Making correct classifications between independent contractors and employees is not getting simpler with flexible, geographically-distributed workforces. For those with long memories, a key case in the area of worker classification was issued by the Ninth Circuit in Vizcaino v. Microsoft Corporation, 97F.3d 1187 (CA-9, 1996). Vizcaino v. Microsoft held that certain workers, originally hired as independent contractors, were actually employees who were entitled to benefits under Microsoft’s 401(k) plan and Microsoft’s Employee Stock Purchase Plan. Determinations like this can lead to substantial corrections costs to fix tax-qualified benefit plans as well as to make the contributions required under plan terms to the improperly excluded employees.
Generally, the tax-qualified benefit plan employee or independent contractor determination will be made under IRS rules for worker classification, but it is useful to note that there are several other tests for employee status that other agencies apply for determining benefit eligibility: the U.S. Department of Labor (Fair Labor Standards Act), state unemployment compensation board (state unemployment benefits), state workers’ compensation insurance (workers’ compensation benefits), state tax departments (state income tax), and state labor departments (wage and overtime laws and benefits). In 2014, again in the Ninth Circuit, the court issued an opinion in Alexander v. FedEx Ground Package Systems, Inc., 765 F.3d 981 (CA-9, 2014) finding that under the applicable state law tests drivers for FedEx were misclassified an independent contractors and were instead employees. This case is noteworthy because after auditing FedEx’s 2002 tax filings, the IRS calculated a tentative assessment of $319 million in back tax, penalties and interest for misclassifying the drivers, but withdrew the case in 2009, letting the contractor designation stand. So these workers were contractors for federal tax purposes but employees under California state laws.
We recommend that companies review their worker classifications regularly, and particularly after any change in status for service providers.