Employee Benefits for the Contingent Workforce (Portfolio 399)

Tax Management Portfolio, Employee Benefits for the Contingent Workforce, No. 399-2nd, addresses the employee benefits-related questions and issues that arise in connection with the employment of contingent or alternative workers. 

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Tax Management Portfolio, Employee Benefits for the Contingent Workforce, No. 399-2nd, addresses the employee benefits-related questions and issues that arise in connection with the employment of contingent or alternative workers. These workers include independent contractors, leased employees, freelancers, on-call employees, contract/technical workers, and part-time, seasonal and temporary employees, among others, that are employed under a myriad of employment arrangements that have come to characterize the “contingent workforce.” Such arrangements include outsourcing, pay-rolling, master vendor arrangements, employee leasing, and the use of professional employer organizations. The Portfolio describes the fundamentals of worker classification principally under the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, and it examines the tax and benefits consequences of worker misclassification in a variety of traditional and non-traditional employment settings such as partnerships, LLCs, joint ventures, and multiple employer arrangements. Considered in detail are the issues that arise when contingent workers are improperly covered under, or excluded from, qualified and nonqualified retirement plans, welfare plans, certain fringe benefit plans, and stock-based compensation arrangements. Also covered are the emerging questions of fiduciary responsibility for the proper classification of workers under ERISA-covered pension and welfare plans.


Alden J. Bianchi

Alden J. Bianchi, B.S., Worcester Polytechnic Institute (1974); J.D., Suffolk Law School (1978); LL.M., Georgetown Law Center (1979); LL.M. (tax), Boston University School of Law (1984); Employee Benefits Committee of the American Bar Association Tax Section; Massachusetts Bar (1978), Illinois and District of Columbia Bars (1979).

Table of Contents

Detailed Analysis

I. Worker Classification and the Contingent Workforce

A. Introduction

1. The Emergence of the Contingent Workforce

2. Scope

B. Overview of Worker Classification

C. Contingent Workers and Alternative Employment Arrangements

1. Independent Contractors

2. Leased Employees

3. “On-Call” Employees/Day Laborers

4. Temps/Agency Temporary Employees

5. Contract Staffing Firms

6. Professional Employer Organizations (PEOs)

7. Outsourcing

8. Pay-rolling

9. Freelancers

10. Contract Employees and Technical Workers

11. Master Vendor Arrangements

12. Perma-temps

13. Part-time, Seasonal and Temporary Employees

D. Measuring the Size and Scope of the Contingent Workforce

1. The BLS Data

2. Department of Labor Advisory Council

3. The 1999 EBRI Study

4. The 2000 GAO Study

E. The Coming Regulatory Challenges

II. Employment Status - Common Law Employee v. Independent Contractor

A. Basic Concepts

1. The Definition of “Employee”

2. The Common Law Agency Test

3. The Economic Realities Test

4. The Hybrid Test

B. The Code and the Multi-factor Test

1. Revenue Ruling 87-41 - Twenty Factors

2. IRS Training Guidelines

3. Exceptions in the Code


III. Coverage of Contingent Workers under Employee Benefit Plans

Introductory Material

A. Participant Rights Under ERISA vs. Tax-Qualification Under the Code

B. Tax Qualification - Pension, Profit Sharing, and Stock Bonus Plans

1. Consequences of Including Independent Contractors

a. Manipulation of Plan Coverage

b. The “Insurance Agent” Cases

c. The Allstate NOA Settlement

d. Private Letter Ruling 9546018 - Reclassified Workers

2. Consequences of Excluding a Covered Employee

3. The Microsoft Case

a. Facts

b. The District Court

c. The Ninth Circuit

d. The Plaintiff Class

e. The Settlement

4. Retroactive Reclassification of Workers

a. 1999 Unreleased TAM

b. 2000 Unreleased TAM

c. The Unresolved Issues

5. Exclusion of Ineligible Classes of Employees

a. Cases Inferring a Private Right of Action

(1) Crouch v. Mo-Kan Iron Workers Welfare Fund

(2) Renda v. Adam Medrum and Anderson Co.

b. Later Cases - No Private Right of Action

(1) Abraham v. Exxon Corp.

(2) Capital Cities/ABC, Inc. v. Ratcliff

(3) Clark v. E. I. DuPont de Nemours & Co.

(4) Bronk v. Mountain States Telephone & Telegraph, Inc.

(5) Trombetta v. Cragin Federal Bank for Savings Employee Stock Ownership Plan

c. Standing

d. Waivers

C. Tax-Sheltered Annuity Arrangements

D. Non-Qualified Plans of Deferred Compensation

E. Welfare and Fringe Benefit Plans

1. Group-term Life Insurance Purchased for Employees ( 79)

2. Amounts Received Under Accident and Health Plans ( 105) and Contributions by Employer to Accident and Health Plans ( 106)

a. Insured Plans

b. Self-Insured Plans

3. Cafeteria Plans ( 125)

4. Educational Assistance Programs ( 127)

5. Dependent Care Assistance Programs ( 129)

6. Adoption Assistance Programs ( 137)

7. Voluntary Employees’ Beneficiary Associations

8. Non-Section 6039D Fringe Benefits with Nondiscrimination Standards

a. (Qualified) Achievement Awards - 74(c) and 274(j)

b. Employer-Operated Eating Facilities - 132(e)(2)

c. Qualified Employee Discounts - 132(a)(2)

d. No-additional Cost Services - 132(b)

e. Qualified Tuition Reduction Programs - 117(d)

f. Athletic Facilities - 132(j)(4)

9. Non-Section 6039D Fringe Benefits without Nondiscrimination Standards

a. (Non-Qualified) Achievement Awards - 74(c) and 274(j)

b. De minimis Fringe Benefits - 132(a)(4)

c. Meals and Lodging Furnished for the Convenience of the Employer - 119

d. Moving Expense Reimbursements - 132(a)(6)

e. Transportation Benefits - 132(a)(5)

f. Working Condition Fringe Benefits - 132(a)(3)

IV. Special Plan Coverage Issues and Problems

Introductory Material

A. Leased Employees

1. Terminology

2. Antecedents of the Leased Employee Rules - The Kiddie and Garland Cases

a. The Evolution of 414(n)

b. Current 414(n)

c. Revenue Ruling 75-41

d. The Evolving Standard

(1) Burrey v. Pacific Gas and Electric Co.

(2) Wolf v. Coca Cola Company

e. Plan Drafting Issues

3. Time-Out Clauses

B. Professional Employer Organizations

1. The Common Law Doctrine of Co-Employment

2. TAM 199918056

3. The PEO Industry and Co-Employment

4. PEOs and (Statutory) Leased Employees

5. PEO Maintenance of Employee Benefit Plans

a. PEO Plan

b. Recipient's Plan

6. Mirror Plans

C. The Post-Employment Consulting Conundrum

D. The “Accidental” Multiple Employer Welfare Arrangement

E. Employees of Partnerships and LLCs

1. Employment Status of LLC Members

2. Tax-Qualified Plans and Cash-or-Deferred Arrangements

3. Welfare and Fringe Benefits


F. Part-Time, Seasonal and Temporary Employees

1. Indirect Age and Service Requirements

2. Counting of Hours vs. Elapsed Time

G. Contract Employees/Technical Workers

H. Employee Benefit Plans of Joint Ventures

V. Coverage of Contingent Workers under Stock-Based and Incentive Plans

Introductory Material

A. Nonstatutory Stock Options

B. Incentive Stock Options Under Code 422

C. Section 423 Plans

VI. ERISA Fiduciary Standards and Contingent Workers

Introductory Material

A. The Time Warner/DOL Litigation

B. Other Misclassification Cases Under ERISA

C. ERISA 510

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Rev. Rul. 87-41, 1987-1 C.B. 296

Worksheet 2 Technical Advice Memorandum dated July 28, 1999 (Unreleased)- Exclusion of Participants by Class or Category

Worksheet 3 Technical Advice Memorandum dated November 28, 2000 (Unreleased)- Exclusion of Certain Employees Under 410(a)

Worksheet 4 IRS Field Directive “Exclusion of Part-Time Employees from Plan Participation Under Code 410,” dated November 22, 1994




Department of Labor Regulations

Department of Labor Opinions


Legislative History:

Treasury Regulations:

Treasury Rulings, Procedures: