News | February 12, 2001

Microsoft, Time Warner both reach settlements involving employee misclassification

From The 401(k) Handbook, ©Thompson Publishing Group, Inc.

As 2000 ended, two lawsuits involving misclassification of employees were resolved. Both Microsoft and Time Warner, Inc., involved in long-running lawsuits regarding employee classification, agreed to pay settlements to allegedly misclassified workers.

Microsoft Settles its Lawsuit with Temporary Workers
In December 2000, Microsoft ended an eight-year long legal battle, agreeing to pay $96.9 million to a class of temporary workers who claim they should have been entitled to benefits under various Microsoft benefit plans when the company was found to have misclassified them as independent contractors rather than employees. The key benefit at issue in the litigation was participation in the company's employee stock purchase plan, which lets all employees buy company stock at a discount.

The settlement appears to bring to an end litigation that has involved 8,000 to 12,000 temporary employees. Those individuals will share $70 million of the settlement (to be allocated based upon the individuals' years of service with Microsoft and the appreciation in Microsoft stock during that time). The balance of the settlement amount will cover administrative and legal costs.

Time Warner and DOL Reach $5.5 Million Settlement
Time Warner has agreed to a $5.5 million settlement with the Department of Labor (DOL) regarding charges that the company misclass-ified employees as independent contractors or temporary workers. In the case, Herman v. Time Warner, Inc., et al., No. 98-7589 (S.D.N.Y. 2000), the DOL alleged that Time Warner misclassified regular, full-time temporary and leased workers, excluding these workers from the company's welfare and pension plans.

The lawsuit alleged that essentially, Time Warner benefit plans did not follow the company's own rules regarding classification of employees, thus improperly excluding workers from the plans. The DOL alleged that three types of ERISA violations were made by Time Warner and the Administrative Committee in charge of employee benefit plans: (1) failure to act solely in the interests of the plan participants; (2) failure to act in accordance with plan documents; and (3) failure to provide plan documents to the misclassified workers. The DOL asked that 14 individually named fiduciaries be held personally liable for failure to administer the plans properly.

Time Warner did not admit any wrongdoing as part of the settlement. The proceeds of the settlement, which was announced Nov. 17, will be used to compensate Time Warner workers by creating three funds (one for temporary workers, one for independent contractors and one for misclassfied workers). To receive the benefits, the individuals must sign a release preventing them from suing Time Warner individually on the same issue.

Time Warner Wins Separate Case Involving Classification
In another case involving Time Warner, Inc. and its affiliates, Administration Committee of the Time Warner, Inc. Benefit Plans v. Biscardi, 2000 U.S. Dist. LEXIS 16707 (S.D.N.Y. 2000), employee classification again was at issue. (The court previously held that the case filed by the Administrative Committee in 1999 and the Herman case could proceed simultaneously.)

Targeted Media, Inc., (TMI) a marketing company selling bulk magazine subscriptions, became a wholly owned subsidiary of Time Inc. in 1995. The six defendants in the case, employed by TMI, were designated as independent contractors by TMI and were paid through TMI's payroll. The defendants contended that they were entitled to benefits from Time Warner because TMI became a participating employer in certain Time Warner pension plans on Jan. 1, 1996, although the workers were never told they were eligible for benefits between 1996 and 1998, and signed contracts that stated that they were not considered "employees" for any purpose.

When the defendants attempted to claim benefits under the plan, the Administrative Committee sent out letters that denied the defendants' claims to benefits for two reasons: (1) because the workers were independent contractors and not common-law employees, and (2) even if they were employees, they were ineligible for benefits because the plan only covers "regular" and "full-time" employees. The Committee then asked a district court for a declaration that certain workers that performed services for subsidiaries of Time Warner were not entitled to benefits under Time Warner's plan. District Court Rules in Favor of Time Warner

The court granted summary judgement in favor of the Administrative Committee.

On the first issue, the court agreed with the parties that the standard for defining an "employee" is set forth in the decision of Nationwide Mutual Insurance Co. v. Darden, 503 U.S. 318 (1992) which adopted a common-law test for determining who qualifies as an employee under ERISA. The court noted that the status of an individual is not determined solely by the label used in the contract between the parties, and the ultimate decision of whether the individuals were employees is a question of law the court could review de novo (that is, without granting discretion to the Administrative Committee's finding on the issue).

The court was unable to affirm the Administrative Committee's conclusion that the defendants were independent contractors. However, the district court did find that the Administrative Committee's determination that the defendants were not eligible for benefits under the plans was reasonable. The court relied largely on the fact that the workers were not paid through Time Warner's payroll, when contributions to the company's savings plan were made through deductions from payroll. The court also noted that the workers should have had no reasonable expectation of benefits, considering the fact that the contracts signed by these workers stated that they would not be considered employees.

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