforce -- a term that applies to a variety of alternatives to traditional employment. Recently, some contingent workers have been demanding the same fringe benefits afforded regular employees. The legal basis for these claims for "non-employee" benefits must be correctly understood, and once they are, preventive strategies become clear

Historically, contingent workers have been temporary, casual or part-time employees who receive few, if any, benefits. They were nonetheless still company employees. In the last several years, however, employers have turned to alternatives that do not, from the company's viewpoint, involve employees at all. The use of "temps" (who are nominally employees of a temporary employment or staff leasing organization) or independent contractors to do the work of traditional employees is on the rise. These non-employee workers are not treated at all like employees: taxes are not withheld; FICA and other payroll taxes are not paid; and no employee benefits are provided. That has, apparently, made some of these workers litigious. Non-employee workers - some of whom may have served their company for years - are demanding the same benefits that regular employees receive.

There are no statutes specifically mandating fringe benefits for non-employees. In fact, with relatively few exceptions, there are no statutes, state or federal, conferring any particular fringe benefits even on regular employees.

But there are statutes, such as ERISA, that both impose procedural fairness on whatever employee benefit plans an employer voluntarily adopts and provide mechanisms for the enforcement of the right of employees actually to receive the promised benefits. For benefits plans not subject to ERISA, state contract or, sometimes, trust law is invoked by employees to enforce employer promises. It is to these that non-employee workers are turning, and their claim is always essentially the same: they are entitled to employee fringe benefits because they are non-employees in name only, or (more legalistically) that they are "common law" employees, i.e., they are employees under traditional common-law standards distinguishing employees from independent contractors which were developed, initially, for purposes of employer vicarious liability, not for employee benefits.

Two Seminal Cases are Raising the Stakes

Two cases have laid the markers for non-employee eligibility under employee benefit plans. One is the lawsuit against Microsoft by a class of nominally independent contractors, "temps," which has so far spanned seven years of litigation and three separate appeals to the 9th Circuit. See Vizcaino v. U.S. District Court for the W. District of Wash. ("Microsoft"), 173 F.3d 713 (9th Cir.), amended by, 184 F.3d 1070 (1999) cert. denied, 120 S. Ct. 844 (Jan. 10, 2000). The other case, brought by the United States Department of Labor ("DOL"), Herman v. Time Warner Inc., 56 F. Supp.2d 411 (S.D.N.Y. 1999), has only just begun, but it portends to be of even greater significance.

The Microsoft case involved workers deemed by the Company to be independent contractors, freelancers and temps. The workers sued because they had been excluded from participating in the company's Savings Plus Plan and Employee Stock Purchase Plan. These workers had often worked with regular employees under the same supervisors, performing identical functions and working the same hours. They were not, however, paid through the Company's payroll department, but through accounts payable. Under agreements which they signed, they had declared themselves to be self-employed independent contractors who did not enjoy an employer-employee relationship with Microsoft.

Previously, in 1990, the IRS had conducted an audit and found that Microsoft should have been withholding taxes for these individuals because they were, under the common-law, employees. In making this determination, the IRS employed the well-established 12-factor test enumerated by the Supreme Court in an ERISA case, Nationwide Mutual Ins. Co. v. Darden, 503 U.S. 318, 323, 112 S. Ct. 1344, 1348 (1992), which looks at: "the skill required; the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over when and how long to work; the method of payment; the hired party's role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party."

After the IRS audit, Microsoft converted the independent contractors to temps, and the affected workers sued for benefits under Microsoft's savings and stock-purchase plans. The full 9th Circuit, sitting en banc, held that because the savings plan was an ERISA plan and because that plan's language stated that all employees who are "on the United States payroll of the employer" may participate, it was for the plan administrator to determine whether that phrase encompassed the contingent workers who would, if it did, be eligible for benefits. The stock-purchase plan, however, was not an ERISA plan and required only that the individual seeking to participate be an "employee" of Microsoft. Since the contingent workers had been found to be employees, and not independent contractors, the court held that they were eligible to participate under that plan and awarded them retroactive rights of participation.

The DOL took a different tack in Time Warner and did not claim directly that contingent workers were entitled to benefits. Rather, it asserted that, as the plan administrator (a term of art under ERISA), Time Warner breached its fiduciary duties by manipulating worker status to exclude them from benefits or by failing to independently assess whether the freelancers were common-law employees.

Time Warner offers its regular employees various benefits, including retirement, health and welfare benefits. Each of the benefit plans had as the designated plan administrator the company's Administrative Committee. Because Time Warner had ceded sole authority to interpret the terms of the plans, including eligibility, to its Administrative Committee, that entity became a fiduciary of the plans pursuant to ERISA � 3(21).

The government's theory, upheld by the district court's denial of a motion to dismiss, was that Time Warner (through the Administrative Committee) was breaching the fiduciary duties it owed to eligible plan participants by failing to (1) properly apply the plans to all eligible workers; (2) identify all employees eligible to participate in the plans; and (3) ensure that all eligible participants were included in the plans. In other words, the government's claim was that the company had an ERISA-imposed duty to assure that all common-law employees were provided benefits, and not excluded by having been misclassified as freelancers or independent contractors by Time Warner managers. Or, as a government spokesman later said, Time Warner should not be "accepting at face value" the hiring manager's classification of these workers.

As a remedy, the DOL is seeking to have an independent fiduciary appointed with exclusive authority over the plans to make the necessary eligibility determinations, to hold the Administrative Committee members personally liable, and to require Time Warner to disgorge all alleged improper profits and redirect all retained funds to make restitution to the plans.

Employer Protection Lies in A Well-Drafted Plan

On closer inspection, there is less to Microsoft and Time Warner than meets the eye. Each case turns primarily on the inherent ambiguity in the meaning of "employee" under the terms of benefit plans and only secondarily on whether certain independent contractors, freelancers or temps were "misclassified" by the employer. The most immediate and effective solution, therefore, lies not in the direction of properly classifying a worker as an employee or non-employee (though this should be done for other reasons discussed below), but in carefully drafting the benefit plan itself.

Employee benefit plans must do more than merely state whom they cover, but should also expressly say who is excluded. To deal with the Time Warner situation, where the DOL contends that plan administrators cannot willy-nilly rely on employee classifications made by hiring managers, the solution is to give the plan administrator express authority to do exactly that, though, of course, less flippantly.

Combining these two approaches would yield express language in the plan definition section, defining "employee" so as to exclude anyone who is, or is regarded by company management to be, a freelancer or independent contractor or anyone providing services to the company through an employee-leasing organization. Amending benefit plans should protect employers, at least prospectively, from Microsoft or Time Warner problems.

This approach was recently validated in Wolf v. Coca-Cola Co., 200 F.3d 1337 (11th Cir. 2000). There, the plaintiff had been a computer programmer for Coca-Cola for more than six years until her "employment" was terminated. She had obtained her job through, a staffing company. Her only contract was with the staffing company, and it declared her to be an independent contractor. Wolf worked at Coke's premises under a series of one-year contracts between Coke and the staffing company, which governed her rate of compensation and length of engagement. The 11th Circuit sanctioned a two-pronged analysis, first, determining whether Wolf could establish that she was a common-law employee and, second, inquiring as to whether Wolf was eligible to receive benefits under the plan's language.

In deciding for the employer, the 11th Circuit found that though Wolf may have been a common-law employee, she had no claim for benefits because she was not an "employee" under the terms of the benefit plan. As the court explained, "companies are not required by ERISA to make their ERISA plans available to all common law employees." 200 F.3d at 140. Unfortunately for Wolf, Coca-Cola's ERISA plans expressly excluded from eligibility "leased employees," defined as those "individuals who perform services for the Company under an agreement with a leasing organization."

It must be cautioned that the recommended plan amendments are not without some potentially significant consequences. For plans that constitute "pension" plans under ERISA, the statute mandates coverage for any employee working more than 1,000 hours a year, see ERISA � 201; though no such requirements exist for a "welfare" plans such as for medical insurance, severance pay, and child-care assistance. While one may exclude from pension plans certain categories of employees, such as "computer programmers" or "leased employees," the exclusion of intended independent contractors or temps risks potential violations of ERISA's coverage and IRS non-discrimination rules if the exclusion is deemed an end-run around the 1000-hour requirement. Still, it is better to make and monitor such plan features with open eyes and with the help of legal and financial advisors, then to have potentially costly decisions made inadvertently by operational managers who think they can improve their own unit's performance (and their own bonuses) by hiring workers "off-budget," as it were, and calling them independent contractors without the slightest thought for how they might impact employee-benefit compliance.

Carefully wording benefit plans will leave other problems, as well. A rose, as Shakespeare said, by any other name would smell as sweet. Calling employees "independent contractors" does not make them so and does not relieve an employer of the statutory obligations it has to, among other things, withhold income taxes for common-law employees, pay unemployment taxes on their behalf, provide workers' compensation coverage for their on-the-job injuries, pay them time-and-a-half for working more than 40 hours a week (unless they are "exempt"), and not discriminate against them on the basis of race, sex, ethnicity, age, or other statutorily protected classification. Thus, while properly amending benefit plans can avoid a Microsoft or Time Warner type of problem for "non-employee benefits," it is hardly a license to misclassify workers. It means only that the legal risks for purported non-employee workers lie elsewhere from where many employers think.

Michael Starr is a partner in the Labor and Employment Group of Hogan & Hartson L.L.P.

A version of this article appeared in The National Law Journal. This article is reprinted with permission from the April 3, 2000 edition of The National Law Journal. �2000 NLP IP Company