Newsletter Vol. 1, No. 1 September 1997

Most benefit plans cover "employees of the Company." Some plans expressly exclude "leased employees" as defined in 414(n); such employees are treated as employees for purposes of determining whether the plan meets the minimum coverage rules of 410 if they have been leased employees for more than one year. Plans usually expressly or implicitly exclude independent contractors.

However, several recent cases indicate that plan eligibility provisions should be reviewed. First, Microsoft had personnel who were retained under agreements designating them as "independent contractors" and expressly excluding them from benefits. The IRS determined that they were common-law employees for employment tax purposes and Microsoft conceded. The personnel then sued Microsoft for coverage by its 401(k) plan and 423 plan. A three-judge panel of the Ninth Circuit concluded (2 to 1) that they were entitled to coverage. On rehearing, the Ninth Circuit recently held (9 judges to 2) that they were entitled to 423 plan benefits and remanded the 401(k) issue for a determination by the plan administrator whether the personnel were "on the U.S. payroll" of Microsoft.

The Eleventh Circuit held in 1993 that an agreement excluding an "independent contractor" from coverage did not foreclose a claim and remanded the case for trial. A U.S. District Court in Kansas held in 1997 that newspaper carriers of the Kansas City Star were barred from coverage by such agreements.

Leased employees are personnel on the payroll of a contractor, such as a temp agency or service company, that are on the Company's premises and subject to its direction and control. A U. S. District Court held in 1992 that such employees were entitied to coverage, and its analysis was applied by a U.S. District Court in Colorado in a 1996 case involving U.S. West. However, the Fifth Circuit rejected the analysis in a 1996 case involving Exxon's plans and personnel formerly employed by Exxon and leased back on a long-term basis. The Seventh Circuit reached similar results in an employee stock ownership case in 1996. There were such personnel involved in the Microsoft litigation but the practice was new and not the focus of the case. The IRS has ruled that some of the leasing companies may have sufficient control over such personnel to be the employer, rather than the Company. TAM 9311001(March 19, 1997)

With many employers out- sourcing functions and using temporary personnel, there are more personnel on employer premises and subject in many respects to its control who may seek benefits as employees.

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