The following article appeared in the October 10, 1997 edition of The Business Journal and is reprinted with the permission of The Business Journal serving greater Milwaukee.

Gray Areas Smudge Contract Employment

Microsoft, Hygrade cases show risks of tapping ‘contractors’ to fill jobs

By Robert Mullins

A lawsuit pending in U.S. District Court in Milwaukee may help settle the issue of whether people hired to do a job are employees or independent contractors.

Thirteen truck drivers and delivery people are suing a New Jersey distribution firm over money deducted from their paychecks for alleged damage to furniture they delivered. The truck drivers argue that they were employees of the distribution firm and, as such, the employer should cover the damages as the cost of doing business.

But the distribution firm argues the delivery people were independent contractors and the contracts called for deducting for damage to the furniture.

The case of the delivery people vs. Hygrade Delivery Distribution and Delivery Systems Inc., Kearny, N.J., is one of a number of court cases testing the contractual relationship between companies and workers. As firms seek to replace permanent employees with contract employees for more flexible staffing, legal issues arise as to the true nature of that relationship.

The debate over the status of contract employees reached the spotlight this past summer when a federal Court of Appeals in San Francisco ruled against computer software maker Microsoft Corp., Redmond, Wash., in a case involving contract worker benefits.

The appeals court ruled that Microsoft improperly excluded certain workers from lucrative company benefit programs by classifying them as temporary or contract workers, The Wall Street Journal reported. Specifically, they were excluded from a company pension plan and a program to allow them to buy Microsoft stock at about a 15 percent discount to its market price. These benefits were available to permanent employees but not to contract employees, even though the contract employees worked at the company for years and reported to the same managers as the permanent employees, the Journal reported.

The Microsoft case serves as a reminder to companies that use contract employees to specify their employment status in contracts with staffing firms, local employment law attorneys said.

“If you are going to make a commitment to contract for workers, you should seek counsel to avoid the risk,” said Frank Gumina, a partner* with Wessels Sherman, a Milwaukee law firm.

Gumina is representing Hygrade Distribution and Delivery Systems in the case that was filed in federal court here in July, 1996.

Hygrade hired the delivery people, mostly from Milwaukee, Racine and other Wisconsin cities to deliver furniture to customers’ homes.

EMPLOYER RELATIONSHIP?

Although the drivers signed an “independent trucking agreement” with Hygrade that regarded them as independent contractors, the truck drivers argued that it was really an employer-employee relationship.

“The company had such control over the way that they worked that they were employees, not contract employees,” said Arthur Nathan of Racine, the attorney for the drivers.

The case is currently in the discovery phase and a trial is scheduled for July 1988.

Gumina said the Hygrade case and the Microsoft case both revolved around the issue of “control” employers have over contract workers.

The federal Internal Revenue Service has established 20 standards for determining whether a person hired to do a job is an independent contractor or an employee of the firm that hired them. The standards cover such issues as whether the worker must obey instructions of the company, whether the company needs to train the contractor, whether the contractor can set his or her own work schedule, and whether the contractor is considered to have “a continuing relationship” with the company.

The more of the 20 standards that are met, the more clear it is that the person is a contractor or an employee, Gumina said.

But the 20 factors list is not absolute, he said.

An agreement between a company and a contractor are suspect “if the facts underlying the agreement are questionable,” Gumina said. “Even when you are meeting all 20 factors, you may still be in a gray area.”

Another Milwaukee employment attorney said the Microsoft case is a reminder to businesses to carefully word contracts with temporary or contract workers.

“They should examine the language in their benefit plans they don’t want to cover,” said Jack Brahm, an employment attorney with Foley & Lardner, Milwaukee. “They need to make sure they exclude people they want to exclude.”

Even though a legal agreement defines the worker as a contact employee and not a permanent employee, the actual work environment they find themselves in may belie what is stated in the contract, said Ed Levy, senior vice president and general counsel for the National Association of Temporary and Staffing Services (NATSS), a trade group for staffing firms based in Alexandria, Virginia.

A company that uses a temporary employee is considered the customer of the staffing firm.

“Potentially, a court could find that the customer had such control over the worker at the work site, that the customer is the employer,” Levy said.

“The reason that it’s not black or white is that it depends on the facts and the circumstances of each case,” he said.

The NATSS is backing the Staffing Firm Worker Benefits Act introduced this year in Congress, Levy said. The legislation seeks to clarify that staffing firms are the employers for tax purposes and for sponsorship of benefit plans such as health care and pensions, he said.

One staffing firm executive said his firm avoids legal complications by not doing business with independent contractors at all.

“We never have used independent contractors and we never intend to,” said Tony Petullo, president of Olsten Staffing Services, Milwaukee.

Independent contractors are truly independent in that they make their own agreements with client firms, Petullo said. The people that a staffing firm such as Olsten assigns to a company are not independent contractors, but employees of Olsten.

Independent contractors who make their own agreements with companies are supposed to file a form 1099 with the IRS and pay income and Social Security taxes.

While Petullo said people in the staffing industry are following the Microsoft case closely, Petullo considers it an isolated case because it concerns independent contractors, which staffing firms such as Olsten avoid.

TEN FACTORS

Ten common law factors the IRS uses to determine whether a worker is an employee or an independent contractor.

• Contractors set own work hours.
• Contractors are not required to accept full-time work.
• Contractors should have own place of business.
• Employees are required to submit reports.
• Pay to contractors should be by the job rather than by the hour.
• Companies should not have to train contractors.
• Continuing relationship with contractor tends to show employee relationship.
• Contractor has total freedom to plan work day.
• Employees must obey instructions.
• Contractor status weakened when company furnishes tools and materials.

Source: Wessels Sherman
Note: Mr. Gumina is a shareholder of Wessels Sherman. The firm is not a partnership.