American
Federal Tax Reports
VIZCAINO
v. MICROSOFT CORP., Cite as 78 AFTR 2d 96-6690 (97 F.3d 1187, 96-2
USTC P 50533), 10/03/1996 , Code Sec(s) 423
Donna
VIZCAINO; Jon R. Waite; Mark Stout; Geoffrey Culbert; Lesley Stuart;
Thomas Morgan; Elizabeth Spokoiny; Larry Spokoiny, PLAINTIFFS-
APPELLANTS v. MICROSOFT CORPORATION, and its Pension and Welfare
Benefit Plans, et al., DEFENDANTS- APPELLEES.
Case
Information:
|
Code
Sec(s): |
423[pg.
96-6690]
|
| Court
Name:
|
U.S.
Court of Appeals, Ninth Circuit,
|
| Docket
No.:
|
Docket
No. 94- 35770, |
| Date
Decided:
|
10/03/1996.
|
| Prior
History:
|
|
| Tax
Year(s):
|
|
| Disposition:
|
Decision
for Plaintiff. 97 F.3d 1187. |
| Cites:
|
97
F3d 1187, 96-2 USTC P 50533. |
HEADNOTE
1.
Employee plans—misclassification of freelancers—employee stock
purchase plans and savings plans--eligibility for benefits.
Software co.'s freelancers, which co. treated as independent
contractors until IRS reclassified them as common- law employees for
withholding and employment tax purposes, were entitled to benefits
under co.'s savings and employee stock purchase plans. Employee
savings plan was construed as extending participation to all
common-law employees, even those paid by accounts receivable. And
employee stock purchase plan, which incorporated Code
Sec. 423
's terms, expressly extended eligibility to all common-law employees;
and exclusion of such employees would result in loss of plan's Code
Sec. 423
qualified status.
OPINION
Stephen
K. Strong and David F. Stobaugh, Bendich, Stobaugh & Strong,
Seattle, Wash., for the Plaintiffs-Appellants.
James
D. Oswald and Timothy St. Clair Smith, Davies, Roberts & Reid,
Seattle, Wash., for the Defendants-Appellees.
Appeal
from the United States District Court for the Western District of
Washington
Before:
Stephen REINHARDT and Stephen S. TROTT, Circuit Judges, and William W
SCHWARZER, District Judge. *
Opinion
Judge:
REINHARDT,
Circuit Judge:
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 named plaintiffs and the class they represent now appeal as to
two of their claims: a) the claim, made pursuant to section 502(a) of
the Employee Retirement Income Security Act (ERISA), 29 U.S.C.
section 1132(a), that they are entitled to savings benefits under
Microsoft's Savings Plus Plan (SPP); and b) the claim, made pursuant
to Washington state law, 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.
I
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, [pg.
96-6691] 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
named plaintiffs worked for Microsoft in the United States between
1987 and 1990 as freelancers in the company's international division.
1
Some were still working for the company when the suit was filed in
1993, and may still be doing so today. Although hired to work on
specific projects, seven of the eight named plaintiffs had worked on
successive projects for a minimum of two years prior to the time the
action was filed, while the eighth had worked for more than a year.
During that time, they 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 “Microsoft Corporation Independent Contractor
Copyright Assignment and Non-Disclosure Agreements” (non-disclosure
agreements) as well as companion documents entitled “Independent
Contractor/Freelancer Information” (information documents) when
first hired by Microsoft or soon thereafter. The non- disclosure
agreement, a three-page document primarily concerned with
confidentiality, 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 information document likewise 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) examined
Microsoft's employment records to determine whether the company was
in compliance with the tax laws. Applying common-law principles
defining the employer-employee relationship, it 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 [pg.
96-6692] taxes
and the employer's portion of Federal Insurance Contribution Act
(FICA) tax.
2
Microsoft agreed to pay overdue employer withholding taxes and issue
retroactive W-2 forms to allow the freelancers to recover Microsoft's
share of FICA taxes, which they had been required to pay. It
apparently also agreed to pay freelancers retroactively for any
overtime they may have worked.
In
response to the IRS rulings, Microsoft began “converting” its
freelancers. That is, it tendered offers to some freelancers to
become permanent employees; it gave other freelancers the option of
terminating their employment relationship with Microsoft completely
or continuing to work at the company but in the capacity of employees
of a new temporary employment agency, which would provide payroll
services, withhold federal taxes, and pay the employer's portion of
FICA taxes. Most of the plaintiffs who were not given the opportunity
to become permanent employees decided to become “temporary agency
employees” rather than to be fired. However, Donna Vizcaino refused
that option and was discharged. Those who elected “temporary
employee status” noticed little change in the terms or conditions
of their employment; they continued working the same hours on the
same projects and under the same supervisors.
After
learning of the IRS rulings, the plaintiffs sought various employee
benefits, including those now at issue: the ESPP and SPP benefits.
The SPP, which became effective January 1, 1987, is a cash or
deferred salary arrangement under section 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. Under the plan, Microsoft matches fifty percent of the
employee's contribution in any year, with a maximum matching
contribution of three percent of the employee's yearly compensation.
The ESPP, established in January, 1986, permits employees to purchase
company stock at eighty-five percent of the lower of the fair market
value on the first or on the last day of each six-month offering
period through payroll deductions of from two to ten percent.
Employees may purchase shares having a value not exceeding ten
percent of their gross compensation for the offering period.
Microsoft
rejected the plaintiffs' claims for benefits, maintaining that they
were independent contractors who were personally responsible for all
their own benefits. The plaintiffs sought review of the denial of
benefits from the Microsoft plan administrator, who determined that
the plaintiffs were ineligible because they contractually waived any
rights to benefits and, in any event, they were not ““regular,
full time employees” in approved headcount positions.” Although
ruling “technically” only on the denial of ERISA benefits, the
plan administrator concluded, for the same reasons, that the
plaintiffs were ineligible to receive non-ERISA benefits.
The
named plaintiffs brought this action, challenging the denial of
benefits. Following cross-motions for summary judgment, the district
court referred the matter to Magistrate Judge David E. Wilson, who
recommended that an award be made in favor of the plaintiffs on both
their SPP and ESPP claims. First, he concluded that the SPP was
ambiguous with respect to whether it afforded coverage to the
plaintiffs and that because the ambiguity could not be conclusively
resolved by resort to extrinsic evidence, the doctrine of contra
proferentum was applicable. Accordingly, he determined that the plan
instruments should be construed in the plaintiffs' favor and
recommended that the district court find that the plan afforded them
coverage. Second, he concluded that by expressly adopting the
conditions of the Internal Revenue Code, which permit tax
qualification only to those plans that extend participation to all
common-law employees, Microsoft had extended an offer of
participation in the ESPP to all common-law em-
[pg. 96-6693] ployees,
and that the plaintiffs fell into that category. Further, he found
that although Microsoft had intended to exclude freelancers from
participation in the ESPP, it had made the plaintiffs an offer in
that plan and could not rely on their failure to accept it because it
had incorrectly told them that they were ineligible to participate.
Again, the magistrate judge recommended that the district court find
that the plaintiffs were eligible for benefits.
The
magistrate judge also made recommendations on several motions
relating to benefits other than the SPP and ESPP. Specifically, he
recommended denying the plaintiffs' motion for summary judgment in
relation to vacation, sick leave, holidays, short-term disability,
group health and life insurance, and granting Microsoft's motion for
summary judgment on all claims governed by ERISA, except the SPP
claim, and on all claims governed by state law, except the ESPP
claim.
The
district court adopted the magistrate judge's recommendations on all
issues other than the SPP and ESPP claims. It rejected his
recommendations as to those two claims and denied the plaintiffs'
motion for summary judgment as to them, while granting Microsoft's.
The district court first concluded that the SPP “clearly restricts
participation to those individuals on Microsoft's payroll,” that
even if Microsoft could waive the argument that only employees paid
through the payroll were eligible it had not done so, and that
because the intent of the parties was to deny the plaintiffs
participation, the terms of the plan were susceptible to only one
reasonable interpretation. Thus, it said, the doctrine of contra
proferentum was not applicable. Then, addressing the plaintiffs'
eligibility to participate in the ESPP, the district court concluded:
First,
the contract between Microsoft and the plaintiffs specifically stated
that no benefits were provided by Microsoft. Second, because the
terms of the plan were not communicated to the plaintiffs, they could
not have become part of the contract between them and Microsoft.
Thus, the plaintiffs had no expectation of receiving any benefits.
Finally, as Microsoft asserts, I.R.C. section 423 does not create a
private right of action by the plaintiffs against Microsoft.
The
named plaintiffs and the class they represent appeal, but only with
respect to the SPP and ESPP claims.
II
[1]
ERISA
is a remedial statute designed to protect the interests of employees
in pension and welfare benefit plans. Scott v. Gulf Oil Corp., 754
F.2d 1499, 1501 (9th Cir. 1985). It creates a federal cause of action
for recovery of benefits due under the terms of pension and welfare
plans. 29 U.S.C. section 1132(a)(1)(B). 3
Congress intended the courts to fashion a body of federal common law
to govern ERISA suits. Richardson v. Pension Plan of Bethlehem Steel,
67 F.3d 1462, 1465 (9th Cir. 1995); Scott, 754 F.2d at 1501- 02.
Courts, therefore, may borrow from state law where appropriate, but
must be guided by the policies expressed in ERISA and other federal
labor laws. Richardson, 67 F.3d at 1465; Scott, 754 F.2d at 1502.
The
parties agree that the SPP is a welfare benefits plan governed by
ERISA. See 29 U.S.C. section 1002(1)(A). They disagree, however, on
the question whether the plaintiffs qualify for benefits under the
terms of the plan. The SPP provides that “[e]ach employee who is 18
years of age or older and who has been employed for six months shall
be eligible to participate in this Plan,” and defines “employee”
to mean “any
common law employee
who receives remuneration for personal services rendered to the
employer and who
is on the United States payroll of the employer
.” (Emphasis added). Because the named plaintiffs were indisputably
over eighteen years of age and were employed for more than six
months, and because, as Microsoft concedes, they were generally
common-law employees who rendered per-
[pg. 96-6694] sonal
services to Microsoft,
4
the issue before us is only whether they were “on the United States
payroll of the employer.” Microsoft contends that the phrase, which
is not defined in the plan, refers to employees paid through its
payroll department, and that the named plaintiffs were ineligible to
participate in the SPP because they were paid through the accounts
receivable department. The plaintiffs assert that the phrase refers
to “Microsoft employees who are paid from United States sources,”
excluding “nonresident alien employees of foreign subsidiaries
whose pensions are generally governed by foreign law.”
In
the usual case, we review a denial of benefits challenged under
section 1132(a)(1)(B) de novo “unless the benefit plan gives the
administrator or fiduciary discretionary authority to determine
eligibility for benefits or to construe the terms of the plan.”
Nelson v. EG & G Energy Measurements Group, Inc., 37 F.3d 1384,
1388 (9th Cir. 1994).
5
Where such discretion is afforded, the standard of review may vary
with the type or nature of the plan. Taft v. Equitable Life Assurance
Soc'y, 9 F.3d 1469, 1474 (9th Cir. 1993) (stating that we review
decisions of administrators who are also employers of plan
beneficiaries under ““a more stringent
version of the abuse of discretion standard””) (citation
omitted).
In
the case before us, the administrator is a Microsoft officer. We need
not, however, determine what standard would ordinarily be applicable
to review of a denial of benefits under the SPP. For, while the plan
gives the administrator discretion to construe its provisions, in
denying the plaintiffs' claims the administrator did not construe the
phrase “on the United States payroll of the employer,” the phrase
in the plan on which eligibility depends. Oddly, Microsoft did not
raise its “United States payroll” theory before the plan
administrator but argued it for the first time to the magistrate
judge in the course of its motion for summary judgment.
6
The plaintiffs initially objected to consideration of the “United
States payroll” argument because it did not appear in the
administrative record, but then waived the objection and, like
Microsoft, urged the magistrate judge and the district judge to
address it. Both parties have consistently maintained that a remand
to the plan administrator would serve no useful purpose. See CR Vol.
12, Document 152, at 22-23; CR. Vol. 12, Document 169, at 12 n.11.
Because both parties urged the district court, and now this court, to
determine the meaning of the disputed provision, they have waived any
possible objection to the failure to remand. Accordingly, we are free
to decide Microsoft's latest argument in the normal course, as if the
plan administrator had no discretion to construe the plan. Cf.
Nelson, 37 F.3d at 1389 (holding that our review is de novo where the
plan administrator, although having discretion to construe the plan,
has not done so). 7
We
interpret the provisions of a plan by looking to its terms and to
other manifestations of intent. Nelson, 37 F.3d at 1389. We interpret
terms in ERISA plans ““in an ordinary and popular sense as would
a [person] of average intelligence and experience.”” Richardson,
67 F.3d at 1465 (quoting Evans v. Safeco Life Ins. Co., 916 F.2d
1437, 1441 (9th Cir. 1990)); Babikian v. Paul Revere Life Ins. Co.,
63 F.3d 837, 840 (9th Cir. 1995); accord Meredith v. [pg.
96-6695] Allsteel
Incorp., 11 F.3d 1354, 1358 (7th Cir. 1993). ““We will not
artificially create ambiguity where none exists. If a reasonable
interpretation favors the insurer and any other interpretation would
be strained, no compulsion exists to torture or twist the language of
the policy.”” Babikian, 63 F.3d at 840 (quoting Evans, 916 F.2d
at 1441 (quoting Allstate Ins. Co. v. Ellison, 757 F.2d 1042, 1044
(9th Cir. 1985))). We find “[a] term is ambiguous if it is subject
to reasonable alternative interpretations.” Hickey v. A.E. Staley
Mfg., 995 F.2d 1385, 1389 (9th Cir. 1993) (citation and internal
quotation marks omitted); see Babikian, 63 F.3d at 840.
When
a plan is ambiguous on its face, we may, and typically do, consider
extrinsic evidence to interpret it. Richardson, 67 F.3d at 1466;
Hickey, 995 F.2d at 1389. If the ambiguity persists even after resort
to extrinsic evidence, we generally apply the rule of contra
proferentum and construe the ambiguity against the drafter. See
Barnes v. Independent Auto. Dealers of Cal., 64 F.3d 1389, 1393 (9th
Cir. 1995) (“We must construe ambiguities in an ERISA plan against
the drafter and in favor of the insured.”); Babikian, 63 F.3d at
840; Mongeluzo v. Baxter Travenol Long Term Disability Benefit Plan,
46 F.3d 938, 942 (9th Cir. 1995) (noting that Kunin v. Benefit Trust
Life Ins. Co., 910 F.2d 534, 539- 41 (9th Cir.), cert. denied, 498
U.S. 1013 (1990), adopted the well-established doctrine of contra
proferentum as federal common law).
Accordingly,
our first task is to determine whether the phrase “on the United
States payroll of the employer” is susceptible to more than one
reasonable interpretation. In doing so, we must examine the phrase in
light of any relevant circumstances that may shed light on its
meaning. Here, the phrase is used in connection with a company that
is engaged in a constantly expanding business venture of major
proportions on a world-wide basis. Because “payroll means ”a list
of persons to be paid, with the amount due each,“ or ”the total
number of people employed by a business firm or organization,“
Random House College Dictionary 976 (1980), the phrase ”on the
United States payroll of the employer,“ when accorded its ordinary
meaning, may plausibly refer to those persons who are on the list of,
or are among the total number of, persons employed by Microsoft and
paid from its United States accounts, as opposed to those paid by its
foreign subsidiaries or out of its foreign accounts. Thus, we believe
that the plan, consistent with the ordinary meaning of its terms,
reasonably can be read to extend eligibility to the plaintiffs. 8
While
an argument could well be made that the plaintiffs' is the only
plausible reading of the plan, we choose not to rely on that
assertion. Instead, we assume that Microsoft's interpretation is also
a reasonable one, and accept its contention that the phrase could
reasonably be construed to refer only to those employees paid through
the payroll department. Assuming, then, that the terms of the SPP are
susceptible to two reasonable interpretations and therefore are
ambiguous, our next step is to determine whether the ambiguity can be
resolved by resort to extrinsic evidence.
Microsoft
contends that the extrinsic evidence, including the non-disclosure
agreements and the information documents, demonstrates its intent not
to provide freelancers or independent contractors with employee
benefits and that this intent necessitates adoption of its
interpretation of the disputed phrase. 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 free
lancers or independent contractors. They were common-law employ-
[pg. 96-6696] ees,
9
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.
To the extent that we may glean any evidence of an intent as to the
more pertinent theoretical question, that evidence is highly
speculative and would be insufficient to resolve in Microsoft's favor
the ambiguity that it created when it chose to define eligibility in
terms of common-law employees “on the United States payroll of the
employer.”
Microsoft
also contends that extrinsic evidence establishes its intent to
restrict eligibility to those common-law employees who were paid
through the payroll department. It argues that compliance with
relevant tax code provisions (I.R.C. sections 401(k) & (m))
required computation of compensation, deferral, and matching
contribution data, and that the necessary computations could
practically be made only through its automated payroll department. It
maintains that employees who were paid through the accounts
receivable department, as opposed to the payroll department, could
not be paid in a manner that would comply with IRS requirements and
that, accordingly, it is clear that those employees were not intended
to be covered in the plan.
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.
In
any event, to interpret the SPP as distinguishing between common-law
employees who were paid through the payroll department and those who
were not would impute to Microsoft an unlawful purpose: to pay some
common-law employees without making the requisite payroll deductions
and contributions, the very tax violation that subsequently
engendered this litigation. We should not, if at all possible, favor
an interpretation that has such an unlawful effect, and we see no
reason to do so here. See Meredith v. Allsteel, Inc., 11 F.3d 1354,
1358 (7th Cir. 1993) (“[A]n interpretation which gives a
reasonable, lawful, and effective meaning to all the terms is
preferred to an interpretation which leaves a part unreasonable,
unlawful, or of no effect[.]”) (citation and internal quotation
marks omitted). Thus, the extrinsic evidence on which Microsoft
relies does not resolve the ambiguity in its favor.
In
light of the rule of contra proferentum, the plaintiffs would prevail
whether the extrinsic evidence supported their interpretation of the
disputed phrase or whether the extrinsic evidence on which they rely
was also deemed immaterial. For purposes of our disposition, we may
assume the latter to be the case. With that assumption in mind, we
find, as did the magistrate judge, that “the correct meaning of the
terms in question, given the record and the agreed upon facts in this
case, cannot be determined by resort to the extrinsic evidence,”
and that, therefore, the rule of contra proferentum is applicable.
[pg.
96-6697]
Microsoft
contends that the rule of contra proferentum should not be applied in
this case because it has been applied generally in ERISA cases only
for the purpose of granting benefits under insurance contracts.
Microsoft is incorrect. It is true that the rule of contra
proferentum, which is strictly applied in the interpretation of
insurance contracts, is not automatically applied to all
other contracts. Eley v. Boeing Co., 945 F.2d 276, 280 (9th Cir.
1991). We have declined to apply the rule to “ERISA plans that are
the product of collective bargaining agreements reached after
arms-length bargaining between parties of equal power.” Patterson
v. Hughes Aircraft Co., 11 F.3d 948, 950 n.3 (9th Cir. 1993); see
Eley, 945 F.2d at 280 (distinguishing Kunin because the plan was the
result of a collective bargaining agreement); see also Kunin, 910
F.2d at 540. This case does not involve such a plan, and we see no
reason to create a new exception to the rule we generally follow in
ERISA cases. See Barnes, 64 F.3d at 1393.
We
have also held that when an administrator has exercised his
discretion to construe a plan pursuant to discretionary authority
vested in him by the plan, we will not apply the rule of contra
proferentum in our review of his discretionary ruling. Winters v.
Costco Wholesale Corporation, 49 F.3d 550, 554 (9th Cir. 1995).
Microsoft argues that this case falls within this exception. Clearly,
it would be inconsistent to review under an abuse of discretion
standard and then to apply the rule of contra proferentum. However,
as we explained earlier, the administrator did not construe the
disputed terms of the plan, and therefore our review is de novo. When
we review under a de novo standard, there is no similar
inconsistency, and thus no reason not to apply the rule of contra
proferentum.
Accordingly,
we agree with the magistrate judge, who concluded that Microsoft,
“[a]s the drafter of the plan, ...could easily have accomplished
the limitation it now urges through the use of more explicit
language....” 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. We note that in doing so, we
construe the phrase “on the United States payroll of the employer”
in the manner we believe to be the most plausible anyway. Put more
directly, were we not to apply the rule of contra proferentum, but
simply to select the more reasonable of the competing
interpretations, we would read the disputed phrase as do the
plaintiffs. Thus, we would conclude in any event that the plan must
be construed as extending participation to all persons employed by
Microsoft and paid from its United State accounts, and not as
excluding from participation those employees who are paid through the
accounts receivable department rather than the payroll department.
III
The
parties agree that the plaintiffs' claims for stock-option benefits
under the ESPP are not subject to ERISA but rather are governed by
Washington state law. The plaintiffs contend that the ESPP, through
its incorporation of section 423 of the Internal Revenue Code,
extended eligibility to participate in the plan to all common- law
employees, including themselves, and that they were therefore
entitled to exercise the options. Microsoft contends that the
plaintiffs are not entitled to ESPP benefits because: (1) the
plaintiffs have no right to enforce section 423; (2) the plaintiffs
signed instruments stating that they would receive no benefits; and
(3) the ESPP was never communicated to the plaintiffs, and they
therefore did not rely on the offer in continuing their employment.
We address these contentions in turn.
First,
we hold that the named plaintiffs and the class they represent 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.” Multicare Medical Ctr. v. D.S.H.S., 790
P.2d 124, 133 (Wash. 1990). Through its incorporation of the tax code
provision into the plan, Microsoft manifested an objective intent to
make all common-law em-
[pg. 96-6698] ployees,
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). The requirements of section 423 dictate that “options are
to be granted to all employees of any corporation whose employees are
granted any of such options by reason of their employment by such
corporation.” 26 U.S.C. section 423(b)(4). Because the term
“employees ” in section 423 is construed to refer to “common-law
employees,” 10
the ESPP, when construed in a manner consistent with the requirements
of section 423, extends participation to all common-law employees not
covered by one of the express exceptions set forth in the plan. 11
Accordingly, we find that the ESPP, through its incorporation of
section 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
argues that section 423 does not grant the plaintiffs a private right
of enforcement. We conclude, as did the magistrate judge, that
Microsoft's argument is without merit. This case is not about a
private right of action. It is about the construction of the terms of
a plan. As the magistrate judge cogently stated,
Plaintiffs
do not contend that section 423, per se, provides them with a private
right of enforcement. What they do contend is that Microsoft
expressly incorporated section 423's terms into its ESPP, thereby
making an offer to its employees, including its “common law
employees,” a classification in which they belonged.
Because
the plan, properly construed, extends participation to all common-law
employees, the plaintiffs may enforce the plan in the same manner as
would any of Microsoft's other employees. They may, and did, assert a
cause of action for breach of contract, not for violation of the
Internal Revenue Code. 12
Microsoft
next contends that the non- disclosure agreements and the information
documents 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. 13
Second, the employment instruments, if construed to exclude the
plaintiffs from receiving ESPP benefits, would conflict with the
plan's express incorporation of section 423. Although Microsoft may
have generally intended to exclude individuals who were in [pg.
96-6699] 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 section 423 in the plan,
because the exclusion of common- law employees not otherwise excepted
would result in the loss of the plan's tax qualification.
Moreover,
we find nothing inconsistent between the employment instruments
signed by the plaintiffs, and an offer of participation in the ESPP.
The statements in those instruments that speak in terms of the
employee being “responsible for...other benefits” or “responsible
to pay all [his] own insurance and benefits” apply most naturally
to health and welfare benefits, or similar employee protection
policies, which an employee would have to pay on his own if the
employer did not provide the benefits. In fact, we find the
instruments fully consistent with the plaintiffs' participation in
the ESPP, because, under the terms of the plan, it is the employee
who makes the stock option payment, not Microsoft. Thus, it is
the employee who is “responsible” for paying for the benefit.
Accordingly, even if the incorporation of section 423 did not
override the instruments signed by the plaintiffs, we would conclude
that nothing in those instruments serves to waive or otherwise
foreclose the plaintiffs' eligibility for participation in the ESPP.
14
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. As a preliminary matter, we find
Microsoft's reliance on policy manual cases such as Kimbro v.
Atlantic Richfield Company, 889 F.2d 869, 879 (9th Cir. 1989), to be
misplaced. In Kimbro, we stated that under Washington precedent, an
employer may be contractually bound by promises in employee handbooks
or manuals to provide specific treatment in specific situations only
if an employee can show that the promise induced his reliance —
that is, “that the promise induced him to remain on the job or not
seek other employment.” 889 F.2d at 879 (quoting Thompson v. St.
Regis Paper Co., 685 P.2d 1081, 1088 (Wash. 1984)). However, many
policy manuals are primarily designed for internal guidance and such
manuals are far different in nature and legal effect than
tax-qualified benefit plans that fix the rights of their
beneficiaries. 15
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 Dangott v. ASG Industries, Inc., 558 P.2d
379, 382 (Okla. 1976), 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.” Id. at 383 (emphasis added).
16
Here, the plaintiffs knew of the plan but were wrongly told by
Microsoft that it did not apply to them. We are not aware of any
Washington case involving a similar set of circumstances, but think
it likely that if presented with the question, the Washington Supreme
Court would adopt the Dangott approach, at least under the
circumstances presented in this case.
Microsoft
itself recognizes “the key distinction between offers actually made
to a class of employees, as to which some courts enforce the offer on
behalf of any
class member, regardless of individual [pg.
96-6700] knowledge
of the offer, and plans as to which no offer is made to the class,
and the class is expressly notified no offer is being made.”
(Emphasis added). Here, the plan was distributed to Microsoft
employees generally. By its terms, the plan extends participation to
the class of common- law employees, and hence offers ESPP benefits to
all members of that class. 17
Thus, applying the “key” distinction recognized by Microsoft, an
offer was actually made to a class of employees of which the
plaintiffs were a part, and it may be enforced on their behalf
regardless of their individual knowledge regarding the offer.
We
are not required to rely, however, on the Dangott 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.” 17A Am. Jur.
2d Contracts section 85 (1991 & Supp. 1996).“[T]he optionor may
not make statements or representations calculated to cause delay,
[or] fail to furnish [necessary] information....” Id. 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.” Highlands Plaza,
Inc. v. Viking Investment Corp., 435 P.2d 669, 676 (Wash. 1967)
(quoting 5 Williston on Contracts section 677 (3d ed. 1961); James S.
Black & Co. v. P & R Co., 530 P.2d 722, 724 (Wash. Ct. App.
1975) (same); Refrigeration Eng'g Co. v. McKay, 486 P.2d 304, 309
(Wash. Ct. App. 1971) (same); see Restatement of Contracts section
295 (1932).
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.
Conclusion
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.
Reversed
and Remanded.
Dissent
of Circuit Judge Trott
Judge:
TROTT,
Circuit Judge, Dissenting:
I
The
Savings Plus Plan
Microsoft
has a payroll
department, and it has a separate accounts
payable
department. Because these plaintiffs were regarded both by Microsoft
and
by themselves as independent contractors or freelancers, Microsoft
did not budget or pay for them through the payroll department, but
through the accounts payable de-
[pg. 96-6701] partment.
This commonplace distinction is fatal to the plaintiff's request for
Savings Plus Plan (“SPP”) benefits because to be eligible for
these benefits, they have to have been on the employer's “payroll.”
The Plan itself so states. As freelancers, the plaintiffs worked for
Microsoft with the clear understanding that they were not entitled to
the benefits they now seek. They knew Microsoft paid them based on
the submission of invoices and out of accounts payable. Nevertheless,
they now contend — without a foot to stand on — that they were
indeed on Microsoft's “payroll” and thus eligible for SPP
benefits. In my reading of this record, they were not on Microsoft's
“payroll,” period. I agree with the district court's analysis.
All this may seem formalistic to the casual reader, but it was an
important distinction to Microsoft, and
to these workers when they agreed as freelancers to perform work for
this company. How the plaintiffs got on Microsoft's payroll budget
from the accounts payable department is a strange tale based not on
the facts, but on an immaculate patching together by the majority of
a series of interpretations, constructions, presumptions,
plausibilities, assertions, and assumptions, topped off by an
irrelevant definition of “payroll” in a Random House dictionary.
This amalgam is driven in turn by an IRS ruling that the majority
takes way beyond its necessary reach. The majority's strained and
Urbanesque journey belies its claim that it does not create ambiguity
where none exists. In the context of this case — forget Random
House — “payroll” has an ascertainable meaning illustrated in
large measure by the existence in Microsoft of an alternative method
of paying people for their work: out of accounts payable. Anyone
familiar with business is familiar with this distinction. Where is
the ambiguity but in the eyes of uninitiated outsiders? I discern
none, and the plaintiffs saw none either when they voluntarily worked
under these circumstances. As the majority indicates, we interpret
terms in ERISA plans “in an ordinary and popular sense as would a
person of average intelligence and experience,” but we should do so
with an eye to what those hypothetical people actually know (e.g.,
that they did not bargain for the payroll benefits they now seek). To
do otherwise is to engage in head-in-the-sand thinking. All the
maxims invoked by the majority to support their holdings are useless
unless they square with the facts. If I know
I have a “no benefits” contract, for example, what good does it
do to ask what the ordinary average Babbitt (George, not Bruce) might
believe after reading a Random House dictionary? These plaintiffs
were university-educated. One had a law degree. They knew
what they were getting into, and contra proferentum should not
suggest otherwise. The majority's preference for answering this issue
as a theoretical rather than a real question is wrong. But for the
sake of argument, we can ignore the contextual definition of
“payroll” and concede the existence of an ambiguity created by
the words “United States.” Then we can examine extrinsic evidence
to see if the plaintiffs have a righteous claim to this benefit.
Here, their argument becomes tenuous in the extreme. The plaintiffs
have not presented a shred of relevant extrinsic evidence that would
justify their
belief (after signing the documents they did and after accepting the
contractual relationship governing this case) that they were on the
payroll and entitled to any of the payroll benefits of regular
employees, including the SPP. Plaintiff Vizcaino's answers in her
deposition testimony, answers representative of the testimony of all
plaintiffs, adequately illustrate this point:
Q.
You didn't ask anything [during your initial interview] about the
benefits on this job?
A.
Well, yeah, I must have I guess. I don't remember what we said but, I
guess it — yeah, we
weren't going to get benefits at that time.
Q.
Okay. And just so we understand each other, when you say benefits —
let me rephrase the question. By benefits I assume that you mean, and
correct me if I'm wrong, things like holidays, vacation, sick leave,
other kinds of paid [pg.
96-6702] leave,
participation in the employee stock purchase plans, that kind of
thing. Is that the way you mean benefits?
A.
Yeah.
Q.
Okay. Now, at the end of this conversation, this interview with Ms.
Carter, I assume it was at the end of the conversation, did you
accept the position on the terms that had been discussed in that
interview?
A.
Yes.
(emphasis
added). Equally telling is the deposition testimony of plaintiff
Culbert:
Q.
Did you ever hear anybody use the term “regular employee” during
your time at Microsoft when you were a freelancer?
A.
I do recall, yes.
Q.
And when that term was used did you understand it to refer to people
who were salaried as opposed to freelancers?
A.
Yes.
Q.
So that until this status change [when Culbert became a regular
employee] in October of 1989 you were never a regular employee at
Microsoft?
A.
I worked at Microsoft consistently.
Q.
But you were never what was referred to as a regular employee?
A.
That's correct. I was never what was referred to as a regular
employee at that time, correct.
Q.
And I take it at no time before October of 1989 did you ever apply
for benefits of any type from Microsoft: sick leave, vacation,
holidays, participation in the employee stock purchase program?
A.
I didn't apply for those things.
****
Q.
But during the course of the next few weeks or months [after
beginning work at Microsoft] it became clear to you that being a
freelancer meant that you got no benefits?
A.
That it meant something, if I may, it meant that in some ways I
was different from the regular salaried employees with whom I worked.
Q.
But among
those ways of which it made [sic] you different was that you got no
benefits?
A.
Correct.
(emphasis
added). In the light of this testimony, this case becomes just
another example of litigants trying to force their feet into glass
slippers that do not fit. As the magistrate judge correctly observed,
these plaintiffs had express contracts for “no benefits.” Why
they would accept such an arrangement without
benefits is also clear from the record: Microsoft paid them more cash
on an hourly basis than regular employees. Plaintiff Culbert
explains:
Q.
Did you have any understanding at that time [when you became a
regular employee of Microsoft] about whether it was common for
freelancers to be making more on an hourly basis than the equivalent
hourly rate for people who were regular salaried employees?
A.
Yes.
Q.
What was your understanding?
A.
That in general freelance production editor [sic] on a gross cash
basis would stand to make more than a regular staff employee.
Nevertheless,
the plaintiffs brought this lawsuit pursuing not only SPP and stock
purchase benefits, but vacation, sick leave, holidays, short-term
disability, and group health and life insurance as well, i.e., the
best of both worlds. With all respect to my colleagues, their
atmospheric use of the IRS's determination to shore up their analysis
by suggesting Microsoft is a tax cheat is gratuitous and
inappropriate. I do not discern on the part of Microsoft an unlawful
purpose to violate the tax laws. What the IRS does for the purpose of
collecting its due — both early and from the most reliable pocket —
need not cast a dark light on a relationship with which both
Microsoft and these employees were comfortable. It simply does not
follow either from the IRS's ruling or [pg.
96-6703] from
Microsoft's compliance with it (1) that these plaintiffs were payroll
employees or (2) that to deny the plaintiffs' claim gives Microsoft
unacceptably unclean hands. To quote the United States General
Accounting Office in June of 1996,
[M]any
employers struggle in making the [employee/independent contractor]
classification decision because of the unclear rules. Until the
classification rules are clarified, we are not optimistic that the
confusion over who is an independent contractor and who is an
employee can be avoided. The Treasury Department characterized the
situation in 1991 in the same terms as it used in 1982; namely, that
“applying the [20 factor] common law test in employment tax issues
does not yield clear, consistent, or satisfactory answers, and
reasonable persons may differ as to the correct classification.” 1
As
the magistrate judge observed, “[p]laintiffs concede that the IRS
ruling...is in no way binding on this court.” The IRS's familiar
aggressive tax collection position and Microsoft's payroll argument
can exist independently of each other without doing violence to the
law.
2
By tone and by choice of words the majority seems subtly to accuse
Microsoft of reprehensible conduct towards its workers. Microsoft is
identified as “refusing” to pay its workers fringe benefits as
though it did something wrong in creating the contractual
relationships in this case. Later in the opinion the majority charges
Microsoft with “misrepresenting” to the plaintiffs their
employment status and with taking advantage of them. They clothe
Microsoft with a Dickensian anti-labor attitude. Such
characterizations spring full-bloom from the first sentence of the
majority's opinion where “avoiding payment of employee benefits”
and “increasing profits” foreshadow the negative coloration of
the infidel Microsoft's role in this drama. The majority's tone and
accusations go against the factual record as developed and described
by the magistrate judge in his Report and Recommendation dated April
15, 1994:
Plaintiffs
offer the explanation that Microsoft really knew all along that they
were regular “employees” entitled to benefits, and hid this
entitlement from them by “mislabelling” them as independent
contractors or freelancers. This
argument is not persuasive.
“Mislabelling” as used by Plaintiffs implies a unilateral act by
Microsoft which in some way hid their true status from Plaintiffs. In
truth, Microsoft was quite open about the terms of its working
relationships with plaintiffs on the subject of employee benefits
and each
of the plaintiffs fully understood and accepted those terms.
(emphasis
added). Neither federal nor state law mandates the benefits sought,
nor does the applicable collective bargaining agreement. Microsoft
was free to offer the benefits in return for work as Microsoft saw
fit. Thus, the majority seems to overlook the constitutional right of
private parties freely to enter into contracts of their own choice
and benefit. It is not for the courts under these circumstances to
add clauses to agreements that the parties never contemplated, or to
accuse parties of attitudes and behavior of which they are not
guilty. Congress designed ERISA to protect benefits workers already
had, not to give them benefits for which they did not contract. See
18 U.S.C. section 1001 (Congressional findings and declaration of
policy).
II
The
Employee Stock Purchase Plan
The
plaintiffs' second claim of entitlement is to stock option benefits
under Microsoft's Employee Stock Purchase Plan (“ESPP”), a claim
we process under the law of the State of Washington. The law in [pg.
96-6704] question
is the Washington law of contracts
. As with the plaintiffs' first claim, the majority engages in
analytical gymnastics to find a contractual right where none exists.
No one disputes that the offer made by Microsoft and accepted by the
plaintiffs explicitly excluded the ESPP benefits now sought.
Plaintiffs freely admit as demonstrated earlier that they never
expected when these contracts were formed to receive any such
benefits. Microsoft never offered the benefits to the plaintiffs,
either bilaterally or unilaterally, the plaintiffs never accepted
them, and the plaintiffs never relied on them in any way whatsoever
as part of their compensation package. As the magistrate judge found
in his Report and Recommendation,
Microsoft
indeed offered such benefits to its “regular employees” and
described them in employee handbooks issued to regular employees, but
not to freelancers. Moreover, it is not contended by any Plaintiff
that he/she was ever offered such benefits by any Microsoft
spokesperson, or even a handbook, and to the extent that any of them
saw the books, they understood that they were not
entitled
to them.
Thus,
without an offer, without acceptance, without consideration, and
without a meeting of the minds, the majority creates by operation of
law a contractual right on behalf of these plaintiffs that they never
even contemplated until this lawsuit began. This unpredictable result
is so radical that it trespasses on Article I, section 10, Clause 1
of the Constitution, which prohibits a state from impairing the
obligation of contracts. Neither through legislation nor by judicial
act could a state severely transmogrify a contractual obligation in
this manner and force one party to it to confer such benefits on the
other. The result in this case resembles the thrust of the Minnesota
statute struck down by the Supreme Court in Allied Structural Steel
Co. v. Spannus, 438 U.S. 234 (1978). In that case, Minnesota had
enacted a law requiring certain private employers who provided
pension benefits under a plan meeting the qualifications of section
401 of the Internal Revenue Code to provide pension benefits
“conspicuously beyond those that [the company] had voluntarily
agreed to undertake.” Id. at 420. The Supreme Court held this
statute unconstitutional under the contracts clause (1) because it
failed to deal with a “broad, generalized economic or social
problem,” and (2) because of its narrow aim at only certain
employers. The Court noted also in the employer's favor (1) that the
employees of Allied Structural never relied on the statutory benefit
at issue, and (2) that the statute “compelled the employer to
exceed bargained-for expectations and nullified an express term of
the pension plan.” Id. at 246 n.18. Justice Stewart said,
The
severity of an impairment of contractual obligations can be measured
by the factors that reflect the high value the framers placed on the
protection of private contracts. Contracts enable individuals to
order their personal and business affairs according to their
particular needs and interests. Once arranged, those rights and
obligations are binding under the law, and the parties are entitled
to rely on them.
Id.
at 245.
3
Because we are bound to apply state law to this dispute, we have no
authority to impair the obligation of these contracts either. To do
so is tantamount to depriving Microsoft of property without due
process of law.
Conclusion
The
IRS's understandably tough enforcement program not only collects more
money for the government, but it now has the unforeseen and
unnecessary consequence of forcing employers retroactively to extend
to workers optional benefits for which they did not contract. I
perceive no need whatsoever to permit the IRS's ruling to spill out
of its unique context and to do damage to contracts between companies
[pg.
96-6705] and
workers. The ruling and the contracts can exist independently of each
other. Peaceful coexistence simply means that all workers will be
made to pay their taxes, no more, no less, and that all workers will
get that for which they bargained. Thus, I respectfully dissent.
*
The
Honorable William W Schwarzer, Senior United States District Judge
for the Northern District of California, sitting by designation.
1
The
district court certified a class comprising
[a]ll
persons employed by Microsoft Corporation in the United States who
are denied employee benefits because they are considered independent
contractors or employees of third-party employment agencies, but who
meet the definition of employees of Microsoft Corporation under the
common law.
Microsoft
did not object to the class certification or contest the
determination that freelancers or independent contractors are proper
class members but sought to reserve the question as to whether
certain specific individuals fell within the class as well as the
question of the amounts due class members by way of benefits or
damages. See ER at 27. See also infra n.4.
2
“[B]ased
on information received from Microsoft and on information received
from a representative sampling of the workers in that job position,”
the IRS concluded in one of several letter rulings that because
“Microsoft either exercised, or retained the right to exercise,
direction over the services performed,” those persons employed as
testers were employees of Microsoft “for purposes of the Federal
Insurance Contribution Act, the Federal Unemployment Tax Act, and for
Collection of Income Tax at the Source on Wages.” The IRS issued
similar findings regarding formatters, proofreaders, and production
editors.
3
Section
1132(a)(1)(B) provides, in pertinent part, that a “civil action may
be brought...by a participant or beneficiary...to recover benefits
due to him under
the terms of the plan....”
(Emphasis added).
4
As
the magistrate judge stated in his Report and Recommendations,
Microsoft conceded the fact that the named plaintiffs and the class
they represent generally were common-law employees. ER at 144,
147-48. See also supra n.1. Microsoft reserved only the right to
object to the employment status of particular plaintiffs during
certain periods of their tenure with Microsoft and to contest the
amount of damages or benefits to be awarded. CR Vol. 12, Document
152, at 9 n.5. For example, Microsoft stated that “for some period
of time, Plaintiff Morgan performed proofreading services from his
home, with an uncertain amount of supervision.” Id. Questions
raising legitimate disputes regarding specific individuals'
eligibility are left to the district court for resolution following
remand.
5
When
the plan does not grant the plan administrator discretion to construe
its provisions, the district court reviews de novo, and our review is
also de novo. Mongeluzo v. Baxter Travenol Long Term Disability
Benefit Plan, 46 F.3d 938, 942 (9th Cir. 1995).
6
Microsoft
prevailed before the plan administrator on the theory that the
plaintiffs were not “regular, full-time employees” in “approved
headcount positions,” a theory that it has since abandoned.
7
This
case is not controlled by Saffle v. Sierra Pacific Power Company, 85
F.3d 455 (9th Cir. 1996). There, we held that where a plan
administrator misconstrues a plan, the court should not determine
whether benefits are to be awarded under a proper construction;
instead, it should remand to the plan administrator for it to make a
determination under the plan, properly construed. Here, the term that
determines the plaintiff's eligibility was not construed at all by
the plan administrator. More important, both parties have agreed that
a remand would be inappropriate. The parties are, of course, free to
waive any right they may have to a construction by a plan
administrator.
8
There
may be a slight variation on the interpretation set forth above that
is equally plausible and would similarly serve to extend eligibility
to the plaintiffs. Under that variation, the disputed phrase would be
construed as referring to all persons employed by Microsoft in the
United States. However, we need not examine that possibility here.
9
The
instruments signed by the plaintiffs label them as independent
contractors. Those instruments, however, do not control the
plaintiffs' employment status. See Daughtrey v. Honeywell, 3 F.3d
1488, 1492 (11th Cir. 1993) (“The employment status of an
individual for the purposes of ERISA is not determined by the label
used in the contract between the parties.”). Accordingly, the label
used here does not determine whether the plaintiffs are or are not
common-law employees. The record does, and as Microsoft has conceded,
the named plaintiffs and those they represent are generally
common-law employees.
10
Treasury
Regulation section 1.423-1(b) cross-references section 1.421-7(h) for
rules relating to the employment relationship. That subsection, in
turn, provides that the determination whether an optionee is an
employee will be made in accordance with section 3401(c)- 1(a), which
states that the term “employee” includes every individual
performing services for another where the legal relationship between
the two is that of employer and employee. Section 31.3401(c)-1(b)
summarizes the common-law test of employee, and section 31.3401(c)-
1(c) provides that where the legal relationship exists, the labels
used by the parties to describe the relationship are of no
consequence.
11
Section
423(b)(4) sets forth four express exceptions. The ESPP incorporates
two of them, as follows:
[a]ny
employee of the Company or any of its subsidiaries who is in the
employ of the Company at one of the offering dates is eligible to
participate in the Plan, except (a) employees whose customary
employment is 20 hours or less per week, and (b) employees whose
customary employment is for not more than five months in the calendar
year.
The
plaintiffs fit neither of these exceptions.
12
A
similar approach obtains with respect to plans that require
compliance with the provisions of ERISA. While Internal Revenue Code
provisions and Treasury regulations do not create substantive rights
under ERISA, if an ERISA plan explicitly provides that it is to be
construed to meet such provisions, courts look to them in determining
employee eligibility for participation in the plan. See Crouch v.
Mo-Kan Iron Workers Welfare Fund, 740 F.2d 805, 809 (10th Cir. 1984)
(“Because the pension plan states that it is to be construed to
meet the requirements of ERISA, [the participating and vesting rules
require the inclusion of a person in plaintiff's position in the
plan,] and there are obvious and significant benefits to meeting
those requirements, we conclude that we must construe the plan as
including plaintiff as a participant.”); see also Abraham v. Exxon
Corp., 85 F.3d 1126, 1131 (5th Cir. 1996) (finding that court could
not look to Treasury regulations to determine employee eligibility
for participation in an ERISA plan when it did not contain an
explicit provision “declaring that it was to be construed to meet
the requirements of an ERISA plan”).
13
The
pertinent Treasury Department regulation provides that
[i]f
the relationship of employer and employee exists, the designation or
description of the relationship by the parties as anything other than
that of employer and employee is immaterial. Thus, if such
relationship exists, it is of no consequence that the employee is
designated as a partner, coadventurer, agent, independent
contractor,
or the like.
Treas.
Reg. section 31.3401(c)-1(e) (emphasis added). Accordingly, that the
instruments describe the plaintiffs as independent contractors and
provide that as such they are not entitled to benefits is not
controlling.
14
For
this reason, Microsoft's reliance on Grimes v. Allied Stores
Corporation, 768 P.2d 528, 529 (Wash. Ct. App. 1989), in which the
court considered a conflict between an employment contract and an
employment manual, is inapposite.
15
Washington
case law regarding pension plans, for example, holds that “[a]n
enforceable contract will arise...even though the [employee] does not
know the precise terms of the pension agreement.” Dorward v.
ILWU-PMA Pension Plan, 452 P.2d 258, 260 (Wash. 1969).
16
See
Woolley v. Hoffman-LaRoche, Inc., 491 A.2d 1257, 1268 n.10 (N.J.
1985) (“The implication of the presumption of reliance is that
the...provisions became binding the moment the [plan] was
distributed. Anyone employed before or after became one of the
beneficiaries of those provisions. And if [Toussaint v. Blue Cross &
Blue Shield, 292 N.W.2d 880 (Mich. 1980)] is followed, employees
neither had to read it, know of its existence, or rely on it to
benefit from its provisions....”); see also A. Corbin, Contracts
section 59 (1963) (suggesting that knowledge of an offer is not
necessary to establish acceptance).
17
Microsoft
contends that despite promulgation of a plan, no rights are created
unless a promise is made directly to the affected employees. The two
cases cited by Microsoft in support of this proposition, Estate of
Bogley v. United States, 514
F.2d 1027 [35 AFTR 2d 75- 1646] (Ct. Cl. 1975), and Schmidt v. Avco,
472 N.E.2d 721 (Ohio Ct. App.), aff'd, 473 N.E.2d 822 (1984), are
readily distinguishable. In Bogley, a corporate board of directors
voted to offer the plaintiff a severance plan but never actually
offered it to him. In Schmidt, there was no allegation that the
severance pay policy was published or generally distributed to Avco
employees. We also reject Microsoft's argument that the plaintiffs
represent a separate class. The plaintiff class is a subset of the
class of common-law employees as to whom Microsoft failed to honor
its promise of benefits. That the plaintiffs were wronged in this
manner hardly makes them a separate class for purposes of determining
the scope of the promise.
1
General
Accounting Office, Pub. No. GAO/T-GGD-96-130, Tax Administration:
Issues in Classifying Workers as Employees or Independent Contractors
5 (1996) (statement of Natwar M. Gandhi, Associate Director, Tax
Policy and Administration Issues, General Government Division).
2
Because
independent contractors have been found by the IRS to have a lower
compliance rate than employees in paying their taxes — to the tune
of two to three billion
dollars a year — the IRS adopted an aggressive enforcement program
in 1986 resulting to date in 12,983 Employment Tax Examination
Program audits and the reclassification of 527,000 workers. Id.
3
See
also Associated Builders & Contractors, Golden Gate Chapter v.
Baca, 769 F. Supp. 1537 (N.D. Cal. 1991) (holding that municipal
legislation requiring contractors to pay minimum wages and benefits
in order to receive private building permits unconstitutionally
impaired the contractors' collective bargaining contracts).
