A recent ruling by the U.S. Court of Appeals against Microsoft Corp. was a wake-up call to businesses that use temporary staffing services.

The decision relayed to all employers the importance of closely monitoring temporary workers to avoid having them classified as employees, entitling them to full benefits. Pacific Bell and PG & E; surely took notice, as they have also seen their share of "temporary" workers claiming employee status.

Market pressures are forcing companies like Microsoft to have a flexible workforce to reduce negative publicity associated with layoffs and allow for increases or decreases in staffing based on production cycles.

Additionally, using temporary workers can give companies access to marketable and skilled candidates to handle projects on an as-needed basis. Conversely, job candidates can benefit through flexible work schedules, the opportunity to constantly increase their skills, and the potential for competitive pay based on the demand for their experience.

Having a flexible staff is a popular business strategy in today's market, although mishandling temporary workers can lead to lawsuits related to employee classifications. In Microsoft's case, the appeals court ruled that thousands of "temporary" workers employed through staffing services since 1986 were entitled to the same benefits that all regular Microsoft employees receive.

Notably, the court disregarded the fact that the workers knew they were not entitled to benefits and had signed agreements concerning their non-eligibility.

The lawsuit began after the Internal Revenue Service audited Microsoft's employment records. Recognizing that the use of independent contractors can result in underpaid taxes, the IRS found that these employees were not independent contractors but were regular employees for withholding and employment tax purposes. At the center of the court's ruling against Microsoft was the fact that the "temps" were actually "common-law employees," workers who had spent more than five months at the company and were substantially under the control of the business.

Equal treatment

Federal law requires that companies offer 401(k) pension plans and stock option plans to all employees on an equal basis, but temporary workers are not classified under this law as full-time employees. So the court ruled that by labeling those thousands of employees "temps," Microsoft had been unfairly denying certain benefits (stock options) to what were, in reality, its common-law employees.

This decision has the potential to cost Microsoft, along with other companies following the same employment strategies, millions of dollars in unpaid benefits and compensation.

For instance, temporary workers are normally not included in fringe benefit programs or entitled to unemployment insurance and workers' compensation. In addition, the ruling will likely change industry-wide practices by challenging the growing use of long-term temporary workers as a means to cut labor costs.

However, companies should be able to employ the practice of using temps without encountering the problems that face Microsoft. In the process, companies should consider what steps a personnel service takes in dealing with responsibilities involved with temporary employees.

First, your company needs to realize that open-ended staffing assignments in which workers have little contact with the staffing service increase the possibility that these workers will be considered your employees.

In addition, your personnel service should be cognizant of the way its people are being utilized by its clients. Its role should involve more than just managing the payroll and supplying the required insurance coverage for the workers.

A personnel service should work with clients to take some responsibility for hiring and firing, salary and benefits, placements in specific company departments, negotiating the specifics of the job (hours, duration of assignment, etc.), assisting clients in supervision of workers (handling complaints, counseling, etc.), and performance and recognition evaluations.

Clear designations

Even if the client company has some say in these facets of the employment relationship, the staffing service should be legally recognized as long as it is substantially involved as well.

In addition to working with the personnel service, companies should take additional steps to ensure that temporary workers are not misclassified and are not legally considered permanent employees.

Companies should clearly distinguish independent contractors, freelancers and temporary employees from regular employees.

One way to do this is by including separate provisions addressing independent contractors, freelancers and temporary employees in employment-related documents such as handbooks, manuals and benefit plans.

Companies should define the separate categories of employees in the workplace and specify the benefits to which each type of employee is entitled. Benefit plans that are extended to regular employees should specify that such benefits are not extended to temporary employees.

Companies also should consider paying temporary employees through an account that is separate from the payroll for their regular employees. It is a good idea to periodically review payroll and benefit plans to make sure that your company is distinguishing between temporary and permanent employees.

As long as these steps are followed, businesses and corporations should not view the Microsoft decision as a reason to sound the alarm and sever ties with their long-term temporary workers and the services that staff them.

Rather, employers should view the ruling as an opportunity to re-evaluate their relationship with their personnel service and the workers it provides.

Joan Van Donge is vice president of Wollborg/Michelson Personnel Service Inc. and can be reached at jvandonge@wmjobs.com.

Entrepreneur's Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.

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