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Employee versus Independent Contractor

15 January, 2016 - 09:35

Vizcaino v. Microsoft Corp.

97 F.3d 1187 (9th Cir. 1996)

Reinhardt, J.

Large corporations have increasingly adopted the practice of hiring temporary employees or independent contractors as a means of avoiding payment of employee benefits, and thereby increasing their profits. This practice has understandably led to a number of problems, legal and otherwise. One of the legal issues that sometimes arises is exemplified by this lawsuit. The named plaintiffs, who were classified by Microsoft as independent contractors, seek to strip that label of its protective covering and to obtain for themselves certain benefits that the company provided to all of its regular or permanent employees. After certifying the named plaintiffs as representatives of a class of “common-law employees,” the district court granted summary judgment to Microsoft on all counts. The plaintiffs…now appeal as to two of their claims: a) the claim…that they are entitled to savings benefits under Microsoft’s Savings Plus Plan (SPP); and b) that…they are entitled to stock-option benefits under Microsoft’s Employee Stock Purchase Plan (ESPP). In both cases, the claims are based on their contention that they are common-law employees.

Microsoft, one of the country’s fastest growing and most successful corporations and the world’s largest software company, produces and sells computer software internationally. It employs a core staff of permanent employees. It categorizes them as “regular employees” and offers them a wide variety of benefits, including paid vacations, sick leave, holidays, short-term disability, group health and life insurance, and pensions, as well as the two benefits involved in this appeal. Microsoft supplements its core staff of employees with a pool of individuals to whom it refuses to pay fringe benefits. It previously classified these individuals as “independent contractors” or “freelancers,” but prior to the filing of the action began classifying them as “temporary agency employees.” Freelancers were hired when Microsoft needed to expand its workforce to meet the demands of new product schedules. The company did not, of course, provide them with any of the employee benefits regular employees receive.

The plaintiffs…performed services as software testers, production editors, proofreaders, formatters and indexers. Microsoft fully integrated the plaintiffs into its workforce: they often worked on teams along with regular employees, sharing the same supervisors, performing identical functions, and working the same core hours. Because Microsoft required that they work on site, they received admittance card keys, office equipment and supplies from the company.

Freelancers and regular employees, however, were not without their obvious distinctions. Freelancers wore badges of a different color, had different electronic-mail addresses, and attended a less formal orientation than that provided to regular employees. They were not permitted to assign their work to others, invited to official company functions, or paid overtime wages. In addition, they were not paid through Microsoft’s payroll department. Instead, they submitted invoices for their services, documenting their hours and the projects on which they worked, and were paid through the accounts receivable department.

The plaintiffs were told when they were hired that, as freelancers, they would not be eligible for benefits. None has contended that Microsoft ever promised them any benefits individually. All eight named plaintiffs signed [employment agreements] when first hired by Microsoft or soon thereafter. [One] included a provision that states that the undersigned “agrees to be responsible for all federal and state taxes, withholding, social security, insurance and other benefits.” The [other one] states that “as an Independent Contractor to Microsoft, you are self-employed and are responsible to pay all your own insurance and benefits.” Eventually, the plaintiffs learned of the various benefits being provided to regular employees from speaking with them or reading various Microsoft publications concerning employee benefits.

In 1989 and 1990, the Internal Revenue Service (IRS)[,]…applying common-law principles defining the employer-employee relationship, concluded that Microsoft’s freelancers were not independent contractors but employees for withholding and employment tax purposes, and that Microsoft would thereafter be required to pay withholding taxes and the employer’s portion of Federal Insurance Contribution Act (FICA) tax. Microsoft agreed.…

After learning of the IRS rulings, the plaintiffs sought various employee benefits, including those now at issue: the ESPP and SPP benefits. The SPP…is a cash or deferred salary arrangement under § 401k of the Internal Revenue Code that permits Microsoft’s employees to save and invest up to fifteen percent of their income through tax-deferred payroll deductions.…Microsoft matches fifty percent of the employee’s contribution in any year, with [a maximum matching contribution]. The ESPP…permits employees to purchase company stock [with various rules].

Microsoft rejected the plaintiffs’ claims for benefits, maintaining that they were independent contractors who were personally responsible for all their own benefits.…

The plaintiffs brought this action, challenging the denial of benefits.

Microsoft contends that the extrinsic evidence, including the [employment agreements], demonstrates its intent not to provide freelancers or independent contractors with employee benefits[.]…We have no doubt that the company did not intend to provide freelancers or independent contractors with employee benefits, and that if the plaintiffs had in fact been freelancers or independent contractors, they would not be eligible under the plan. The plaintiffs, however, were not freelancers or independent contractors. They were common-law employees, and the question is what, if anything, Microsoft intended with respect to persons who were actually common-law employees but were not known to Microsoft to be such. The fact that Microsoft did not intend to provide benefits to persons who it thought were freelancers or independent contractors sheds little or no light on that question.…

Microsoft’s argument, drawing a distinction between common-law employees on the basis of the manner in which they were paid, is subject to the same vice as its more general argument. Microsoft regarded the plaintiffs as independent contractors during the relevant period and learned of their common-law-employee status only after the IRS examination. They were paid through the accounts receivable department rather than the payroll department because of Microsoft’s mistaken view as to their legal status. Accordingly, Microsoft cannot now contend that the fact that they were paid through the accounts receivable department demonstrates that the company intended to deny them the benefits received by all common-law employees regardless of their actual employment status. Indeed, Microsoft has pointed to no evidence suggesting that it ever denied eligibility to any employees, whom it understood to be common-law employees, by paying them through the accounts receivable department or otherwise.

We therefore construe the ambiguity in the plan against Microsoft and hold that the plaintiffs are eligible to participate under the terms of the SPP.

[Next, regarding the ESPP] we hold that the plaintiffs…are covered by the specific provisions of the ESPP. We apply the “objective manifestation theory of contracts,” which requires us to “impute an intention corresponding to the reasonable meaning of a person’s words and acts.” [Citation] Through its incorporation of the tax code provision into the plan, Microsoft manifested an objective intent to make all common-law employees, and hence the plaintiffs, eligible for participation. The ESPP specifically provides:

It is the intention of the Company to have the Plan qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of 1954. The provisions of the Plan shall, accordingly, be construed so as to extend and limit participation in a manner consistent with the requirements of that Section of the Code. (emphasis added)

[T]he ESPP, when construed in a manner consistent with the requirements of § 423, extends participation to all common-law employees not covered by one of the express exceptions set forth in the plan. Accordingly, we find that the ESPP, through its incorporation of § 423, expressly extends eligibility for participation to the plaintiff class and affords them the same options to acquire stock in the corporation as all other employees.

Microsoft next contends that the [employment agreements] signed by the plaintiffs render them ineligible to participate in the ESPP. First, the label used in the instruments signed by the plaintiffs does not control their employment status. Second, the employment instruments, if construed to exclude the plaintiffs from receiving ESPP benefits, would conflict with the plan’s express incorporation of § 423. Although Microsoft may have generally intended to exclude individuals who were in fact independent contractors, it could not, consistent with its express intention to extend participation in the ESPP to all common-law employees, have excluded the plaintiffs. Indeed, such an exclusion would defeat the purpose of including § 423 in the plan, because the exclusion of common-law employees not otherwise accepted would result in the loss of the plan’s tax qualification.

Finally, Microsoft maintains that the plaintiffs are not entitled to ESPP benefits because the terms of the plan were never communicated to them and they were therefore unaware of its provisions when they performed their employment services.…In any event, to the extent that knowledge of an offer of benefits is a prerequisite, it is probably sufficient that Microsoft publicly promulgated the plan. In [Citation], the plaintiff was unaware of the company’s severance plan until shortly before his termination. The Oklahoma Supreme Court concluded nonetheless that publication of the plan was “the equivalent of constructive knowledge on the part of all employees not specifically excluded.”

We are not required to rely, however, on the [this] analysis or even on Microsoft’s own unwitting concession. There is a compelling reason, implicit in some of the preceding discussion, that requires us to reject the company’s theory that the plaintiffs’ entitlement to ESPP benefits is defeated by their previous lack of knowledge regarding their rights. It is “well established” that an optionor may not rely on an optionee’s failure to exercise an option when he has committed any act or failed to perform any duty “calculated to cause the optionee to delay in exercising the right.” [Citation] “[T]he optionor may not make statements or representations calculated to cause delay, [or] fail to furnish [necessary] information.…” Similarly, “[I]t is a principle of fundamental justice that if a promisor is himself the cause of the failure of performance, either of an obligation due him or of a condition upon which his own liability depends, he cannot take advantage of the failure.” [Citation]…

Applying these principles, we agree with the magistrate judge, who concluded that Microsoft, which created a benefit to which the plaintiffs were entitled, could not defend itself by arguing that the plaintiffs were unaware of the benefit, when its own false representations precluded them from gaining that knowledge. Because Microsoft misrepresented both the plaintiffs’ actual employment status and their eligibility to participate in the ESPP, it is responsible for their failure to know that they were covered by the terms of the offer. It may not now take advantage of that failure to defeat the plaintiffs’ rights to ESPP benefits. Thus, we reject Microsoft’s final argument.


For the reasons stated, the district court’s grant of summary judgment in favor of Microsoft and denial of summary judgment in favor of the plaintiffs is REVERSED and the case REMANDED for the determination of any questions of individual eligibility for benefits that may remain following issuance of this opinion and for calculation of the damages or benefits due the various class members.


  1. In a 1993 Wall Street Journal article, James Bovard asserted that the IRS “is carrying out a sweeping campaign to slash the number of Americans permitted to be self-employed—and to punish the companies that contract with them…IRS officials indicate that more than half the nation’s self-employed should no longer be able to work for themselves.” Why did Microsoft want these employees to “be able to work for themselves”?
  2. Why did the employees accept employment as independent contractors?
  3. It seems unlikely that the purpose of the IRS’s campaign was really to keep people from working for themselves, despite Mr. Bovard’s assumption. What was the purpose of the campaign?
  4. Why did the IRS and the court determine that these “independent contractors” were in fact employees?