Manage Temp Benefits Without Turning into the Next Microsoft Debacle

August 30, 2000
When the Internal Revenue Service ruled in 1989 that some 600 Microsoft contract workers were actually employees for payroll purposes, little did anyone know that it would start a fire that still rages today across the Redmond campus -- and beyond.

In this feature, learn about:

  • Background of the Issue
  • Solutions to the Problem
  • ERISA and the IRS
  • The Length-of-Service Trap
  • Stock Options
  • Staffing-Agency Control
  • Benefits Waivers
  • An Opposing Viewpoint
  • Tips for Temp-Benefit Management
  • The NLRB's Aug. 25 Ruling
  • The step that Microsoft took after the ruling -- rerouting its contract workers through temporary agencies in an attempt to sidestep paying benefits -- didn't solve its 600-worker problem.

    Instead, the software giant found itself with a bigger, far more costly headache: a 10,000-person class of "permatemp" workers who, federal courts have ruled, now stand to collect as much as $100 million in back benefits.

    This and other high-profile lawsuits, combined with an emerging wave of political activism, have prompted HR professionals to ask, 'Whose employees are these people, anyway?'

    Recruiting, training, job assignments, firing, complaints, raises and payroll issues, expense reimbursement -- all these should be handled by the staffing agency as much as possible.

    It's a sobering question: The Bureau of Labor Statistics reported in a February 1999 survey that 10 million Americans worked for temporary help agencies, contract firms or as independent contractors. Many are in the high-tech sector, which feeds on the economies of temp and contract workers.

    Flurry of Activity

    Microsoft isn't the only employer with a perma-problem. King County, Washington, (where Microsoft is located) settled a class-action lawsuit in June for $18 million after a Superior Court judge ruled that some 500 long-term government temps had been denied benefits. Nor is the rash of action confined to the courts.

    In May, a coalition of civic activists, labor unions, and minority-rights advocates formed the National Alliance for Fair Employment to promote equal pay and benefits for "contingent" workers. In July, Senator Ted Kennedy (D-Mass.) introduced the ERISA Benefits Eligibility Act to compel employers to provide benefits to temp and contract workers and prohibit companies from forcing them to sign benefits waivers.

    Temporary agencies don't want to discuss the issue. Officials at headquarters of Kelly Services and Adecco declined to comment for this article. Attempts to reach Manpower were unsuccessful.

    Return to top


    Companies need not push the panic button, according to two nationally recognized experts on the topic: Ed Lenz, senior vice president, public affairs and legal counsel, for the American Staffing Association, a Washington, D.C.-based trade group for temporary agencies; and Fred Oliphant, a veteran employee and benefit-law attorney with the Washington, D.C., firm of Miller and Chevalier.

    They point to the volatile Microsoft case as a classic example of what went wrong, and say that a relatively easy step can help other companies avoid the same pitfall. Microsoft mistakenly re-classified contract workers as temps to avoid paying benefits, when instead it should have outright excluded the contract workers in the language of the company benefits plan, Lenz says.

    "The court ruled they could have excluded Microsoft's temps from the benefit plan; it's just that they didn't do it."

    Companies frequently make two major mistakes as they try to avoid paying benefits to temp and contract workers, Lenz says. They become preoccupied with classifying or defining employee status, or they rely on setting arbitrary time limits on job assignments to distinguish temps/contract workers from common-law employees.

    Both miss the mark. Instead, Lenz says employers should take advantage of recent Internal Revenue Service and appeals court decisions that allow employers to exclude temp and contract workers from benefits, even if they are found to be common-law employees.

    Return to top

    ERISA and IRS Outline Exclusions

    "Companies need to revise their employee benefit plans to explicitly exclude groups that don't need to be covered," Oliphant says.

    Although there are exceptions, the Employee Retirement Income Security and Information Act (ERISA) does not compel employers to provide benefits, the two experts say. In Bronk v. Mountain States Telephone and Telegraph Co., a federal appeals court used ERISA as a basis to rule that U.S. West could exclude workers provided by a staffing firm, even if they met the test as U.S. West's common-law employees.

    "The purpose of ERISA is to make employers make good on the benefits they've promised their employees," Oliphant says. "ERISA doesn't require all common-law employees to be covered."

    There are exceptions. For example, if an employee is otherwise eligible, the employer can't impose minimum age or length-of-service requirements to deny participation. But in general, ERISA allows exclusions, Lenz and Oliphant say.

    On the IRS front, a July 1999 Technical Advice Memorandum says that companies may exclude employees who are not reported on payroll records as common-law employees, even if a court has determined that they are common-law employees and not independent contractors. The memorandum said the same determination applies to those identified by a specific work status code on the employer's payroll records.

    HR departments and legal counsel should be informed on these rulings when drafting eligibility status language for benefits plans, Lenz says.

    Another reason not to fixate on defining who or who isn't considered a permanent worker, he says, is that the IRS and the courts have reserved that decision for themselves. Again, the key is for companies to be aware that they can generally exclude temp and contract workers regardless of their legal definition as employees.

    Even the IRS's 20-factor test for determining common-law employees isn't a good bellwether, Oliphant says.

    "They [IRS and courts] may cite the 20 factors in some cases, and in others they may come up with their own list of five, or six, or seven factors," he says. "There are a great deal of subjective elements, and that's what makes this test so hard."

    Case in point is last year's IRS technical memorandum, which states, "A worker's status is based on facts and circumstances. Making a determination as to whether a common-law employment relationship exists is not always straightforward." Businesses should be concerned because their assumptions of employee status based on the 20-factor test can be easily overturned by the courts or the IRS.

    Return to top

    The Length-of-Service Trap

    The second error, the length-of-service strategy, draws arbitrary time lines on how long temps or contract workers can stay in order to distinguish between temporary and permanent workers. It also does not work, Lenz says.

    "There are no clear, bright lines you can draw where they can be assured there will be no employer liability," he says. "Some client liability for staffing firm workers is not at all time-sensitive," such as EEO and OSHA requirements.

    And while time limits may in some cases be used to deny benefits, they are not good solutions for companies needing long-term staffing help, Lenz says. The continuity and familiarity afforded by long-term temps and contract workers need not be sacrificed if the company stops focusing on time limits and employee status and instead excludes temp and contract workers with explicit, detailed language in benefits plans.

    "If a worker can position himself to be within a covered classification, then he's going to be able to sue for benefits," Oliphant says. "The trick is to review the terms of the plan and make sure it accurately describes who you want to cover and who you don't want to cover. "You can say we're going to cover this group of people and going to exclude the people we don't treat as common-law employees, even if the courts or an administrative agency determines they are common-law employees."

    Return to top

    Stock Option Options

    Stock options, meanwhile, are a different ballgame. There, the IRS has jurisdiction in establishing participation rules for the purpose of tax breaks. Tax benefits generally require 100 percent coverage of all employees, Lenz says.

    "Stock options are not covered by ERISA, but by the tax code," he says. Companies should consult legal counsel on details. However, most of the concern in the current controversy is with retirement, pension, 401(k), and health-benefits plans, not stock options.

    Return to top

    Give Staffing Agency Control

    An essential protective measure with temporary employees is to defer as much control and responsibility, whenever appropriate, to the staffing agency, so temps are clearly distinguished from regular employees, Lenz suggests.

    Recruiting, training, job assignments, firing, complaints, raises and payroll issues, expense reimbursement -- all of these should be handled by the staffing agency as much as possible. "Do only what you have to do legally, and let the staffing agency do the rest," he says.

    Avoid the Microsoft mistake of shifting payroll duties to a staffing firm just for the purpose of trying to prove they're temps, Lenz warns. Microsoft tried that after the IRS reclassified "independent contractors" as employees. But Lenz says the Ninth Circuit saw it as an evasive maneuver.

    Return to top

    Wavering Waivers

    Not quite so certain is how the courts view waivers. A judge in the Microsoft case ruled that the company's specifically written benefits waivers, signed before work actually began, "may" be valid, Lenz says.

    Two years ago, in Capital Cities/ABC v. Ratliff, the 10th U.S. Circuit Court of Appeals found that newspaper carriers, who claimed they were common-law employees due benefits, were not entitled because of agreements they signed stipulating their status as ineligible independent contractors.

    Lenz says the court dismissed their claim for benefits, not on the basis of the waiver, which relinquishes a right that already exists, but as terms of the contract they signed.

    He also says some benefits experts think waivers won't be enforceable unless consistent with and expressly sanctioned by benefits plans.

    Return to top

    Opposing Viewpoint

    The Center for a Changing Workforce, which has emerged as one of the nation's leading advocates and watchdog groups for equal wages and benefits for permatemps, sees all this quite differently. The Seattle-based organization shares offices with the law firm of Bendich, Stobaugh and Strong, attorneys for the contract workers and temps in the Microsoft, King County, and Atlantic Richfield (ARCO) cases.

    The center's executive director, David West, disagrees with Oliphant and Lenz on their interpretation that ERISA allows the exclusion of temps and contract workers from benefits plans.

    "We believe under ERISA you have to properly classify employees. They're saying you can ignore some provisions of ERISA. I think the question here is which parts of ERISA are controlling parts and whether you have to comply with parts of ERISA or all of [it]."

    But he concedes that some appeals court decisions have ruled otherwise.

    "Some of these rulings essentially are saying the employer can give these leased or contract workers an incorrect label," West says. "Our view is under ERISA, the employer has the responsibility to accurately classify workers. If the employer excludes people who are truly temporary, fine. The problem as we see it is they're applying incorrect labels to contingent and contract workers and temp agency workers who qualify as common-law employees."

    West says the July 1999 Technical Advice Memorandum issued by the IRS, which excludes contract workers from benefits, even if the courts say they're common-law employees, is also in conflict with the Microsoft ruling.

    He cites the Center for a Changing Workforce's interpretation of ERISA, which is that employers must properly classify workers. West notes that some employee benefits, such as stock-purchase plans and paid leave, are governed by state laws, not ERISA. Many state laws "are pretty clear on what a common-law employee is," he says.

    He uses the King County case and its $18 million settlement as an example. "The advice to HR people is to make sure that managers, who have authority to bring in contingent workers, make sure that the contingent workers should be short-term," West says. "Or if they're going to call someone a contract worker or leased worker, they should be under the control of an outside company providing the work. It should be on a contract basis and should be a deliverable product, not ongoing work."

    Return to top

    Growing Activism

    The Center for a Changing Workforce belongs to the National Alliance for Fair Employment, one of a growing number of new activist groups on the offensive to help temp and contract workers secure benefits. Lenz sees the alliance and its AFL-CIO ties as another repackaged attempt to unionize workers.

    Oliphant agrees: "Organized labor and plaintiffs' lawyers have moved this issue up on their agenda." Companies should take precautions because it makes good legal and business sense, he says. And there are plenty of unknowns and gray areas that compel companies to be vigilant.

    "You've got conflicting decisions from various U.S. courts of appeal. You'll have different laws in different parts of the country" unless the U.S. Supreme Court decides to resolve the disparities, says permatemp advocate West. "I'd say it's very much up in the air."

    Return to top

    Give Benefits Where Benefits Are Due

    Here are steps that companies can take to minimize the risk of litigation by long-term temp or contract workers demanding the same health, retirement and other benefits as permanent employees.

    • Explicitly exclude temp and contract workers from benefits plans.

    • Minimize contact between the employer and assigned employee, letting the staffing agency assume as much control and responsibility as possible.

    • Avoid switching employees to temp firms just for payroll as a method to deny benefits.

    • In large companies, stay on top of how many temp and contract workers you employ, and for what reasons.

    • Have legal counsel review your benefits plans and tailor for exceptions and gray areas.

    Return to top

    Observers are still mulling the implications of an Aug. 25 ruling from theNational Labor Relations Board involving temp agency employees and theirstatus in regards to union representation.The NLRB ruled that employees from a labor supplier may be included in thesame bargaining unit as permanent employees of the employer to which theyare assigned, when the supplied workers are jointly-employed by bothemployers.

    In doing so, the NLRB overruled its 1990 decision that bargaining units thatinclude both jointly-owned employees and employees of the user employer aremulti-employer bargaining units that require consent of the employers.

    This article is not legal advice; check with your attorney when making legal decisions.