# Amicus Curiae Brief — Microsoft Corp. v. Vizcaino > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_1773%3A4 ## Record - **Collection:** Supreme Court brief - **Document type:** Amicus Curiae Brief - **Published:** January 1, 1998 - **Citation:** 522 U.S. 1098 ## Text 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 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386013_1773%3A4. Public record. Not legal advice.