By: A.J. Cook

If you misclassify workers as independent contractors rather than employees, you will just owe money to the Internal Revenue Service, right? Wrong! Mega-giant Microsoft Corporation agreed with the agency to reclassify and now owes the workers big bucks for unpaid employee benefits.

Does this mean mom and pop stores owe health care to workers who are not listed on their payroll? Maybe.

Because of the difficulty in some situations of classifying workers, the IRS and businesses continue to battle over the issue. Now, with the Microsoft case, we see a new, non tax, element -- employee benefits.

The case involved freelancers who agreed in a contract they were self-employed, wouldn't receive employee benefits and were responsible for their own Social Security taxes. They worked as formatters, software testers, production editors side by side with regular employees. The freelancers weren't paid through the payroll department but submitted invoices and were paid through another department. They were also distinguishable from regular employees because they had different E-mail addresses, wore different color badges, weren't invited to company functions.

Because of the company's extensive control over the workers, the IRS said the freelancers were employees, and the company owed overdue withholding taxes and the employer's half of Social Security taxes. After intensive arguing, the company agreed.

When the freelancers learned of the IRS deal, they demanded to participate in employee pension and stock purchase plans for prior years. The company refused, and they sued.

In court, the world's largest computer software company said the freelancers were ineligible. They weren't on the payroll and had signed contracts saying they were independent contractors.

The court said these points didn't matter. The company's benefit plan say employees are covered. Since the freelancers were determined by the IRS -- with the company's consent -- to be employees, they were entitled to employee benefits.

In the Microsoft case, as in tax cases, the facts, not the contracts, determine workers' status. And the biggest factor is control -- who decides how, when and where the worker performs the job. That "who" pays the taxes, and now pays the benefits as well.

The Moral: A rose -- or an employee -- by any other name would be the same.

A.J. Cook is a lawyer and CPA. His tax column appears weekly in numerous newspapers. Why isn't it published in your hometown newspaper? Ask its Business Editor to subscribe.

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Released 7-28-97