Vizcaino v. Microsoft Corp., No. 94-35770

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: FERNANDEZ; FLETCHER, Circuit Judge, with whom HUG, Chief Judge, and PREGERSON, MICHAEL DALY HAWKINS and THOMAS; O'SCANNLAIN, Circuit Judge, joined by CYNTHIA HOLCOMB HALL and T.G. NELSON
• Citation: 120 F.3d 1006
• Parties: -5594, 97-2 USTC P 50,572, 21 Employee Benefits Cas. 1273, 97 Cal. Daily Op. Serv. 5847, 97 Daily Journal D.A.R. 9429, Pens. Plan Guide (CCH) P 23935S 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.
• Decision Date: 24 July 1997
• Docket Number: No. 94-35770

Page 1006

120 F.3d 1006 80 A.F.T.R.2d 97-5594, 97-2 USTC P 50,572,
21 Employee Benefits Cas. 1273,
97 Cal. Daily Op. Serv. 5847,
97 Daily Journal D.A.R. 9429,
Pens. Plan Guide (CCH) P 23935S 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. No. 94-35770. United States Court of Appeals,
Ninth Circuit. Argued and Submitted March 27, 1997.
Decided July 24, 1997.

Page 1007

Stephen K. Strong, David F. Stobaugh, Bendich, Stobaugh & Strong, Seattle, WA, and Charles K. Wiggins, Bainbridge Island, WA, for plaintiffs-appellants.

Page 1008

James D. Oswald and Timothy St. Clair Smith, Davies, Roberts & Reid, Seattle, WA, for defendants-appellees.

Ethan Lipsig, Paul, Hastings, Janofsky & Walker, Los Angeles, CA, for amici curiae American Electronics Association, California Chamber of Commerce, California Employment Law Council, and The Employers Group.

Steven Cherensky, Weil, Gotshal & Manges, Menlo Park, CA, for amici curiae American Payroll Association, Association of Private Pension and Welfare Plans.

Linda J. Dunn, Office of the Attorney General, Seattle, WA, for amicus Washington State Department of Labor and Industries.

Appeal from the United States District Court for the Western District of Washington; Carolyn R. Dimmick, District Judge, Presiding. D.C. No. CV-93-00178-CRD.

Before: HUG, Chief Judge, and BROWNING, FLETCHER, PREGERSON, HALL, O'SCANNLAIN, FERNANDEZ, T.G. NELSON, HAWKINS, TASHIMA, and THOMAS, Circuit Judges.

Opinion by Judge FERNANDEZ; Partial Concurrence and Partial Dissent by Judge FLETCHER; Partial Concurrence and Partial Dissent by Judge O'SCANNLAIN.

FERNANDEZ, Circuit Judge.

Donna Vizcaino, Jon R. Waite, Mark Stout, Geoffrey Culbert, Lesley Stuart, Thomas Morgan, Elizabeth Spokoiny, and Larry Spokoiny brought this action on behalf of themselves and a court-certified class (all are hereafter collectively referred to as "the Workers"). They sued Microsoft Corporation and its various pension and welfare plans, including its Savings Plus Plan (SPP), and sought a determination that they were entitled to participate in the plan benefits because those benefits were available to Microsoft's common law employees. The district court granted summary judgment against the Workers, and they appealed the determinations that they were not entitled to participate in the SPP or in the Employee Stock Purchase Plan (ESPP). We reversed the district court because we decided that the Workers were common law employees who were not properly excluded from participation in those plans. See Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir.1996) (Vizcaino I ). However, we then decided to rehear the matter en banc, and we now agree with much of the panel's conclusion and reverse the district court.

BACKGROUND

At various times before 1990, Microsoft hired the Workers to perform services for it. They did perform those services over a continuous period, often exceeding two years. They were hired to work on specific projects and performed a number of different functions, such as production editing, proofreading, formatting, indexing, and testing. "Microsoft fully integrated [the Workers] 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." Id. at 1190. However, they were not paid for their services through the payroll department, but rather submitted invoices to and were paid through the accounts payable department.

Microsoft did not withhold income or Federal Insurance Contribution Act taxes from the Workers' wages, and did not pay the employer's share of the FICA taxes. Moreover, Microsoft did not allow the Workers to participate in the SPP or the ESPP. The Workers did not complain about those arrangements at that time.

However, in 1989 and 1990 the Internal Revenue Service examined Microsoft's records and decided that it should have been withholding and paying over taxes because, as a matter of law, the Workers were employees rather than independent contractors. It made that determination by applying common law principles. Microsoft agreed with the IRS and made the necessary corrections for the past by issuing W-2 forms to the Workers and by paying the employer's share of FICA taxes to the government.

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Microsoft also realized that, because the Workers were employees, at least for tax purposes, it had to change its system. It made no sense to have employees paid through the accounts payable department, so those who remained in essentially the same relationship as before were tendered offers to become acknowledged employees. Others had to discontinue working for Microsoft, but did have the opportunity to go to work for a temporary employment agency, which could then supply temporary Workers to Microsoft on an as-needed basis. Some took advantage of that opportunity, some--like Vizcaino--did not.

The Workers then asserted that they were employees of Microsoft and should have had the opportunity of participating in the SPP and the ESPP because those plans were available to all employees who met certain other participation qualifications, which are not relevant to the issues before us. Microsoft disagreed, and the Workers asked the SPP plan administrator to exercise his authority to declare that they were eligible for the benefits. A panel was convened; it ruled that the Workers were not entitled to any benefits from ERISA plans ¹--for example, the SPP--or, for that matter, from non-ERISA plans--for example, the ESPP. That, the administrative panel seemed to say, was because the Workers had agreed that they were independent contractors and because they had waived the right to participate in benefit plans. This action followed.

JURISDICTION AND STANDARD OF REVIEW

The district court had jurisdiction pursuant to 29 U.S.C. § 1132(e)(1) and 28 U.S.C. §§ 1331 and 1367(a). We have jurisdiction pursuant to 28 U.S.C. § 1291.

We review the district court's grant of summary judgment de novo. See Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.1996). However, when reviewing the decision of a plan administrator who has discretion, "the exercise of that discretion is reviewed under the arbitrary or capricious standard, or for abuse of discretion, which comes to the same thing." Snow v. Standard Ins. Co., 87 F.3d 327, 330 (9th Cir.1996); see also Saffle v. Sierra Pac. Power Co. Bargaining Unit Long Term Disability Income Plan, 85 F.3d 455, 458 (9th Cir.1996).

DISCUSSION

Although the Workers challenge both their exclusion from the SPP and their exclusion from the ESPP, the two plans are subject to rather different legal regimes. The former is a 26 U.S.C. § 401(k) plan, which is governed by ERISA; the latter is a 26 U.S.C. § 423 plan, which is not governed by ERISA. It, instead, is governed, at least in large part, by principles arising out of the law of the State of Washington. Nevertheless, certain issues, perhaps the most critical ones, cut across both regimes, and we will address them first.

I. GENERAL CONSIDERATIONS.

A. The Workers' Status.

It is important to recognize that there is no longer any question that the Workers were employees of Microsoft, and not independent contractors. The IRS clearly determined that they were. In theory one could argue that what the IRS said was fine for withholding and FICA purposes, but that is as far as it goes.

However, the IRS made its determination based upon the list of factors which is generally used to decide whether a person is an independent contractor or an employee. See 26 C.F.R. § 31.3401(c)-1(b). The same essential definition is used for § 401(k) plans, see 26 C.F.R. § 1.410(b)-9, and for § 423 plans, see 26 C.F.R. §§ 1.423-2(e)(2), 1.421-7(h). That there should be a congruence of approaches is not surprising. As the Supreme Court has pointed out, when Congress uses the word "employee," courts " 'must infer, unless the statute otherwise dictates, that Congress means to incorporate the established meaning' " of that word. Nationwide Mut. Ins. Co. v. Darden, 503 U.S. 318, 322, 112 S.Ct. 1344, 1348, 117 L.Ed.2d 581 (1992). The Court then went on to scrutinize

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the various typical factors that go into a determination of whether a person is an employee. See id. at 323-24, 112 S.Ct. at 1348-49. Those were the usual common law factors. But, again, we recognize that one could still question the IRS's application of those factors in a particular case.

That question is obviated here for, perhaps more to the purpose, both Microsoft and the SPP have conceded for purposes of this appeal that the Workers were common law employees. In fact, they have asserted that the Workers' status is a "nonissue" because they concede that the Workers were common law employees. That is to say, they were employees of Microsoft.

B. The Employment Agreements.

The concession that the Workers were employees would, at first blush, appear to dispose of this case. It means that for legal purposes they, along with the other employees of Microsoft, were subject to Microsoft's control as to both "the manner and means" of accomplishing their job, that they worked for a substantial period, that they were furnished a workplace and equipment, that they were subject to discharge, and the like. See id.; see also 26 C.F.R. § 31.3401(c)-1(b). If that were all, this would be an exceedingly easy case. Of course, it is not all.

Microsoft also entered into special agreements with the Workers, and it is those which complicate matters to some extent. Each of the Workers and Microsoft signed agreements which stated, among other things not relevant...