Amicus Curiae Brief — Microsoft Corp. v. Vizcaino

DEC 24 1997

No. 97-854

| IN THE

Supreme Court of the United States

OCTOBER TERM, 1997

MICROSOFT CORPORATION, et al.,

. Petitioners,

DONNA VIZCAINO, et al.,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

AND BRIEF AMICI CURIAE OF THE INFORMATION

TECHNOLOGY ASSOCIATION OF AMERICA,

AMERICAN ELECTRONICS ASSOCIATION, AND

SOFTWARE PUBLISHERS ASSOCIATION

IN SUPPORT OF THE PETITION

OF MICROSOFT CORPORATION

MARC A. PEARL FREDRIC S. SINGERMAN *

INFORMATION TECH NOLOGY DONALD L. ROSENTHAL

ASSOCIATION OF AMERICA ErRicA A. WATKINS

JEFFREY MCMILLEN SEYFARTH, SHAW,

AMERICAN ELECTRONICS FAIRWEATHER & GERALDSON

ASSOCIATION 815 Connecticut Avenue, N.W.

Suite 500

— E. Spee Washington, D.C. 20006

SOFTWARE FUBLISHERS (202) 463-2400

ASSOCIATION are -

Counsel to Amici Curiae

* Counsel of Record

WILSON - Epes PRINTING Co., . + 789-0096 - WASHINGTON, D.C. 20001

ais natant oe

In THE

Supreme Court of the United States

OCTOBER TERM, 1997

No. 97-854

MICROSOFT CORPORATION, et al.,

. Petitioners,

DONNA VIZCAINO, et al.,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

MOTION FOR LEAVE TO FILE BRIEF AMICI CURIAE

Information Technology Association of America

(“ITAA”), American Electronics Association (“AEA”)

and Software Publishers Association (“SPA”) (collec-

tively the “Employer Amici”) respectfully move this

Court, pursuant to Supreme Court Rule 37, to grant leave

to file their brief, submitted herewith, as Amici Curiae

in Support of the Petition for Writ of Certiorari filed by

Microsoft Corporation (“Microsoft”).

Pursuant to Supreme Court Rule 37.2, the Employer

Amici have obtained the consent of Petitioner Microsoft

Corporation to the filing of their Brief Amici Curiae.

However, Stephen Strong, counsel for Respondents Donna

Vizcaino, Jon R. Waite, Mark Stout, Geoffrey Culbert,

Lesley Stuart, Thomas Morgan, Elizabeth Spokoiny and

Larry Spokoiny, declined to consent to the filing of this

Brief.

The Employer Amici are the leading trade associations

in the information technology (“IT”) and electronics in-

dustries. Information Technology Association of America

(“ITAA”) is a leading trade association of companies

that create and market products and services associated

with computers, communications and data. ITAA’s

11,000 direct and affiliate members encompass systems

integration, professional services, telecommunications, In-

ternet, electronic commerce, client-servers and custom

software manufacturing. IT products constitute the United

States’ number one export and the industry has a current

workforce total of over 2.5 million individuals.

American Electronics Association (“AEA”) members,

which number over 3,000, are companies that conduct

business in virtually every aspect of technology, including

the fields of computer software and hardware, compo-

nents, peripherals, semi-conductors and telecommunica-

tions. AEA estimates that 4.3 million people work in the

industries it represents.

Software Publishers Association (“SPA”) is the prin-

cipal trade association of the personal computer software

industry. Its membership of more than 1,200 companies

represents 90% of all software publishers in the United

States. SPA members sold more than $30 billion of soft-

ware in 1995.

This case is of exceptional importance to the industries

represented by the Employer Amici. Much of the work

in the IT and electronics industries is project-oriented, de-

manding mobile, highly educated and highly compensated

workers on a flexible, temporary or infregqent basis. In-

dustry employers have met these demands by engaging

workers in varying contractual relationships, including as

independent contractors, temporary “contract” employees

and leased employees.

In entering into relationships with skilled workers,

members of the Employer Amici, like their counterparts

in other industries, frequently enter into written contracts

governing pay and benefits. When the parties intend that

the worker will not receive benefits as an employee, the

contract will say so. Typically, these contracts also at-

tempt to clarify the parties’ respective employment tax

and withholding obligations, so that the worker and the

recipient of the services will treat the transaction con-

sistently for tax purposes. That is exactly what Microsoft

did, and it is very common practice throughout the IT

and electronics industries.

The Ninth Circuit’s holding in Vizcaino v. Microsoft

Corp., 120 F.3d 1006 (9th Cir. 1997), upsets the legiti-

mate, settled contractual rights of businesses throughout

all industries, and it does so retroactively. The IT and

electronics industries are particularly at risk from the fall-

out of Vizcaino, because of their extensive use of highly

skilled alternative workers, such as computer program-

mers, product testers and systems analysts, to work on

specific projects and to provide specialized technological

expertise. Further, the industries’ common use of equity

compensation to reward employees provides disgruntled

workers with a windfall if they are able, at their discre-

tion, to reconsider and repudiate the independent contrac-

tor characterization to which they themselves agreed.

Because of their role as leading trade associations in

the eletctronics and IT industries, the Employer Amici

have an understanding of the impact the Vizcaino deci-

sion will have on these industries nation-wide. The Em-

ployer Amici’s Brief explains the critical role that alterna-

tive workers play in the IT and electronics industries and

the United States as a whole, as well as the important

reasons businesses and workers enter into alternative

arrangements.

The Brief Amici Curiae also discusses the serious diffi-

culty and uncertainty that businesses face when they

classify highly skilled workers as employers or independent

contractors and the extraordinary, retroactive burden that

the ruling places on nearly every employer who misclassi-

fies workers. It also addresses the use of employee stock

purchase plans in high technology industries. The Em-

ployer Amici believe that their Brief will serve to impress

upon the Court the importance of this case to United

States employers and the critical need for this Court to

grant Microsoft’s Petition for Writ of Certiorari.

This motion is timely filed pursuant to Supreme Court

Rule 37.2.

For the foregoing reasons, the Employer Amici respect-

fully request that the Court grant them leave to file their

Brief Amici Curiae in support of Microsoft’s Petition for

Writ of Certiorari.

Respectfully submitted,

MARC A, PEARL FREDRIC S. SINGERMAN *

INFORMATION TECHNOLOGY DONALD L. ROSENTHAL

ASSOCIATION OF AMERICA ERICA A. WATKINS

JEFFREY MCMILLEN SEYFARTH, SHAW,

AMERICAN ELECTRONICS FAIRWEATHER & GERALDSON

ASSOCIATION 815 Connecticut Avenue, N.W.

Suite 500

MARK E. NEBERGALL

SOFTWARE PUBLISHERS

ASSOCIATION

Washington, D.C. 20006

(202) 463-2400

Counsel to Amici Curiae

* Counsel of Record

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .. ii

INTEREST OF THE AMICI CURIAE .................... 1

SUMMARY OF ARGUMENTS ......... oe 3

RUIN ie ees 6

I. THE NINTH CIRCUIT OPINION UNDER-

MINES ALTERNATIVE WORK ARRANGE-

MENTS THAT BENEFIT BOTH BUSI-

NESSES AND WORKERS .......2..0.0.0..........-....... 6

Il. THE NINTH CIRCUIT OPINION IMPOSES

A DRACONIAN PENALTY ON EMPLOYERS

FOR WORKER MISCLASSIFICATION ............ 9

Ill. THE NINTH CIRCUIT MISCONSTRUED

RR I etirin corti icsiceclersighateshnenk eee 13

IV. THE NINTH CIRCUIT UTTERLY NEGATED

FEEIPONESEY BOW. ren thee tn ewaes 14

RIP T RIRPIOY ss it tc hevpvisensrcatiery apps ccolanibeaann aaa ade 17

(i)

ii

TABLE OF AUTHORITIES

FEDERAL CASES Page

Boren v. Southwestern Bell Telephone Co., 933

a Pk. SRK SG RID ickiticinacienbik eine soni 16

Cort vy: Ava, 428.05. G6 (I9TE) 22. ne 5, 14

Vizcaino v. Microsoft Corp., 120 F.3d 1006 (9th

ES RBA ETE SOCAN HSA CI PRD a: passim

STATE CASES

Bill v. Gattavara, 209 P.2d 457 (Wash. 1949)........ 16

Corbray v. Stevenson, 656 P.2d 473 (Wash. 1982).. 15

Daniel v. Pacific Northwest Bell Tele. Co., 580

P.2d 652 (Wash. App. 1978), review denied, 90

Wash. 2d 1085 (Wash. 1978) ann.cccncccccccncccsecnicsscees 16, 17

Hatley v. West, 445 P.2d 208 (Wash. 1968) Ce eet 16

Mayer v. Pierce County Med. Bureau, Inc., 909

UE CP UNOES BOTT cacictussalenciclescuctbsesinctipbs abil 15

Seattle-First National Bank v. Earl, 565 P.2d 1215

REISS A ie aOR TP RN ee 15

Tanner Electric Cooperative v. Puget Sound &

Light Co., 911 P.2d 1801 (Wash. 1995) ............... 15

Wagner v. Wagner, 621 P.2d 1279 (Wash. 1980)... 15

Weyerhaueser Timber Co. v. Skaglund, 132 P.2d

Es FIED: eile cishiinacsi naan dic ieiciahansde scones 15, 16

FEDERAL STATUTES

Be rae hetkc Bleee CRD nooo scciscesinasencecsomens sake Bit 5, 13

26 U.S.C.A. § 3509 (West Supp. 1997) ..............0..0... 11

20 U.SC.A. 3% 1001-1461 (1966) ...................2........... 14

Section 269 of the Tax Equity and Fiscal Responsi-

bility Act of 1982, P.L. 97-248, 96 Stat. 552........ 11

Section 530 of the Revenue Act of 1978, P.L. 95-

eR a ERIS ONE TOR ie es RETA RN 10, 11

JOURNALS

Katherine Abraham & Susan Taylor, Firms’ Use

of Outside Contractors: Theory and Evidence,

314 J. of Lab. Hoon. 304 (1996) ............................ 7,8

iii

TABLE OF AUTHORITIES—Continued

Lewis Segal and Daniel Sullivan, The Growth of

Temporary Services Work, Federal Reserve

Bank of Chicago Working Paper Series, WP-

I Sas OOD candace rt

Sandra Slaughter & Ang Sun, Employment Qut-

sourcing in Information Systems, 39 Ass’n for

Computing Machinery 47 (July 1996) —........... ea

MISCELLANEOUS

Bureau of Labor Statistics, U.S. Dep’t of Labor,

news release, U.S.D.L. 97-422, Contingent and

Alternative Employment Arrangements, Febru-

ary 1997, Labor Force Statistics from the Cur-

Page

rent Population Survey (Dec. 2, 1997) ............... 4,6, 7,8

143 Cong. Rec. 82429 (daily ed. Mar. 18, 1997)......

Hearing on Small Business Taxation Proposals

Before the Subcomm. on Taxation and IRS

Oversight of the Senate Comm. on Finance,

105th Cong. (1997) (statement of Donald C.

Lubick, Acting Ass’t Sec’y, U.S. Dep’t of

WEE siitccbipaaiece ie ice acs ae tear

Internal Revenue Service, U.S. Dep’t of Treas.,

Internal Revenue Service Training Materials on

Worker Classifications for Tax Purposes as Inde-

pendent Contractors or Employees (Training

3320-102 rev. 10-96), TPDS 842381, issued

BEM Gy BOE | ccnitedicecedmastidaituinbesiiin ts sli

PTET ieniiantchienhedcetniela. carebte honest cia Saisie bees ae

24 Pens. & Ben. Rep. (BNA) 1104 (May 5, 1997)..

Rev. Rul, 87-41, 1967-1 C.B, 206 ..............................

11

9, 10

11

12

10

In THE

Supreme Court of the United Staten

OcTOBER TERM, 1997

No. 97-854

MICROSOFT CORPORATION, et al.,

. Petitioners,

DONNA VIZCAINO, et al.,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals

for the Ninth Circuit

BRIEF AMICI CURIAE OF THE INFORMATION

TECHNOLOGY ASSOCIATION OF AMERICA,

AMERICAN ELECTRONICS ASSOCIATION » AND

SOFTWARE PUBLISHERS ASSOCIATION

IN SUPPORT OF THE PETITION

OF MICROSOFT CORPORATION

INTEREST OF THE AMICI CURIAE

Information Technology Association of America

(“ITAA”), American Electronics Association (“AEA”)

and Software Publishers Association (“SPA”) (collec-

tively the “Employer Amici”) respectfully submit this

Brief Amici Curiae’ in support of the Petition for Writ

of Certiorari filed by Microsoft Corporation (“Microsoft”),

ITAA is a leading trade association of the companies

which create and market products and services associated

? This brief was authored in whole by counsel for the Employer

Amici, Seyfarth, Shaw, Fairweather & Geraldson.

2

with computers, communications and data. ITAA’s 11,000

direct and affiliate members encompass systems integra-

tion, professional services, telecommunications, Internet,

electronic commerce, client-servers and custom software

manufacturing. The information technology (“IT”) in-

dustry’s workforce currently totals over 2.5 million indi-

viduals, ten times that of the basic steel industry, and

three times that of the automotive industry. IT is our

country’s number one export.

AEA is a leading trade association of the electronics

and IT industries, with over 3,000 members. AEA mem-

bers include companies doing business in virtually every

aspect of technology, including the fields of computer

software and hardware, components, peripherals, semi-

conductors and telecommunications. Its members range

in size from large, well-known corporations to small start-

up ventures. AEA estimates that 4.3 million people work

in the industries it represents.

SPA is the leading trade association of the personal

computer software industry, with membership of more

than 1,200 companies, representing 90% of all software

publishers in the United States. Its members range in size

from large, well-known companies to hundreds of smaller

companies, all of which develop and market business,

consumer, and education software. SPA members sold

more than $30 billion of software in 1995.

This case is of exceptional importance to the industries

represented by the Employer Amici. The IT and elec-

tronics industries are growing at a very rapid pace and in

some areas production demand outstrips the supply of

available workers. Much of the work is project-oriented,

demanding mobile, highly educated and highly compen-

sated workers on a flexible, temporary or infrequent basis.

Industry employers have met these demands by engaging

workers in varying contractual relationships, including as

independent contractors, temporary “contract” employees

and leased employees.

3

In entering into relationships with skilled workers,

members of the Employer Amici, like their counterparts

in other industries, frequently enter into written contracts

governing pay and benefits. If the parties intend that the

worker will not receive benefits as an employee, the con-

tract will say so. Typically, these contracts also clarify

the parties’ respective employment tax and withholding

obligations, so that the worker and the recipient of the

services (and the leasing company, if there is one) will

treat the transaction consistently for tax purposes. That

is exactly what Microsoft did, and it is very common

practice throughout the IT and electronics industries.

Reclassification of a worker, however, must not change

the basic terms of their contract—what services the worker

will provide and what he or she will be paid.

The Ninth Circuit’s holding in Vizcaino v. Microsoft

Corp., 120 F.3d 1006 (9th Cir. 1997), upsets the legiti-

mate, settled contractual rights of businesses throughout

all industries, and it does so retroactively. The IT and

electronics industries are particularly at risk from the fall-

out of Vizcaino, because of their extensive use of highly

skilled alternative workers, such as computer program-

mers, product testers and systems analysts, to work on

specific projects and to provide specialized technological

expertise. Further, the industries’ common use of equity

compensation to reward employees provides disgruntled

workers a financial brass ring to aim for in second-guessing

the independent contractor characterization that they them-

selves agreed to.

SUMMARY OF ARGUMENTS

This case is important because the non-traditional work-

force is a large and important segment of the United

States economy. Independent contractors, temporary help

agency workers and other “alternative workers” comprise

10% of the nation’s workforce.? Independent contractors

*The phrase “alternative work” refers to work outside of the

traditional employer-employee relationship. It encompasses inde-

4

alone comprise 6.7% of the workforce. The determination

of whether a worker is an employee or an indpendent

contractor—or whether a temporary help agency worker

is an employee of the agency or the service recipient—

is necessarily a factual determination, and the right answer

is often a very difficult and uncertain one. Where the

employer and worker have selected the wrong characteri-

zation for tax purposes, they may face significant adverse

consequences, including liability for back taxes, penalties

and interest.

Vizcaino v. Microsoft Corp. imposes an additional,

draconian penalty on employers who have misclassified

workers, in the form of a retroactive award of benefits.

In the guise of applying state law, the Ninth Circuit has

created a doctrine of Federal common law that is openly

hostile to non-traditional work arrangements. The doc-

trine is simple: An employer who has misclassified a

worker as an independent contractor may be required to

provide employee benefits to the worker retroactively,

notwithstanding that the worker has agreed to the classifi-

cation and has further agreed not to receive such benefits.

This doctrine has no basis in Federal law and is inimical

to the approach to worker classification issues taken by

Congress and the Internal Revenue Service (“IRS”). It

will discourage employers from voluntarily correcting

worker misclassifications, as Microsoft did, because doing

so will be used as a club against them in subsequent liti-

gation. It may also chill the development and use of

alternative work arrangements going forward. Such non-

pendent contractors (regardless of whether they are otherwise

identified as wage and salary workers), on-call workers, temporary

help agency workers and workers provided by contract firms. The

figures cited in the text are from the Bureau of Labor Statistics,

U.S. Dep’t of Labor, news release, U.S.D.L. 97-422, Contingent and

Alternative Employment Arrangements, February 1997, Labor Force

Statistics from the Current Population Survey (Dec. 2, 1997) (cited

as “BLS”). The definitions used in the text follow the BLS

definitions.

5

traditional work arrangements are, however, vital to

American industry and beneficial to the workers who

enter into them.

It is undisputed that any rights Microsoft's “freelancers”

could have to participate in the corporation’s Employee

Stock Purchase Plan (“ESPP”) must be found under con-

tract law of the State of Washington. Yet the court’s

analysis utterly tramples the essential elements of Wash-

ington law governing contract formation and reformation.

In disregarding the parties’ expressed intent, the Ninth

Circuit assigns to Microsoft an intent that ignores the

fundamental purpose of equity compensation and unjustly

enriches the freelancers who neither bargained for nor

expected to receive ESPP benefits. In essence, the court

has created a new private cause of action to enforce the

tax provision relating to stock purchase plans, Section 423

of the Internal Revenue Code of 1986 (“Code”), 26

U.S.C.A. § 423 (1988), in violation of the principles

espoused by this Court in Cort v. Ash, 422 U.S. 66 (1975).

Vizcaino v. Microsoft Corp. raises the question of

whether a Federal court may ignore state law to impose

a retroactive obligation on an employer to provide a bene-

fit to a party, in the absence of a Federal law requirng such

benefit to be provided, and in the face of a contract stating

that such benefit will not be provided. The Ninth Cir-

cuit’s decision imposes an enormous cost on businesses

throughout the country that have made good faith efforts

to comply with the complex and changing rules regarding

worker classification. Unless the decision is reviewed and

reversed, these businesses will face a flood of litigation, in

which workers will challenge the independent contractor

status that they themselves agreed to, in order to gain

windfall benefits.

6

ARGUMENT

I. THE NINTH CIRCUIT OPINION UNDERMINES

ALTERNATIVE WORK ARRANGEMENTS THAT

BENEFIT BOTH BUSINESSES AND WORKERS.

Underlying the Ninth Circuit’s opinion in Vizcaino v.

Microsoft Corp. is a steadfast refusal to view the inde-

pendent contractor agreements (“ICAs”) entered into

between Microsoft and the freelancers as truly bilateral

agreements freely entered into by the parties. Instead, the

court makes Microsoft solely responsible for classification

of the freelancers as independent contractors. By doing

so, the court converts an agreement and accompanying

information sheet, each signed by the freelancer, each

acknowledging that he or she is an independent contractor

and is not entitled to benefits, into non-agreement “expla-

nations” not binding upon the freelancers. Vizcaino, 120

F.3d at 1019.

The court’s presumption appears to be based on a view

of alternative workers as displaced clerical workers who

work for low pay and no benefits and are forced to move

from office to office on a daily basis. This caricature of

the alternative work force is certainly not true of the free-

lancers at Microsoft; nor is it true in the United States

work force as a whole. Microsoft’s freelancers were appar-

ently well-educated—performing services as software test-

ers, production editors, proof readers, formatters and in-

dexers—and often worked for periods exceeding two

years. 120 F.3d at 1008.

About 10% of the American work force—over 12.5

million people—are actively employed in alternative work

arrangements, mostly as independent contractors. BLS,

Table A.* Independent contractors are significantly more

8 The BLS includes as independent contractors persons identified

as independent contractors, consultants and freelance workers, but

excludes business owners such as shopkeepers and restauranteurs.

BLS, Technical Notes.

7

likely than traditional employees to have graduated college

and are more likely to be employed in managerial, sales,

professional specialty or precision production occupations.

BLS, Tables 4 & 8. Fewer than one-half of alternative

workers are in contingent or temporary jobs expected to

be of limited duration. BLS, Table A.

Most telling, however, is that the overwhelming ma-

jority of independent contractors, 83.6%, actually prefer

an alternative work arrangement over a more traditional

employment arrangement. BLS, Table 11.

Businesses and workers enter into non-traditional work

arrangements for a number of very important reasons.

Many businesses rely on temporary or contingent workers

to meet short-term or cyclical production demands:

Accommodating an uneven demand for the organi-

zation’s products or services may entail a variety of

costs, including costs associated with carrying more

workers on the payroll than are needed during slow

periods and/or costs associated with varying the size

of the regular workforce. Some firms may be able to

smooth the flow of in-house work by contracting out

peak period tasks.

Katherine Abraham & Susan Taylor, Firms’ Use of Out-

side Contractors: Theory and Evidence, 14 J. of Lab.

Econ. 394, 397 (1996). This is particularly true in the

IT and software industries, where businesses may need to

“staff-up” rapidly as a specific project or program moves

into production.

In IT and other high-technology industries, where the

demand for certain skills outpaces supply, non-traditional

work arrangements are particularly important:

Volatility of information technology has the effect of

rapidly making IS [information services] skills obso-

lete and creating IS skills shortages. Firms may out-

source because they cannot find and recruit sufficient

numbers of permanent employees with certain skills.

Outsourcing can help address labor shortages be-

cause temporary help agencies, part time work, and

contract work may attract people into the labor pool

who would not enter if they had to work as perma-

nent employees.

Sandra Slaughter & Ang Sun, Employment Outsourcing in

Information Systems, 39 Ass’n for Computing Machinery

47 (July 1996).

Many businesses turn to alternative work arrangements

because they do not have the technical expertise to hire,

train or supervise workers with highly specialized skills.

Where a business does not have sufficient need for a work-

er’s highly specialized skills to keep the worker fully em-

ployed, both parties may prefer a non-traditional employ-

ment arrangement:

For example, it may not be cost-effective for a small-

or medium-sized organization to provide a full range

of computer support activities in-house. Even if the

firm could keep one or more full-time computer

specialists busy, much of the day-to-day work likely

would be rather routine. More complex problems

would be outside the experience of the in-house

mam...

Abraham & Taylor, 14 Journal of Labor Economics at

399. See also Lewis Segal and Daniel Sullivan. The

Growth of Temporary Services Work, Federal Reserve

Bank of Chicago Working Paper Series, WP-96-26 (Dec.

1996).

An alternative work arrangement may also be extremely

attractive from the worker’s perspective. An independent

contractor typically receives more of his or her compen-

sation in cash than a traditional worker, BLS, Table 13,

and will presumably make more efficient choices about his

or her benefits than an employer would. Non-traditional

workers may prefer the flexibility and control they exer-

cise over their time and working conditions. For highly

skilled workers, in particular, an alternative work arrange-

9

ment may provide a significantly better opportunity for

professional development and exposure to a wider range

of challenges than a traditional employment relationship.

Thus, the use of non-traditional work arrangements

is driven by the needs of both businesses and their workers,

and the contracts entered into between businesses and

their alternative workers benefit both. The Ninth »Cir-

cuit’s opinion in Vizcaino v. Microsoft Corp. undermines

these contracts by allocating the entire risk of worker

mischaracterization to only one party, the employer, and

by granting a windfall benefit to workers retroactively.

II. THE NINTH CIRCUIT OPINION IMPOSES A DRA-

CONIAN PENALTY ON EMPLOYERS FOR

WORKER MISCLASSICATION.

In effect, the Ninth Circuit’s opinion imposes a retro-

active, judicial sanction on Microsoft for misclassifying

the freelancers as independent contractors for tax pur-

poses that is without precedent in Federal statute or com-

mon law. This result ignores the real-world difficulties

Surrounding the proper characterization of workers in the

marketplace. In its internal training manual, the IRS

makes this point:

[IRS] representatives are sometimes faced with the

difficult task of making a determination of the classi-

fication of workers who provide products and serv-

ices for others. . . . Businesses decide whether to

hire independent contractors or employees depending

on individual needs, customer expectations, and

worker availability. Either worker classification—

independent contractor or employee—can be a valid

and appropriate business choice.

Internal Revenue Service, U.S. Dep’t of Treas., Internal

Revenue Service Training Materials on Worker C lassifica-

tions for Tax Purposes as Independent Contractors or

Employees (Training 3320-102 rev. 10-96), TPDS

si i ae a ia ca So het ee

10

842381, issued March 4, 1997 (“Training Manual”), at

p. i (emphasis in original).

It can be extremely difficult to determine whether a

particular worker is an employee or independent con-

tractor. In 1987, the IRS promulgated a list of twenty

factors that affect the decision. Rev. Rul. 87-41, 1987-1

C.B. 296. These factors include whether the recipient of

the services has the right to require compliance with in-

structions about when, where and how the work is per-

formed; whether the recipient provides training; how “in-

tegrated” the worker’s services are in the recipient’s busi-

ness operations; whether a continuing relationship is in-

tended; whether full-time work is required; etc. Obviously,

some factors may indicate an employer-employee relation-

ship, while others may indicate an independent contractor

relationship. Worse, there is no clear guidance on the rela-

tive weight to be accorded to each factor.

Changes over time compound the complexity of the

determination. As a worker’s duties and the employer’s

business change, the worker’s employment status may

change as well. The relevant test governing employment

status also changes over time. As the IRS Training Man-

ual points out:

Bear in mind also that information important in help-

ing determine worker status may change over time

because business relationships change over time. As

a result, some of the twenty common law factors

listed in Rev. Rul. 87-41 are no longer as relevant

as they once were.

Training Manual at 2-4.

Congress recognized the complexity of worker classi-

fication issues and specifically addressed taxpayer con-

cerns about the potential for large, retroactive employment

tax assessments in such cases. Section 530 of the Rev-

enue Act of 1978, P.L. 95-600, 92 Stat. 2885, bars the

IRS from reclassifying workers as long as the employer

11

had a reasonable basis for the classification, including

reliance on long-standing industry practice or a past audit

in which the IRS did not challenge the classification of

similarly-situated workers. It also bars the IRS from issu-

ing additional regulations or revenue rulings on worker

classification issues. Although Section 530 was initially

passed as a one year “stop-gap” measure, it was extended

on an interim basis several times, and was extended indefi-

nitely by Section 269 of the Tax Equity and Fiscal Re-

sponsibility Act of 1982, P.L. 97-248 (“TEFRA”), 96

Stat. 552. Congress also enacted a provision te mitigate

retroactive employment tax liability where Section 530

relief is not available. 26 U.S.C.A. § 3509 (West Supp.

1997), as enacted by TERFA § 270.

The IRS has also attempted to respond to taxpayer

concern about how the retroactive recharacterization of

workers can affect businesses. In addition to implement-

ing comprehensive training procedures for its agents (as

evidenced by the Training Manual), the IRS recently

promulgated a Classification Settlement Program (“CSP”),

in order to address and relieve the possibility of draconian

penalties from worker misclassification. 23 Pens. & Ben.

Rep. (BNA) 1343 (May 20, 1996). Under the CSP:

businesses that have misclassified their workers as

independent contractors, have filed Form 1099

information returns, but have failed to meet the

other requirements for relief under section 530 [of

the Revenue Act of 1978], can settle the matter with

IRS examiners by reclassifying their workers prospec-

tively and paying only limited tax assessments. This

eliminates the risk that tax assessments could be

applied for multiple years.

Hearing on Small Business Taxation Proposals Before the

Subcomm. on Taxation and IRS Oversight of the Senate

Comm. on Finance, 105th Cong. (1997) (statement of

12

Donald C. Lubick, Acting Ass’t Sec’y, U.S. Dep’t of

Treas. ).

Nonetheless, the area remains an important concern

to United States businesses. Senator Christopher S. Bond

recently stated:

As the chairman of the Small Business Committee,

I have heard from countless small business owners

who are caught in the environment of fear and con-

fusion that now surrounds the classification of work-

ers. This situation is stifling the entrepreneurial spirit

of many small business owners who find that they do

not have the flexibility to conduct their businesses in

a manner that makes the best economic sense and

that serves their personal and family goals.

143 Cong. Rec. $2429 (daily ed. Mar. 18, 1997).

There is no finding in this case that Microsoft acted

in bad faith in characterizing the freelancers as inde-

pendent contractors for tax purposes, or that the free-

lancers were somehow hoodwinked into agreeing to the

characterization. Presumably, the parties agreed to the

characterization because they legitimately, but mistakenly,

believed it was accurate.

Nonetheless, when the IRS recharacterized the free-

lancers as employees rather than independent contractors,

it triggered a specific set of statutory provisions imposing

specific liability on Microsoft. The Ninth Circuit has gone

far beyond the statutory liability associated with worker

misclassification. At the same time that Congress and

the IRS have made efforts to minimize the retroactive

impact of worker misclassification, and to increase the

predictability associated with worker classification issues,

* According to a recent report, there are currently 1,500 cases

in the CSP. 24 Pens. & Ben. Rep. (BNA) 1104 (May 5, 1997).

This provides a sense of how significant this case is, in that each

of these 1,500 employers—the tip of the iceberg—may be open to a

claim under the Ninth Circuit’s theory in Vizcaino.

13

the Ninth Circuit has unfairly imposed enormous retro-

active liability on Microsoft and increased the risks asso-

ciated with worker misclassification for all employers.

If it stands, the court’s ruling will result in a flood of

litigation, in which workers will challenge the independent

contractor status that they themselves agreed to, in order

to gain windfall benefits. The workers will have the ad-

vantage of litigating a complex, subjective and shifting

test of employment status.

III. THE NINTH CIRCUIT MISCONSTRUED THE ESPP.

Companies use stock purchase plans, like Microsoft's

ESPP, as a means of instilling loyalty among employees

and aligning the employees’ financial interests with the

interests of the company’s shareholders. Further, stock

purchase plans provide regular employees, who forgo flex-

ibility and often work for lower hourly compensation,

with an opportunity to participate in their employers’

long-term growth as a reward for staying with the com-

pany. Many of the publicly-traded members of the Em-

ployer Amici have employee stock purchase plans.

The Ninth Circuit fundamentally misunderstood the

nature of stock purchase plans when it imputed to Micro-

soft the intent to cover the freelancers under the ESPP.

It is extremely unusual for a company to provide equity-

based compensation to alternative workers, because such

workers have not made the same type of commitment to

the company as its regular employees. Alternative work-

ers are not expected to contribute to the long-term growth

of the company, so it makes little sense to reward them

with equity compensation that is normally realized over

a number of years.

The ESPP is subject to Section 423 of the Code, 26

U.S.C.A. § 423, which provides certain tax benefits to

stock purchase plans that meet its requirements. Under

Section 423, a stock purchase plan must be available to

14

all employees’ with certain exceptions—and oni/y to em-

ployees. Consistent with the notion that it makes little

sense to provide equity-based compensation to temporary

workers, employees who have worked for an employer

under two years and part-timers may be excluded from

participation.

It is clear from the ICAs that Microsoft did not intend

to cover the freelancers in the ESPP. Had Microsoft

wanted or intended to provide equity compensation to

the freelancers, it could have done so perfectly “legally”

using non-qualified stock options or restricted stock (or

other “shadow stock” techniques), and only the tax result

would have differed from that provided by the ESPP.

But, in fact, neither Microsoft nor the freelancers intended

this.

The ESPP is not subject to the Employee Retirement

Income Security Act of 1974, as amended, 29 U.S.C.A.

§$§ 1001-1461 (1985) (“ERISA”), so no enforceable

participation requirement can be found under Federal

law. What the Ninth Circuit has done in this case is

provide the freelancers a private right of action to enforce

the requirement in Section 423 of the Code that an em-

ployee stock purchase plan must cover all employees in

order to receive favorable tax treatment. The Code itself

provides no such cause of action, and this Court has made

it clear that none may be inferred. Cort v. Ash, 422 U.S.

66 (1975).

IV. THE NINTH CIRCUIT UTTERLY NEGATED

WASHINGTON LAW.

The Ninth Circuit’s decision completely disregards

Washington contract law by casting aside the unambiguous

agreements between Microsoft and the freelancers and

binding the two parties to a new agreement to which they

never assented. The Supreme Court of Washington has

repeatedly held that its courts cannot ignore a contract’s

express language:

15

In construing a contract, a court must interpret it

according to the intent of the parties as manifested

by the words used. Courts can neither disregard

contract language which the parties have employed

nor revise the contract under a theory of construing

it. An interpretation of a writing which gives effect

to all its provisions is favored over one which renders

some of the language meaningless or ineffective.

Wagner v. Wagner, 621 P.2d 1279, 1283 (Wash. 1980);

Mayer vy. Pierce County Med. Bureau, Inc., 909 P.2d

1323 (Wash. 1995); Corbray v. Stevenson, 656 P.2d

473, 475 (Wash. 1982) (“[C]Jontracts should be con-

strued to reflect the intent of the parties . . . and courts,

under the guise of construction or interpretation, should

not make another or different contract for the parties.”).

The ICAs state not only that the freelancers were in-

dependent contractors, but further that they agree to be

responsible for their own “insurance and other benefits.”

Vizcaino v. Microsoft Corp., 120 F.3d at 1019. The

Ninth Circuit’s reading of the contract ignores the require-

ment of Washington law that a contract be interpreted so

that all provisions are meaningful and effective and con-

sistent with the intent of the parties. Wagner, 621 P.2d

at 1283; Tanner Elec. Coop. v. Puget Sound & Light Co.,

911 P.2d 1301, 1310 (Wash. 1995) (“The touchstone of

contract interpretation is the parties’ intent.”); Seattle-

First National Bank v. Earl, 565 P.2d 1215, 1218 (Wash.

1977).

Similarly, the court ignores Washington law on contract

reformation. In reforming a contract, a court may not

impose new obligations on a party; instead, the court may

reform the contract only to reflect the parties’ actual

intent in making agreement. Seattle-First, 565 P.2d at

1218 (Wash. 1977) (“It is a longstanding rule that courts

cannot, and ought not, make a contract for parties which

they did not make for themselves or impose upon one

party an obligation which was not assumed.”); Weyer-

16

haueser Timber Co. v. Skaglund, 132 P.2d 724, 725-726

(Wash. 1942). (“Courts of equity do not rectify con-

tracts. They simply rectify instruments purporting to

have been made in pursuance of the terms of the contract.”).

Finally, the Ninth Circuit’s decision disregards the set-

tled legal principle that an individual “should not be

permitted unjustly to enrich himself at the expense of

another.” Bill v. Gattavara, 209 P.2d 457, 459 (Wash.

1949); Hatley v. West, 445 P.2d 208, 210 (Wash. 1968).

The Vizcaino opinion stands this equitable principle on

its head, by creating a contract that without question

unjustly enriches the freelancers, each of whom received

exactly what they agreed and expected to be paid for

their services.

In declining to enforce the ICAs, the Ninth Circuit

reaches a result directly contrary to the opinion of the

Court of Appeals for the Tenth Circuit in Boren v. South-

western Bell Telephone Co., 933 F.2d 891 (10th Cir.

1991). Mr. Boren sought benefits as an employee, after

working for Southwestern Bell for over 20 years pursuant

to a series of agreements labeling him an independent

contractor. The Tenth Circuit held that ERISA did not

apply, because Brown was not a “participant” for ERISA

jurisdictional purposes. In reviewing Boren’s contract

claim, however, the court held that Boren’s agreement not

to be considered an employee “prevent[s] him from claim-

ing that the work he performed for Southwestern Bill con-

stituted an acceptance of the company’s unilateral offer

of pension benefits. Clearly, neither party intended Mr.

Boren’s work to constitute such an acceptance.” 933 F.2d

at 894. Because the service contracts fixed the rights as

between the parties, and the rights of third parties were

not at issue, the court did not believe it necessary to deter-

mine whether Boren was actually an “employee” under

common-law standards. /d.

The Court of Appeals of Washington reached precisely

the same result in Daniel v. Pacific Northwest Bell Tele.

17

Co., 580 P.2d 652 (Wash. App. 1978), review denied,

90 Wash.2d 1025 (Wash. 1978).

CONCLUSION

For the reasons set forth above, we respectfully urge

this Court to grant Microsoft’s Petition for Writ of

Certiorari.

Respectfully submitted,

MARC A. PEARL FREDRIC S. SINGERMAN *

INFORMATION TECHNOLOGY DONALD L. ROSENTHAL

ASSOCIATION OF AMERICA ERICA A. WATKINS

JEFFREY MCMILLEN SEYFARTH, SHAW,

AMERICAN ELECTRONICS FAIRWEATHER & GERALDSON

Association 815 Connecticut Avenue, N.W.

Suite 500

MARK E. NEBERGALL Washington, D.C. 20006

SOFTWARE PUBLISHERS (202) 463-2400

ASSOCIATION

Counsel to Amici Curiae

Date: December 24, 1997 * Counsel of Record