Sidebar: Permatemps Law

After Microsoft got in trouble with the Internal Revenue Service in 1989, the company told many of its contractors to sign up at local temp agencies so that it could hire them back. Before Microsoft would allow them to return, however, it asked them to sign contracts, which were an attempt to clarify their status. Normally, if people sign a contract saying that they know they're not going to get any benefits, that permanently settles the matter. But the courts later ruled that the temps had signed the contracts under a mistaken premise. You are what you are, the courts decided. Signing a waiver saying that you're a temp doesn't make you a temp -- not if you've been doing the work of a full-time employee all along.

Once the courts had established that the contracts had mischaracterized the permatemps, they had to figure out how to decide which workers were eligible to sue. That required the courts to determine who the true employer of the temps was -- Microsoft or the temp agencies. Under the law, temps could be on an agency payroll and still be "common-law employees" of the company that they were working for.

To get to the bottom of this, the courts (and the IRS, which also rules on such cases) have developed a rubric that takes as many as 20 different standards into account. The courts are supposed to weigh all factors to determine the employer-employee relationship. According to this test, there could be more than 10,000 temps who were actually common-law employees and who could therefore join the class action.

What were the temps able to sue for? Even though the contracts described their status incorrectly, they were not necessarily entitled to receive benefits -- with one exception: Microsoft's employee stock-purchase plan (ESPP). That plan allows an employee to purchase Microsoft stock at a 15% discount on the lowest price that the stock had reached in the six-month period prior to that employee's making the purchase. In order for Microsoft to receive the kind of lucrative tax breaks that make it possible to offer an ESPP, the plan requires the company to allow any common-law employee to participate. So, once the courts determined that temps were, in fact, common-law employees, temps became eligible to participate, retroactively, in the ESPP.

The question is still up for debate as to how much stock the temps might have bought had they known that they were eligible to buy it. One possible precedent: the buying and selling patterns of other employees. Since 1993, 70% to 80% of all full-time Microsoft employees have purchased stock through the ESPP at any given time. So Microsoft could be on the hook for many millions of dollars.

Sidebar: Why Permatemps?

Why did Microsoft begin the practice of employing large numbers of free agents in the first place? And why did it insist upon continuing that practice even after it got in trouble with the IRS? After dozens of interviews with free agents, permatemps, lawyers, agency operators, and Microsoft employees, no single, compelling answer emerges. But a variety of explanations do come to light.

Was it about money? Not according to Microsoft. In fact, the original 1990 email that went out, which led managers to clarify the roles of the temps who worked for them, indicated that money wasn't the issue: "This is going to mean a large increase in full time headcount but should not cause much increase in actual spending," the internal email read. "It will mean that we add stock for a number of people but that is to be expected and combined with the benefits should allow us to put these people on our payroll for less than we are paying them as 'contractors.' "

Was it about Microsoft? Some observers suggest that the permatemps issue has more to do with Boeing than it does with Microsoft. Boeing, historically the largest employer in the Seattle area, had gone through both boom and bust cycles, adding large numbers of full-time employees during good times, only to lay off those workers during industry downturns. Microsoft had no desire to see its name splashed across local papers as the new economy's poster child for community disruption.

Was it about the industry? The emerging world of software in the new economy is the perfect site for workplace ambiguity to crop up: Everyone is a knowledge worker, work is largely organized around projects, and distinctions between free agents and permatemps become fuzzy. Small wonder that employment rules are unclear.

Was it about Microsoft's coding culture? To some people, the permatemps controversy is a result of Microsoft's early culture: Hackers and other hard-core software employees were at the heart of the company -- and everyone else was, in one sense or another, temporary. Without adopting this cultural split as a matter of human-resources policy, the company simply drifted toward valuing nonhackers less than hackers. The "permatemp" status emerged gradually, as another way of doing business.

Was it an accident? Even the courts that have been handling the lawsuit ascribe no malicious intent to Microsoft. Microsoft made a series of individual decisions about whom to hire full time and whom to hire through an agency; somewhere along the way, those decisions led to the creation of a class of permatemp workers. At worst, it was sloppy management -- at best, an inadvertent practice that spun out of control.