OLR Research Report

August 12, 1999





By: Laura Jordan, Research Attorney

You asked for a history of the lawsuit filed by Microsoft's contingent workers and for some background information on contingent workers.


In 1989 and 1990 the Internal Revenue Service (IRS) ruled that Microsoft misclassified certain workers as independent contractors. Following this ruling approximately 10,000 current and former contingent workers sued Microsoft for benefits, including the ability to participate in its lucrative stock-purchase plan. They also sued for the value of past benefits that Microsoft did not provide.

The class action suit consists of the independent contractors identified in the IRS ruling and workers placed in Microsoft by temporary employment agencies. The plaintiffs worked for at least 20 hours per week for at least five months during a year, any time after 1986. Microsoft objected to the fact that the temporary employees, who were not identified in the IRS ruling, were plaintiffs in the suit. A lower court agreed with the company and the plaintiffs appealed the court's decision.

In May 1999 a special, three-judge panel for the U.S. Ninth Circuit Court of Appeals ruled that the temporary workers could participate in the lawsuit. The opinion also stated that Microsoft must provide full benefits to the plaintiffs.

Microsoft appealed this decision to the full Ninth Circuit and that court upheld the portion of the special panel's ruling that concerned participation in the class action suit. It overturned the portion of the decision concerning benefits and said that workers were entitled only to participate in the company's stock purchase plan. If the workers win their lawsuit, Microsoft could owe them up to $20 million in stock.


Contingent Workers

In a 1997 study the Bureau of Labor Statistics said there are approximately 8.5 million contingent workers (which encompasses independent contractors and temporary agency and leased employees). About 50% work for one employer for at least six months.

Contingent worker status can be beneficial for employers and employees. Employers can save on their labor cost because they do not have to pay fringe benefit costs or payroll taxes or provide tools or equipment. In addition, because personnel policies are inapplicable to them and they are frequently off-premises, contingent workers do not use managers' time. Contingent worker status can benefit employees by providing them with flexible work schedules.

Companies began increasingly using contingent workers during the early 90's to replace employees who were laid off during the recession. The trend did not disappear with the recession. Some contingent workers complain that they have exclusively worked full-time for one employer for long periods without receiving benefits given to permanent employees.

Other Contingent Worker Cases

Contingent workers have filed many lawsuits in the past few years claiming that they have been wrongly denied benefits provided to permanent employees because companies have misclassified them. Contingent worker cases have been filed against Allstate Corp., Time Warner, Inc., Perdue Farms, Inc., Los Angeles-area Korean-owned restaurants, Pacific Bell, and the conglomerate ARCO. In some cases the U.S. government has filed suit against the companies on behalf of workers.

Congressional Reaction

In response to the recent high-profile cases and an apparent uncertainty in the law used to determine whether workers are independent contractors, Congress recently introduced legislation. The proposed bill (H.R. 1525, attached) clarifies the distinction between independent contractors and regular employees. It replaces the current IRS created, 20-point test with a three-part test that assumes a worker is an employee unless the employer does not control the worker, the worker makes his or her services available to others, and he assumes entrepreneurial risk. It establishes a “safe harbor” to protect employers from retroactive taxes and allows them to continue treating workers as independent contractors until 2003. It addresses classification for payroll tax purposes, but not for benefits. It also does not specify how to classify workers hired by temp agencies and leasing companies.