Employment Law: The issue of whether a person has been engaged to render a service as an employee or an independent contractor is a legal minefield. While it is true that many people would rather be paid as an independent contractor so that payroll taxes and other items are not deducted from their pay check, if they become sick or disabled, they may switch gears and argue that such deductions should have been made. Therefore, the person’s initial preference as to whether they would like payroll deductions to be taken from their pay check should not be the deciding factor.
This was highlighted by the Viciano v. Microsoft case in which the independent contractors working for Microsoft were actually paid more per hour than normal employees performing comparable jobs. They nevertheless, successfully argued to the Ninth Circuit Court of Appeals that they were actually employees who should have been eligible for the Microsoft Savings Plus Plan (“SPP”). They relied upon an Internal Revenue Service ruling against Microsoft in regard to other workers in a similar situation. The Court sided with them and ordered Microsoft to treat them as employees entitled to participate in the SPP.
The key here is the interplay between a ruling by the IRS in one instance and the application of that ruling by the employees for their own benefit in a different instance. This is akin to a situation in which a State taxing authority finds that independent contractors should be reclassified as employees, and this triggers a reclassification by the Federal taxing authorities. There are many ways that a reclassification can occur, and once it does, it can cascade to other levels within an institution.
Therefore, it is critical that employers determine whether a person is an employee or independent contractor at the outset of the engagement, and without regard to the person’s initial preference.