October 2005 Bar Bulletin
Employee Benefits Errors Can Cost Millions
By Jaime Drozd Allen
In today's competitive job market, benefits packages are crucial. Employers choose what benefits to offer, but once they offer benefits, they must comply with a variety of state and federal laws or risk multi-million dollar exposure to damages.
For example, in Vizcaino v. Microsoft Corp.,1 a class of long-term temporary employees, ("permatemps") who signed contracts agreeing that they would not receive the same benefits as regular employees, sued Microsoft for participation in a Savings Plus Plan (SPP) and an Employee Stock Purchase Plan (ESPP). The permatemps often worked on teams with regular employees, shared the same supervisors and performed identical functions, working the same core hours. They also received card keys, office equipment and supplies from Microsoft.
However, Microsoft paid permatemps differently. They submitted invoices and were paid through the accounts payable department, while regular employees were paid through the payroll department. Microsoft also did not withhold federal income tax or Federal Insurance Contribution Act (FICA) taxes from the permatemps' pay.
In 1990, the IRS determined that the permatemps were regular employees, subject to withholding.2 Microsoft paid back taxes and added the workers to its payroll system. It also made some of the permatemps regular, full-time employees and placed others with a temporary agency and hired them on an as-needed basis.
As permatemps, the workers had not been allowed to participate in the SPP or ESPP. After being classified as employees by the IRS, they sued, claiming they should have had the opportunity to participate in the two plans. The Ninth Circuit found that Microsoft's earlier "reasons for rejecting the Workers' participation in the SPP and ESPP were invalid" and remanded the cases to the district court and plan administrators.3 Ultimately, Microsoft settled the claims for $97 million.4 After a series of delays, it appears that the settlement will be paid this month.5
Health Insurance Benefits
Other cases in Washington have made it equally clear that misclassification of employees may require the employer to pay back benefits. In Mader v. Health Care Authority, the Supreme Court held that community college professors who worked more than half-time during the school year must be allowed to keep their employer-paid health insurance during the summer.6 The court noted that the employer "must examine the actual work circumstances of a state employee, rather than the contracts or titles under which he or she is employed, to determine whether an employee satisfies the eligibility requirements." After multiple court decisions, the class of professors shared in a $12 million settlement.7
Usually, employers offer benefits to full-time regular employees. However, some employers also offer full or partial benefits to part-time or short-term employees. The criteria for eligibility are usually established in the benefits plan or in an employee manual. Whatever route an employer chooses, the employer should correctly classify employees as regular or temporary and full-time or part-time consistent with their duties and their work schedules. An arbitrary title, even with an agreement to forego benefits, is not determinative of an employee's status. Additionally, classifications should be re-examined as a worker's duties or schedule change to be sure that they remain correctly classified.
Laws Regulating Benefits
Employers are not required to offer health insurance, but with rising insurance costs and the difficulty in acquiring individual coverage, health insurance as an employee benefit is more important now than ever to potential employees. Because health insurance is an optional benefit, the employer can choose how much of the premiums it will pay and how much it will pass on to the employee.
However, under the Consolidated Omnibus Budget Reconciliation Act (COBRA),8 when an employer offers health insurance, it must allow employees to continue the insurance, usually for 18 months, if they leave or lose their eligibility. COBRA also provides continuing coverage for dependents for 36 months. COBRA allows employers to charge the premiums to the employees and there are other restrictions and requirements that also apply.
Employers do not have to offer paid time off, but most do. When an employer provides paid time off, Washington's Family Care Act (FCA) allows employees to use that time to care for a child, spouse, parent, parent-in-law or grandparent who has a serious health condition or an emergency condition.9 Under the FCA, "children" include biological, adopted or foster children, stepchildren, legal wards or children of a person standing in for a parent. For those who have paid time off, the FCA provides flexibility to use this benefit for more than just personal needs.
Also, Washington's Family Leave Act provides 12 weeks of time off for the care of a newborn, adopted or terminally ill child.10 The Act applies only to employees working more than 35 hours per week for employers with more than 100 workers. However, most of its provisions have been suspended due to the availability of similar benefits under the Federal Family Medical Leave Act.11
The laws discussed here only scratch the surface of state and federal regulation of employment benefits. For example, wage-and-hour laws, anti-discrimination laws, workers' compensation and ERISA add complexity that is beyond the scope of this article. The key is for employers to become familiar with all of the laws and regulations surrounding benefits, to treat similarly situated employees similarly and to offer employees benefits consistent with their actual job duties, rather than their job titles. n
1 104 F.3d 1006, 1008 (9th Cir. 1997).
2 Id. at 1009.
3 Id. at 1015.
4 Mike Carter, "Permatemp" Lawyers Get $27 Million, Seattle Times, May 16, 2002.
5 Brier Dudley, "Permatemp" Payouts Near, Attorney Says, Seattle Times, August 12, 2005.
6 Mader v. Health Care Authority, 149 Wn.2d 458, 477, 70 P.3d 931 (2003).
7 Seattle Post Intelligencer Staff, Part-Time Instructors Win on Retirement Benefits, Seattle Post-Intelligencer, October 22, 2002.
8 See 29 U.S.C. 1162 (1986); 26 U.S.C. 4980B (1986); 42 U.S.C. 300bb-1 (1986).
9 RCW 49.12.2780; WAC 296-130-030.
10 RCW ch. 49.78.
11 See 29 CFR 825.