Microsoft Testing Limits on Temp Worker Use

“Why are we at Microsoft?” bellowed Microsoft Corp.’s billionaire Executive Vice President Steve Ballmer to a crowd of 9,000 employees packed into the Kingdome, Seattle’s indoor stadium.

“For the money!” he screamed. “Show me the money!” The crowd responded with a roar: “Show me the money!”

The annual company meeting, a revivalist celebration held this fall to mark another year of record-breaking profits for the software company and its stock-wielding employees, was classic Microsoft. But excluded from the gathering--and the money--were thousands of other full-time Microsoft employees, including program manager Jim Johnson, who has worked there for the last five years.

Johnson has taken long business trips as a Microsoft representative and helped negotiate important deals on behalf of the software giant. Yet he works on revolving three-month contracts that leave him open to being laid off at any time--even before his contract ends--and leave him out in the cold when it comes to showing him the money.

“People who started at the same time as I did are cashing in their options and paying for their houses in cash,” said Johnson, who doesn’t want his real name used for fear of retribution. “Meanwhile, I live in an apartment; I’m still paying $200 a month for health care.”

Such is life for Microsoft’s “permatemps.” These men and women stoke the Microsoft moneymaking machine by doing everything from writing software manuals to developing CD-ROMs and designing Internet Web sites. But although they often work doggedly and loyally for 50 hours or more a week, they are denied employee status--and, more important, the stock options and other rich benefits that come with it.

Microsoft is in the vanguard of a growing movement in corporate America, especially among high-tech companies: using full-time temp workers who save the company millions of dollars in benefits but who can be fired in the time it takes to boot up a computer.

Using temporary workers isn’t a new phenomenon, but Microsoft has added a twist: The Redmond, Wash.-based company funnels the workers through “payrolling” agencies that cut paychecks and often force the workers to sign restrictive contracts. Microsoft aggressively uses these agencies, hiring great numbers of workers for critical jobs and over long periods.

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Microsoft has long been viewed as an industry leader for providing unusually generous stock options to a broad swath of employees. “We share more of our wealth with our employees than anybody,” boasted Microsoft Chairman Bill Gates.

As for contingency workers, Gates said Microsoft is above reproach because it uses few temps to fill its most important positions. “Of the technical people, it’s a tiny percentage,” Gates said in an interview. “For people who have talent, our doors are open.”

But Microsoft’s use of temporary workers has thrust it in the center of a hotly contested class-action lawsuit whose outcome could have wide-reaching implications for the thousands of companies that depend on contingent workers.

Businesses--particularly in the technology sector--are closely watching the case, which will in effect define who is an employee and what responsibilities an employer has.

If Microsoft prevails in its arguments, other companies are likely to expand their use of payrolling agencies, one of the fastest-growing sectors of a temporary staffing business that has doubled over the last four years to reach $31 billion in worker wages last year, according to the National Assn. of Temporary and Staffing Services, an industry trade organization.

A study by the Conference Board, a business research group, estimates that as many as 20% of U.S. corporations use temps for more than 10% of their work force, although there’s no indication how many are long-term permatemps.

“In recent years, businesses have begun to use staffing services on a strategic basis,” said Richard Wahlquist, executive vice president of the National Assn. of Temporary and Staffing Services.

But the pendulum of public opinion has been moving against employers who try to deny full-time status or benefits to a large segment of their workers. Earlier this year, support for part-time workers played a key role in the United Parcel Service strike settlement in favor of the union.

A look at Microsoft’s use and treatment of permatemps illuminates the legal and social issues that have arisen as companies seek to redefine what constitutes an employee and what responsibilities they have regarding workers.

The issue has come to a head as the result of a U.S. 9th Circuit Court ruling that ordered Microsoft to pay full benefits to contractors who were hired and supervised by Microsoft managers on campus and who met other criteria for being “common law” employees.

In its ruling, the court found that Microsoft should have been classifying contractors as employees and paying them full benefits.

The class-action suit has been remanded to U.S. District Court in Seattle, which now must determine whether benefits should be paid only to the 800 or so contractors Microsoft itself hired before 1990, as Microsoft argues, or if the thousands of contractors hired through payrolling agencies since then who have worked for the company for more than a year should also receive benefits, as the plaintiffs argue. (Microsoft is taking the Appeals Court decision to the U.S Supreme Court.)

Temp workers have become commonplace in the high-tech industry. Up to 40% of all workers in Silicon Valley are contingent workers, according to a South Bay AFL-CIO Labor Council study. Some businesses, like Hewlett-Packard Co., have publicly stated their intention to keep the proportion of temps they hire at about 10%.

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But not Microsoft. Testing common notions of what is legal and socially acceptable, the software giant has aggressively increased its use of contingent workers in every part of its business.

About 3,500 of Microsoft’s 13,000 employees--or 27%--in the Seattle area are temp workers. Among the several thousand people at the Interactive Media Division, which develops Microsoft’s CD-ROM and Internet products, about half are temps.

In contrast to what Gates said, Microsoft personnel officer Doug McKenna said, “We count on them to do a lot of important work for us.” In addition, he said, “we use them to provide us with flexibility and to deal with uncertainty.”

Indeed, temps act as shock absorbers, protecting Microsoft’s regular employees during inevitable downturns. When the company needs to cut its work force, it always eliminates temps first. And because Microsoft considers them employees of the payrolling companies, it can fire the workers without offering severance pay--potentially saving the company millions of dollars--and without providing any explanation.

Last fall, for example, Microsoft hired hundreds of temp workers to staff its push into developing content for the Internet. But that effort faltered, and in recent months the company has fired many of the workers.

And earlier this year, about 90 receptionists were fired and told that Microsoft’s clerical needs would henceforth be handled by an outside provider, with which they could enlist. Along with their jobs, those employees lost their Microsoft benefits and stock options.

“We were overpaying them,” said Bob Herbold, Microsoft’s chief operating officer.

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And the push to use more temporary workers has paid off for the company. “Boy, it’s had a positive impact financially,” Herbold said in an interview. But such an attitude--especially from a company that has won praise in the past for sharing its wealth through employee stock options--doesn’t sit well with critics.

Microsoft “is so enormous and so wealthy,” said Amy Dean, an executive officer of Silicon Valley’s South Bay AFL-CIO Labor Council, who has been active in trying to organize the growing temporary work force in Silicon Valley. “It’s inexcusable and incomprehensible that they would use these tactics.”

But Microsoft officials say there are reasons for their actions. “We are not good at managing that part of the business,” explained Sharon Decker, director of contingent staff at Microsoft. “There are outside companies who can do it better.”

Microsoft’s use of contractors first came under scrutiny as a tax issue in 1990. An Internal Revenue Service inquiry concluded that Microsoft’s freelance workers should be considered regular employees under its tax rules and treated as such.

Microsoft responded by firing most of the contractors and offering to rehire them if they would sign up at one of several outside staffing agencies. The move provided a boost to the nascent payrolling, or “employee leasing,” business.

The new arrangement allows Microsoft to continue to interview and hire the temps, but the payrolling company issues checks, withholds taxes and otherwise acts as employer, taking about 30% from worker paychecks each month to cover taxes and basic benefit costs, as well as the agency’s markup. IRS officials could not be reached for comment.

“The IRS just wants to see as many people on somebody’s payroll as possible,” said Jeff Christiansen, who runs Art Source, a payrolling agency that provides graphic artists to Microsoft and other tech companies.

But contractor Donna Vizcaino refused to go along with demands that she sign up with an agency and was subsequently fired. In 1993, Vizcaino filed a suit, later granted class-action status, demanding full benefits for the three years she was at Microsoft.

“They would give job guarantees and benefits to all these students they were hiring from overseas, but then deny us benefits,” Vizcaino said.

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The U.S. 9th Circuit Court of Appeals ruled in favor of Vizcaino and the contract workers in July. The Circuit Court judges ruled the contractors were “common law” employees deserving of full benefits, even though they had signed contracts agreeing they would not receive benefits.

The case could not only define who should be considered an employee, but also have an impact on a number of laws nationwide that govern retirement benefits, hiring rules and a range of workplace regulations based on whether or not a worker is regarded as an employee.

The federal Employee Retirement Income Security Act, for example, prevents a company from discriminating against any group of employees in giving out retirement benefits.

Steve Strong, attorney for the Microsoft contractors, argues that the company’s use of permatemps is a blatant effort to bypass such laws.

Microsoft counters that its agencies--which sign contracts with the temps, pay their wages and offer benefits--are the true employers of the temps and are therefore responsible for their care.

Officials at Microsoft and payroll agencies say they find it strange that temps should complain.

“These guys are paid well,” said Peg Cheirrett, founder of Wasser Communications Services, a subsidiary of AccuStaff, which provides payrolling services for Microsoft. Cheirrett says it isn’t uncommon for technical writers to be paid $25 to $35 an hour, wages that are high for the Seattle area.

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But even at those rates, Microsoft can save a substantial amount of money. A recent study by Washington state’s chief economist found that over the last year, Microsoft employees earned, on average, about $220,000, including stock options. That number excludes Microsoft’s five best-paid executives.

In addition, Microsoft has used its enormous clout as a major employer in the Seattle area to impose limits on the growth in wages of temporary employees. To prevent department managers from inflating temp wages by hiring people from other departments, a practice known as “sharking,” Microsoft put a 5% cap on the amount that temporary-employee wages could rise every year. The company says it wanted to keep wages consistent across certain job categories.

But beyond pay issues, the permatemps complain of being treated like second-class citizens. In a practice some have come to call badge apartheid, Microsoft draws a sharp distinction between regular employees--who carry blue-bordered ID badges--and temps--who carry orange badges. Those with orange badges aren’t permitted to use the campus play fields or basketball courts, can’t buy stock at a 15% discount, can’t get discounted products at the company store and can’t sign up for job-training programs.

“As a part-timer, you are like a tool,” said Philip Hirschi, a Web designer who recently left a temporary job at Microsoft to take a full-time position elsewhere. “If you are a Phillips screwdriver and they need a flat head, they just get rid of you. They won’t retool you.”

As a temp, “they treat you like pond scum,” said Lin Laurie, who worked as a Microsoft contractor for many years. When Microsoft decided to take her on as a regular employee, she said, “suddenly the world opened up,” and the attitude of colleagues changed.

One Microsoft manager, who graduated from an orange badge to a blue badge, admits that even he treats temps differently.

“Temps are temps--they come and go,” he said. “They are probably not working as hard. They aren’t invested in the company, so it’s not in their interest to work 70-hour weeks.”

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Agencies have portrayed the contract workers as enjoying a carefree life of extended vacations sandwiched between months on the job. But most of the contract workers interviewed for this story said they would prefer the security of a permanent job.

“My wife and I felt we could never plan for anything. We didn’t feel we could buy a car or remortgage the house,” said former temp Hirschi. “It is a colder, more heartless way of being employed.”

Many permatemps say Microsoft has made their situation even more untenable by giving a handful of agencies the contracts to handle the bulk of Microsoft’s payrolling business. That gives payrolling agencies the leverage to require temps to sign restrictive contracts with non-compete clauses, effectively tying the worker to the agency for a year at a time.

Lorna Chong said she was happy with her temp contract job at Microsoft. But when she tried to get a job at another Microsoft division through a different agency, her payroll agency threatened to sue, citing the non-compete clause. As a result, Chong had to find work outside Microsoft.

“If there is a non-compete agreement, that is between the agency and the employee,” said Microsoft’s Decker. “We don’t know about it; we don’t want to know about it.”

Payrolling agencies say they are addressing some of the issues. “We are trying to help Microsoft work through their morale problem,” said Art Source’s Christiansen.

But for Ballmer, who takes it upon himself to keep up the pressure on Microsoft to perform, the issue is hardly worth addressing.

“A temp is a temp. Some people prefer to work as temps,” he said in an interview. “People know when they sign up. It’s not like we fool anybody.”