LEGAL: Not Your Employee? Courts Beg to Differ

Last May, a federal appeals court ruled against Microsoft Corp. in an employment law case that ought to send a message to the waste disposal industry and other businesses. The court ruled that Microsoft could not withhold from so-called "temporary" employees the same benefits the company provides to its full-time employees.

Around the same time, two former "volunteers" at America On-line Inc. (AOL) sued the company in federal district court in New York to collect back pay and overtime.

In June, the Texas Supreme Court held that a woman could sue a hospital for employment discrimination even though she had never worked for the hospital.

The common thread in all three cases is the legal definition of "employee."

Almost all companies, from industry giants to small businesses, add temporary workers from time to time. Whether to meet an unexpected demand or simply to trim overhead, employers increasingly rely on temporary staffing services.

Years ago, the Internal Revenue Service, applying common-law legal principles, determined that Microsoft's "independent contractors" were, for tax purposes, ordinary company employees. Instead of challenging this finding, Microsoft converted the workers to temporary employees by insisting that they link themselves with employment agencies.

The plaintiffs in the Microsoft lawsuit primarily were workers who refused to register with agencies. They argued that they were common-law employees, and thus were eligible for the stock option plan just the same as any full-time employee.

Microsoft's defense included independent-contractor agreements in which the plaintiffs expressly took responsibility for their own benefits.

The appeals court held that neither the agreements nor the law would allow Microsoft to exclude the "temps" from participation in the stock option plans. The court ignored the company's classification of the workers and instead focused on the nature of Microsoft's control of "the manner and means by which the product is accomplished."

Ten years ago, the U.S. Supreme Court announced the test for determining whether a hired party is an employee:

"Among the other factors relevant to this inquiry are the skill required; the source of the instrumentality's and tools; the location of the work; ... whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party's discretion over when and how long to work; ... [and] whether the work is part of the regular business of the hiring party."

Even though the workers at Microsoft were "employed" and paid by temp agencies, the appeals court concluded that they nevertheless were equivalent to full-time employees.

Shortly after the Microsoft decision was handed down, two former volunteers who monitored chat rooms, message boards and online discussions for AOL filed a class action charging AOL with violating the federal Fair Labor Standards Act by failing to pay its volunteers.

The suit, which still is pending, alleges that the volunteer workers rightfully should be considered as employees because AOL insists that they work a certain minimum number of hours, terminates them at will and furnishes the "tools necessary" for them to do their jobs.

In another example, the case of Margaret Rennels illustrates the pitfalls of an agreement whereby one company provides services for another. Rennels was employed by Sierra, a pathology lab under contract to provide services to a Texas hospital. After Sierra terminated her, she sued the hospital and Sierra for gender discrimination on the grounds that a similarly situated male Sierra employee received greater benefits and had more authority.

Significantly, the suit alleged, Sierra treated the male employee as though he were a shareholder. Indeed, Sierra had offered to reinstate Rennels and give her shareholder status, but later withdrew the shareholder status. Moreover, as if to add insult to injury, Sierra would not allow her to return to work until she signed a liability release, which she refused to do.

The hospital argued that Rennels could not sue for employment discrimination without having a direct employer-employee relationship. Under the Texas discrimination law, which is modeled on Title VII of the Civil Rights Act of 1964, any "person claiming to be aggrieved" can seek relief. Ignoring the lack of an employment relationship, the state high court examined whether the hospital "controlled access to the plaintiff's employment opportunities and denied or interfered with the access based on unlawful criteria."

Relying on analogous judicial interpretations of Title VII, the court noted that the federal law protects "parties aggrieved," not just "employees." Thus, it rejected the argument that a plaintiff could claim sex discrimination only if he or she were an employee of the defendant.

Under this standard, employment discrimination suits can be filed by non-employees as long as some sort of employment relationship exists between the plaintiff and a third party. Companies must carefully review contracts with outside service providers to minimize the chances that such actions will succeed.