Magazine article Management Review

The Dangers of MISCLASSIFYING Workers

Magazine article Management Review

The Dangers of MISCLASSIFYING Workers

Article excerpt

With the flood of restructuring, reorganizations and downsizing, millions of American workers have become self-employed or have gone on the payrolls of temporary or leasing companies. The legal implications of such arrangements are enormous, and corporate America must pay attention to its obligations to these workers in the areas of taxation, labor laws and employee benefits.

Following the infamous class-action suit against Microsoft in the early 1990s, in which temporary and contract workers successfully sued the company for denying them savings and benefits programs, a growing number of similar claims are being made throughout the United States.

A few months ago, the U.S. Department of Labor brought suit against Time-Warner, charging that the entertainment and publishing giant had mistakenly classified workers as independent contractors or temporaries, thereby depriving them of the health and retirement benefits provided to "regular" employees. According to the suit, the denial of these benefits violated the Employee Retirement Income Security Act (ERISA), the federal benefits protection law.

In addition, a court of appeals recently reinstated a suit against California's Pacific Gas and Electric Co. by a group of workers who worked at one of its offices but were on the payroll of an employee leasing agency. The workers claimed that PG&E violated ERISA by failing to include them in benefit plans. A district court dismissed the action, concluding that the workers were not PG&E employees. But the appellate court, applying the nowfamiliar "20 questions" test used by the IRS to determine employee status, decided the suit should go forward.

Intensified scrutiny by the Internal Revenue Service, combined with the rise in lawsuits and agency enforcement, make it essential that companies review the status of all workers who are being treated differently from "regular employees" under benefit programs. The Microsoft case is a prime example of the pitfalls. Prior to 1990, the company had hundreds of so-called temporary workers who had worked there for years. The agreements with these workers said they were not employees and were not entitled to the stock purchase and savings programs offered to "regular" employees.

But the "temps" worked side-by-side with Microsoft employees, performing the same functions under the same supervision.

When the IRS conducted an audit, it found that they should have been considered employees, at least for tax purposes. …

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