Microsoft ruling a blow to 'independent contractor' dodge

WASHINGTON, D.C. -- In a decision that could lead companies to rethink calling workers "independent contractors," the U.S. Supreme Court ordered Microsoft to give benefits such as stock options and savings plans to at least 800 workers.

Without comment, the justices in late January upheld a lower court decision saying the Seattle area computer software giant called workers "independent contractors" when they really were "employees."

Legally, the difference is crucial. Labor laws such as the minimum wage, overtime pay and the Occupational Safety and Health Act cover an "employee" -- and a company must pay its share of Social Security and Medicare taxes for each worker. The laws don't cover "independent contractors," who must pay both the employer's share and the worker's share of the taxes.

To call a worker an independent contractor, a company must meet a 20-part Internal Revenue Service (IRS) test, showing the worker is really independent, not on the payroll in all but name.

In the Microsoft case, it hired the independent contractors for specific projects in 1987 and 1989 -- and made them sign agreements saying they were independent -- but the IRS ruled Microsoft flunked its test and the workers were really employees.

Microsoft started paying the workers' share of the taxes, but still called them independent contractors when it came to things like stock options and savings plans -- which have enriched Microsoft employees. The workers sued and the Ninth U.S. Circuit Court of Appeals ruled for them. So did the Supreme Court.

The court sent the Microsoft mess back to plan administrators to determine how much money the workers would get, including retroactive money. The appellate court added that Microsoft's stock option plan "was created and offered to all employees" and "their labor gave them the right to participate in it."

"In light of the Microsoft case, companies -- especially companies that make extensive use of independent contractors -- will have to scrutinize those arrangements very carefully to see if they meet the IRS test," said Chris Owens, an AFL-CIO specialist on the independent contractor issue.

"If they don't, they could be open to claims for past violations -- failure to pay FICA (Social Security) taxes and overtime," she added.

Though he called the decision "very narrow," AFL-CIO pensions specialist Shaun O'Brien said "the case brings up the whole issue of whether large employers are creating these two-tier worker structures -- like part-time workers and 'leased' workers provided by temp agencies" who aren't temporary -- in order to escape paying benefits. "They set up independent contractors or leased workers who get little or no benefits, though their wages are the same" as those of regular workers, he added. On average, benefits account for 30 percent of an employee's total compensation.

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