CWS 3.0: May 16, 2012

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IC Reclassification & Past Benefits Liability

Even as companies have become more sophisticated in the use and management of contingent labor, certain myths about using contingent workers have persisted. Debunking some of these staffing myths will help contingent workforce managers better understand the potential risks and decide how to address them in their engagement agreements. This is the first in a series of articles on the topic.

Myth: Worker Reclassification Automatically Leads To Employee Benefits Liability

Since the 1990s, employers have been aware of the significant benefits liability risk posed by worker reclassification. In the leading case Vizcaino v. Microsoft, former Microsoft freelancers argued — despite written agreements to the contrary — that they should have been eligible for Microsoft’s employee stock purchase plan. After years of litigation, Microsoft ultimately settled the claims for more than $96 million. The case put employers on notice that written agreements with contingent workers might not be sufficient to prevent benefits liability in the event of reclassification.

Reclassification, however, will not necessarily result in benefits liability. A carefully drafted benefit plan document allows an employer to clearly define who is eligible for benefits under the plan. A recent case demonstrates how the result in the Microsoft litigation could have been avoided if Microsoft’s benefit plans had been drafted to account for contingent workers. Plaintiffs in Kalksma v. Konica Minolta Business Solutions U.S.A. Inc.applied for full-time jobs, but insisted on working only part-time hours. To accommodate their request, the company engaged the workers as independent contractors. The plaintiffs were dissatisfied with this arrangement, and one requested that the IRS determine federal employment tax status of her services. After the IRS determined that the worker could not be treated as an independent contractor for tax purposes, the company conducted an internal audit and negotiated new employment terms with the plaintiffs.

The plaintiffs claimed that they experienced “retaliation” because of their change in classification, including that as employees they were called upon to assist coworkers and work overtime. The plaintiffs filed suit seeking damages for unpaid benefits during the period they worked as independent contractors and retaliation under ERISA. The court determined that the plans’ language specifically excluded independent contractors and the plaintiffs were “ineligible for benefits even if that classification is subsequently found to be legally erroneous.” It did not matter that the IRS reclassified the workers. Under the plan, eligibility was not based on legal classification status — the plan gave the plan administrator direction to determine eligibility. Because the law defers to plan administrators, even if they are wrong, the employer won. The plaintiffs’ retaliation claim also failed because they were not eligible for benefits under any ERISA plan. Take away: making sure benefit plans are drafted properly in most cases will solve benefits liability for employee misclassification.

Eric H. Rumbaugh is a partner and Mark Lotito is an associate with the law firm Michael Best & Friedrich LLC. They represent employers in labor, employment and benefits law matters.

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