Vizcaino v. Microsoft Corp.
U.S. 9th Circuit Court of Appeals
DONNA VIZCAINO; JON R. WAITE;
MARK STOUT; GEOFFREY CULBERT;
LESLEY STUART; THOMAS MORGAN;
ELIZABETH SPOKOINY; LARRY
No. 94-35770
SPOKOINY,
D.C. No.
Plaintiffs-Appellants,
CV-93-00178-CRD
v.
OPINION
MICROSOFT CORPORATION, and its
pension and welfare benefit plans,
et al.,
Defendants-Appellees.
Appeal from the United States District Court
for the Western District of Washington
Carolyn R. Dimmick, District Judge, Presiding
Argued and Submitted
March 27, 1997--San Francisco, California
Filed July 24, 1997
Before: Procter Hug, Jr., Chief Judge, and
James R. Browning, Betty B. Fletcher, Harry Pregerson,
Cynthia Holcomb Hall, Diarmuid F. O'Scannlain,
Ferdinand F. Fernandez, Thomas G. Nelson,
Michael Daly Hawkins, A. Wallace Tashima, and
Sidney R. Thomas, Circuit Judges.
Opinion by Judge Fernandez;
Partial Concurrence and Partial Dissent by Judge Fletcher;
Partial Concurrence and Partial Dissent by
Judge O'Scannlain
SUMMARY
_________________________________________________________________
COUNSEL
Stephen K. Strong, David F. Stobaugh, Bendich, Stobaugh &
Strong, Seattle, Washington, and Charles K. Wiggins, Bain-
bridge Island, Washington, for the plaintiffs-appellants.
James D. Oswald and Timothy St. Clair Smith, Davies, Rob-
erts & Reid, Seattle, Washington, for the defendants-
appellees.
Ethan Lipsig, Paul, Hastings, Janofsky & Walker, Los Ange-
les, California, for amici curiae American Electronics Associ-
ation, California Chamber of Commerce, California
Employment Law Council, and The Employers Group; Steven
Cherensky, Weil, Gotshal & Manges, Menlo Park, California,
for amici curiae American Payroll Association, Association of
Private Pension and Welfare Plans; Linda J. Dunn, Office of
the Attorney General, Seattle, Washington, for amicus Wash-
ington State Department of Labor and Industries.
_________________________________________________________________
OPINION
FERNANDEZ, Circuit Judge:
Donna Vizcaino, Jon R. Waite, Mark Stout, Geoffrey Cul-
bert, Lesley Stuart, Thomas Morgan, Elizabeth Spokoiny, and
Larry Spokoiny brought this action on behalf of themselves
and a court-certified class (all are hereafter collectively
referred to as "the Workers"). They sued Microsoft Corpora-
tion and its various pension and welfare plans, including its
Savings Plus Plan (SPP), and sought a determination that they
were entitled to participate in the plan benefits because those
benefits were available to Microsoft's common law employ-
ees. The district court granted summary judgment against the
Workers, and they appealed the determinations that they were
not entitled to participate in the SPP or in the Employee Stock
Purchase Plan (ESPP). We reversed the district court because
we decided that the Workers were common law employees
who were not properly excluded from participation in those
plans. See Vizcaino v. Microsoft Corp., 97 F.3d 1187 (9th Cir.
1996) (Vizcaino I). However, we then decided to rehear the
matter en banc, and we now agree with much of the panel's
conclusion and reverse the district court.
BACKGROUND
At various times before 1990, Microsoft hired the Workers
to perform services for it. They did perform those services
over a continuous period, often exceeding two years. They
were hired to work on specific projects and performed a num-
ber of different functions, such as production editing, proof-
reading, formatting, indexing, and testing. "Microsoft fully
integrated [the Workers] into its workforce: they often worked
on teams along with regular employees, sharing the same
supervisors, performing identical functions, and working the
same core hours. Because Microsoft required that they work
on site, they received admittance card keys, office equipment
and supplies from the company." Id. at 1190. However, they
were not paid for their services through the payroll depart-
ment, but rather submitted invoices to and were paid through
the accounts payable department.
Microsoft did not withhold income or Federal Insurance
Contribution Act taxes from the Workers' wages, and did not
pay the employer's share of the FICA taxes. Moreover,
Microsoft did not allow the Workers to participate in the SPP
or the ESPP. The Workers did not complain about those
arrangements at that time.
However, in 1989 and 1990 the Internal Revenue Service
examined Microsoft's records and decided that it should have
been withholding and paying over taxes because, as a matter
of law, the Workers were employees rather than independent
contractors. It made that determination by applying common
law principles. Microsoft agreed with the IRS and made the
necessary corrections for the past by issuing W-2 forms to the
Workers and by paying the employer's share of FICA taxes
to the government.
Microsoft also realized that, because the Workers were
employees, at least for tax purposes, it had to change its sys-
tem. It made no sense to have employees paid through the
accounts payable department, so those who remained in
essentially the same relationship as before were tendered
offers to become acknowledged employees. Others had to dis-
continue working for Microsoft, but did have the opportunity
to go to work for a temporary employment agency, which
could then supply temporary Workers to Microsoft on an as-
needed basis. Some took advantage of that opportunity, some
-- like Vizcaino -- did not.
The Workers then asserted that they were employees of
Microsoft and should have had the opportunity of participat-
ing in the SPP and the ESPP because those plans were avail-
able to all employees who met certain other participation
qualifications, which are not relevant to the issues before us.
Microsoft disagreed, and the Workers asked the SPP plan
administrator to exercise his authority to declare that they
were eligible for the benefits. A panel was convened; it ruled
that the Workers were not entitled to any benefits from
ERISA plans1 -- for example, the SPP -- or, for that matter,
from non-ERISA plans -- for example, the ESPP. That, the
administrative panel seemed to say, was because the Workers
had agreed that they were independent contractors and
because they had waived the right to participate in benefit
plans. This action followed.
JURISDICTION AND STANDARD OF REVIEW
The district court had jurisdiction pursuant to 29 U.S.C.
S 1132(e)(1) and 28 U.S.C. SS 1331 and 1367(a). We have
jurisdiction pursuant to 28 U.S.C. S 1291.
We review the district court's grant of summary judgment
de novo. See Bagdadi v. Nazar, 84 F.3d 1194, 1197 (9th Cir.
1996). However, when reviewing the decision of a plan
administrator who has discretion, "the exercise of that discre-
tion is reviewed under the arbitrary or capricious standard, or
for abuse of discretion, which comes to the same thing." Snow
v. Standard Ins. Co., 87 F.3d 327, 330 (9th Cir. 1996); see
also Saffle v. Sierra Pac. Power Co. Bargaining Unit Long
Term Disability Income Plan, 85 F.3d 455, 458 (9th Cir.
1996).
DISCUSSION
Although the Workers challenge both their exclusion from
the SPP and their exclusion from the ESPP, the two plans are
subject to rather different legal regimes. The former is a 26
U.S.C. S 401(k) plan, which is governed by ERISA; the latter
is a 26 U.S.C. S 423 plan, which is not governed by ERISA.
It, instead, is governed, at least in large part, by principles
arising out of the law of the State of Washington. Neverthe-
less, certain issues, perhaps the most critical ones, cut across
both regimes, and we will address them first.
I. GENERAL CONSIDERATIONS.
A. The Workers' Status.
It is important to recognize that there is no longer any ques-
tion that the Workers were employees of Microsoft, and not
independent contractors. The IRS clearly determined that they
were. In theory one could argue that what the IRS said was
fine for withholding and FICA purposes, but that is as far as
it goes.
However, the IRS made its determination based upon the
list of factors which is generally used to decide whether a per-
son is an independent contractor or an employee. See 26
C.F.R. S 31.3401(c)-1(b). The same essential definition is
used for S 401(k) plans, see 26 C.F.R.S 1.410(b)-9, and for
S 423 plans, see 26 C.F.R. SS 1.423-2(e)(2), 1.421-7(h). That
there should be a congruence of approaches is not surprising.
As the Supreme Court has pointed out, when Congress uses
the word "employee," courts " `must infer, unless the statute
otherwise dictates, that Congress means to incorporate the
established meaning' " of that word. Nationwide Mut. Ins. Co.
v. Darden, 503 U.S. 318, 322, 112 S. Ct. 1344, 1348, 117 L.
Ed. 2d 581 (1992). The Court then went on to scrutinize the
various typical factors that go into a determination of whether
a person is an employee. See id. at 323-24, 112 S. Ct. at 1348.
Those were the usual common law factors. But, again, we rec-
ognize that one could still question the IRS's application of
those factors in a particular case.
[1] That question is obviated here for, perhaps more to the
purpose, both Microsoft and the SPP have conceded for pur-
poses of this appeal that the Workers were common law
employees. In fact, they have asserted that the Workers' status
is a "nonissue" because they concede that the Workers were
common law employees. That is to say, they were employees
of Microsoft.
B. The Employment Agreements.
The concession that the Workers were employees would, at
first blush, appear to dispose of this case. It means that for
legal purposes they, along with the other employees of Micro-
soft, were subject to Microsoft's control as to both "the man-
ner and means" of accomplishing their job, that they worked
for a substantial period, that they were furnished a workplace
and equipment, that they were subject to discharge, and the
like. See id.; see also 26 C.F.R.S 31.3401(c)-1(b). If that were
all, this would be an exceedingly easy case. Of course, it is
not all.
Microsoft also entered into special agreements with the
Workers, and it is those which complicate matters to some
extent. Each of the Workers and Microsoft signed agreements
which stated, among other things not relevant here, that the
worker was "an Independent Contractor for [Microsoft]," and
nothing in the agreement should be construed as creating an
"employer-employee relationship." As a result, the worker
agreed "to be responsible for all of [his] federal and state
taxes, withholding, social security, insurance, and other
benefits." At the same time, Microsoft had the Workers sign
an information form, which explained: "[A]s an Independent
Contractor to Microsoft, you are self employed and are
responsible to pay all your own insurance and benefits. . . .
Microsoft . . . will not subject your payments to any withhold-
ing. . . . You are not either an employee of Microsoft, or a
temporary employee of Microsoft." We now know beyond
peradventure that most of this was not, in fact, true because
the Workers actually were employees rather than independent
contractors. What are we to make of that?
We now know that as a matter of law Microsoft hired the
Workers to perform their services as employees and that the
Workers performed those services. Yet we are also obligated
to construe the agreements. See Republic of Nicaragua v.
Standard Fruit Co., 937 F.2d 469, 474 (9th Cir. 1991);
Swanson v. Liquid Air Corp., 118 Wash. 2d 512, 521, 826
P.2d 664, 669 (1992). In doing so, we could take either a neg-
ative or a positive view of Microsoft's intent and motives. We
could decide that Microsoft knew that the Workers were
employees, but chose to paste the independent contractor
label upon them after making a rather amazing series of deci-
sions to violate the law. Or we could decide that Microsoft
mistakenly thought that the Workers were independent con-
tractors and that all else simply seemed to flow from that sta-
tus.
Were we to take the former approach, we would have to
determine that Microsoft, with the knowledge that the Work-
ers were simply a group of employees, decided to engage in
the following maneuvers:
(1) Despite the requirements of federal law that amounts
be withheld from employee wages, Microsoft decided it
would not withhold. See 26 U.S.C. SS 3102, 3401-3406.
(2) Despite the fact that the SPP states that "employee"
means "any common law employee . . . who is on the United
States payroll of the employer," Microsoft decided to manipu-
late the availability of that benefit by routing the wages of
these employees through the accounts payable department, so
that it could argue that they were not on the United States
payroll. Beyond that, it also determined that it would tell the
IRS in its "Application for Determination for Defined Contri-
bution Plan," that Microsoft did, indeed, basically include all
employees, a category that it knew included the Workers,
even though it had contrived to exclude them. Beyond even
that, Microsoft excluded these employees when it filed its tax
returns for the SPP, even though it knew better.
(3) Despite the fact that the ESPP must, essentially, be
made available to all employees, Microsoft excluded these
employees and thereby intentionally risked the possibility that
the plan would not qualify for favorable tax treatment. It did
that, even though the plan itself stated that it covered all regu-
lar employees and that it was to be construed to comply with
26 U.S.C. S 423, a law which basically requires that all
employees be covered. The officers of Microsoft also decided
to eliminate one group of common law employees from the
benefits, even though the board of directors and the share-
holders had already made the benefits of the ESPP available
to those employees. In doing that, the officers intentionally
violated the corporate law of Delaware, to which Microsoft
was subject, because the terms of coverage of stock option
plans are not in the hands of corporate officers; they are in the
hands of the board itself. See Del. Code Ann. tit. 8, S 157; see
also Michelson v. Duncan, 386 A.2d 1144, 1150-51 (Del. Ch.
1978), aff'd in part and rev'd in part on other grounds, 407
A.2d 211 (Del. 1979).
On the other hand, in construing the agreements we can
view the label as a simple mistake. That is, Microsoft honestly
thought that the Workers were independent contractors and
took its various actions and inactions based upon that misap-
prehension. Its actions and the conclusions conveyed to the
Workers in the agreements and in the explanation in the infor-
mation form, which accompanied the agreements, were sim-
ply an explication of what the effect of independent contractor
status would be and had no separate purpose or effect aside
from that explanatory function. That is to say, of course there
could neither be withholding from wages nor participation in
the benefit plans because those keyed on common law
employment status. If the Workers were independent contrac-
tors, those would be the inevitable results, even if nothing
were said about them in the agreement or the information
form. Explaining the meaning of independent contractor sta-
tus was simply a helpful disclosure.
Absent evidence that the officers of Microsoft used their
daedalian talents to follow the first route we have just out-
lined, we must decide that the second route is a more accurate
portrayal of what occurred here. In other words, we should,
and we do, consider what the parties did in the best light. In
so doing, we do not believe that we are being panglossian; we
are merely acting in accordance with the ancient maxim
which assumes that "the law has been obeyed." See, e.g., Cal.
Civ. Code S 3548.
[2] The evidence does not undercut our approach; it sup-
ports it. As soon as Microsoft realized that the IRS, at least,
thought that the Workers were employees, it took steps to cor-
rect its error. It put some of them on its United States payroll
forthwith. It also gave the Workers retroactive pay for over-
time hours. If Microsoft had been withholding taxes while
failing to provide benefits, that would have suggested that it
knew that the Workers were a species of employee. However,
its failure to withhold indicates that it did not think that the
Workers were a special breed of employee; it simply thought
that they were not employees at all. That was underscored
when Microsoft told its managers about the status of the
Workers. See Microsoft Manager's Handbook 4.7-4.8 (1988).
It distinguished the Workers from other employees, both reg-
ular full-time and temporary. It did not say that the Workers
were employees in some special category; rather, it said that
they were not employees at all. See id.
[3] But they were employees, which returns us to the con-
tracts themselves. Viewed in the proper light, it can be seen
that the Workers were indeed hired by Microsoft to perform
services for it. We know that their services were rendered in
their capacities as employees. The contracts indicate, how-
ever, that they are independent contractors, which they were
not. The other terms of the contracts do not add or subtract
from their status or, indeed, impose separate agreements upon
them. In effect, the other terms merely warn the Workers
about what happens to them if they are independent contrac-
tors. Again, those are simply results which hinge on the status
determination itself; they are not separate freestanding agree-
ments. Therefore, the Workers were employees, who did not
give up or waive their rights to be treated like all other
employees under the plans. The Workers performed services
for Microsoft under conditions which made them employees.
They did sign agreements, which declared that they were
independent contractors, but at best that declaration was due
to a mutual mistake, and we know that even Microsoft does
not now seek to assert that the label made them independent
contractors.
[4] On the contrary, Microsoft intended that the Workers
perform services under the conditions in question, and they
agreed to do so. The parties' intentions were in perfect accord
in that respect, and the independent contractor label was a
mere error. We see no reason to embrace and perpetuate that
error. It could be argued that we would have to reform the
contracts in order to elide the mutual mistake. Reformation is
a concept available under the law of Washington, as it is else-
where. See Wilson v. Westinghouse Elec. Corp., 85 Wash. 2d
78, 84-85, 530 P.2d 298, 301-02 (1975); Denny's Restau-
rants, Inc. v. Security Union Title Ins. Co., 71 Wash. App.
194, 212, 859 P.2d 619, 629-30 (1993); cf. Scott v. Petett, 63
Wash. App. 50, 57-58, 816 P.2d 1229, 1234-35 (1991). But
Microsoft saved us and the Workers the trouble of applying
reformation doctrine when it agreed that the Workers were, in
fact, not independent contractors. Thus, the label became
meaningless, as did the explication of what would follow
from that label -- no withholding, no benefits.
A similar case from the Eleventh Circuit lends support to
our conclusion. See Daughtrey v. Honeywell, Inc., 3 F.3d
1488 (11th Cir. 1993). In Daughtrey, the plaintiff had gone to
work for Honeywell and had signed an agreement which
stated that she was an independent contractor, that she was
not an employee, and that she was not "entitled to any bene-
fits or privileges provided by HONEYWELL to its
employees." Id. at 1490. She later claimed that she was enti-
tled to certain ERISA benefits because she was, in fact, an
employee. The district court granted summary judgment
against her on the theory that she was actually an independent
contractor, but the Eleventh Circuit reversed. It did so because
it found the facts to be in dispute on that status issue. It seems
apparent that what made her status an issue of material fact
was that she would be entitled to "employee benefits for the
period during which she performed services as a consultant,"
if she was an employee. Id. at 1493. Similarly, in this case,
other things remaining equal, it would appear that the Work-
ers are entitled to the benefits of all other employees, or, at
least, they are not excluded simply because of the contractual
terms.
One additional matter must detain us for a moment. It
could, perhaps, be argued that the statements about benefits,
unlike statements about withholding, stand on their own foot-
ing as a waiver of benefits, regardless of the Workers' true
status as employees. As we have said, we think that would be
an incorrect interpretation of these agreements, and Microsoft
assured us at argument that this is not a waiver case. Were it
one, we would have to consider whether the waivers based, as
they would have been, on the mistaken premise of indepen-
dent contractor status were knowing and voluntary under
ERISA and Washington law. See, e.g., Laniok v. Advisory
Comm., 935 F.2d 1360, 1367 (2d Cir. 1991) (ERISA); Yakima
County (West Valley) Fire Protection Dist. No. 12 v. City of
Yakima, 122 Wash. 2d 371, 384, 858 P.2d 245, 252 (1993)
(Washington law). Moreover, at least as far as the SPP is con-
cerned, we would have to consider whether the mistaken
waiver must and would withstand special scrutiny designed to
prevent potential employer or fiduciary abuse. See, e.g.,
Sharkey v. Ultramar Energy Ltd., 70 F.3d 226, 230-31 (2d
Cir. 1995) (close scrutiny used); Smart v. Gillette Co. Long-
Term Disability Plan, 70 F.3d 173, 181-82 (1st Cir. 1995)
(careful scrutiny used); Leavitt v. Northwestern Bell Tel. Co.,
921 F.2d 160, 162 (8th Cir. 1990) (release reviewed to assure
no breach of fiduciary duty); cf. Holt v. Winpisinger, 811 F.2d
1532, 1541 (D.C. Cir. 1987) (ERISA vesting provisions can-
not be waived); Amaro v. Continental Can Co., 724 F.2d 747,
752 (9th Cir. 1984) (ERISA's minimum standards cannot be
waived). However, these issues need not even be mooted once
it is recognized that there was no separate waiver at all. More-
over, we need not consider what the result would be if the
agreements were of a different form or character.
In short, Microsoft has already recognized that the Workers
were employees and that the "no withholding" consequence
of the independent contractor label has fallen; we now hold
that the "benefit" consequence has fallen also. Having thus
burned off the brumes which threatened to obscure our view,
we will now turn to the plans themselves.
II. THE PLANS.
A. The SPP.
[5] The SPP is an ERISA plan. See 29 U.S.C. S 1002(2)(A)
(ii); 26 U.S.C. S 401(k); In re Dunn, 988 F.2d 45, 46 (7th Cir.
1993). The Workers seek enforcement of the terms of that
plan. That is, they seek to have us review the determination
of the plan administrator and to require that the plan make its
benefits available to them. See 29 U.S.C.S 1132(a)(1)(B). As
we have already pointed out, the administrative panel of the
SPP determined that the Workers are not entitled to benefits.
The reasons appear to have been that the Workers were inde-
pendent contractors and that they waived the benefits. We
must review those determinations to see if they were arbitrary
or capricious. See Snow, 87 F.3d at 330. Based upon what we
have already said, it is pellucid that they were. To the extent
that the decision was based upon the supposed independent
contractor status of the Workers, the plan conceded that the
decision was wrong when it conceded that the Workers were,
in fact, employees. To the extent that the decision was based
upon a supposed waiver of benefits, the plan administrator
purported to construe the agreements rather than the plan
itself. But, as we have pointed out, our construction is the
opposite. We, therefore, determine that the reasons given for
denying benefits were arbitrary and capricious because they
were based upon legal errors which "misconstrued the Plan
and applied a wrong standard to a benefits determination."
Saffle, 85 F.3d at 461.
[6] The SPP now concedes as much, but it and the Workers
asked the district court, and ask us, to decide a different issue
of plan construction, one on which the administrator has not
opined. The district court accepted that invitation, so did the
panel. See Vizcaino I, 97 F.3d at 1193. We are tempted to do
the same, but upon reflection we have determined that we
should not allow ourselves to be seduced into making a deci-
sion which belongs to the plan administrator in the first
instance.
[7] We are asked to decide what is meant by the SPP's
restriction of benefits to common law employees who are "on
the United States payroll of the employer." The panel
explored some of the reasonably possible meanings of that
phrase and construed the apparent ambiguity in favor of the
Workers. See id. at 1193-96. No doubt the plan administrator
should pay careful attention to what was said there. We have
also pointed out that we are dubious about the proposition that
Microsoft would manipulate plan coverage by assigning rec-
ognized common law employees to its accounts payable
department or to its payroll department, as it saw fit. We have
our doubts that it could properly do so. But it is the terms of
the SPP which control, and the plan is separate from Micro-
soft itself. Thus, we cannot, and will not, predict how the plan
administrator, who has the primary duty of construction, will
construe the terms of the SPP.
We do not know whether he will rely upon an "is " con-
struction -- you must actually be on the payroll -- or upon
an "ought" construction -- you must be a person who should
be on the payroll. Nor do we know if he will accept the
domestic versus foreign gloss on the provision in question.
What we do know is that the decision is his in the first
instance. We would set a poor precedent were we to intrude
upon that exercise of discretion before he has even considered
and ruled upon the issue. We would encourage the dumping
of difficult and discretionary decisions into the laps of the
courts, although one of the very purposes of ERISA is to
avoid that kind of complication and delay. Of course, should
he rule in favor of the Workers' position, he must then go on
to determine what benefits they are entitled to and under what
conditions, but that, too, is exactly the kind of decision that
he should be making for each of the Workers in the first
instance.
[8] We are aware of and do not resile from our decision in
Nelson v. EG & G Energy Measurements Group, Inc., 37 F.3d
1384 (9th Cir. 1994). However, that case presented us with a
somewhat unusual set of facts. In Nelson the Administrative
Committee had not construed the particular provision, but,
more than that, an attempt had been made to induce the Com-
mittee to rule on the claims, and that request was rejected out
of hand. See id. at 1388. Moreover, while the litigation was
in progress, the plaintiffs again attempted to induce the
Administrative Committee to rule, but that approach was also
rebuffed. See id. at 1388-89. Given that recalcitrance, we
decided that we would determine the issue ourselves and
would decide it de novo because there was no exercise of dis-
cretion to defer to. See id. at 1389. That is not this case; this
is simply a case where a wholly new issue, which was never
put to the SPP administrator, has been raised. He has both the
right and the duty to decide it, and we must then review his
ultimate decision regarding the Workers by the usual stan-
dard. " `It is not the court's function ab initio to apply the cor-
rect standard to [the participant's] claim. That function, under
the Plan, is reserved to the Plan administrator.' " Saffle, 85
F.3d at 461 (citation omitted).
B. The ESPP.
The ESPP was a plan adopted for the purpose of taking
advantage of the benefits conferred under 26 U.S.C.S 423. It
was approved by the board of directors and by the sharehold-
ers of Microsoft. Their action was an offer to employees, as
that term is defined in S 423. As we have already suggested,
we doubt that the corporate officers set out to withdraw the
offer from some employees, even if they could have done
that. The Workers knew about the fact of that offer, even if
they were not aware of its precise terms. Under the law of the
State of Washington, which all agree applies here, a contract
can be accepted, even when the employee does not know its
precise terms. See Dorward v. ILWU-PMA Pension Plan, 75
Wash. 2d 478, 452 P.2d 258 (1969). In Dorward the court
pointed out that a pension is not a gratuity, but "rather is
deferred compensation for services rendered." Id. at 483, 452
P.2d at 261. We think that that same form of reasoning
applies to all employee benefits. Few of them are mere gratu-
ities or a result of unadulterated altruism. Most are for ser-
vices rendered or for the purpose of inducing the further
rendering of services. They help to guarantee a competent and
happy labor force. The Washington Supreme Court went on
to say:
The consideration rendered for the promise in the
pension contract of the employer to pay a pension is
established when the employee is shown to have
knowledge of the pension plan and continues his
employment. An enforceable contract will arise in
such instances even though the pensioner does not
know the precise terms of the pension agreement.
Id. Again, we are confident that the court would apply the
same reasoning to this employee benefit. Other of its deci-
sions confirm us in our opinion, for it has adopted a protective
view toward employees' rights. See Bowles v. Washington
Dep't of Retirement Sys., 121 Wash. 2d 52, 67-68, 847 P.2d
440, 448 (1993) (pension benefit rights enforced for public
employees, even in the absence of specific expectations);
Culinary Workers & Bartenders Union No. 596 Health &
Welfare Trust v. Gateway Cafe, Inc., 91 Wash. 2d 353, 368,
588 P.2d 1334, 1344 (1979) (pension and welfare benefit
promises enforced for employees as third-party beneficiaries);
Jacoby v. Grays Harbor Chair & Mfg. Co., 77 Wash. 2d 911,
915, 468 P.2d 666, 669 (1970) (where employee knows that
a pension plan exists, continued employment is consider-
ation).
[9] The ESPP was created and offered to all employees, the
Workers knew of it, even if they were not aware of its precise
terms, and their labor gave them a right to participate in it. Of
course, Microsoft's officers would not allow that participation
because they were under the misapprehension that the board
and the shareholders had not extended the offer to the Work-
ers. That error on the officers' part does not change the fact
that there was an offer, which was accepted by the Workers'
labor. Of course, the ESPP provides for a somewhat unusual
benefit. An employee, who chooses to participate, must pay
for any purchase of stock, and the Workers never did that.
We, however, leave the determination of an appropriate rem-
edy to the district court.2
CONCLUSION
Microsoft, like other advanced employers, makes certain
benefits available to all of its employees, who meet minimum
conditions of eligibility. For some time, it did not believe that
the Workers could partake of certain of those benefits because
it thought that they were independent contractors. In that it
was mistaken, as it now knows and concedes.
The mistake brought Microsoft difficulties with the IRS,
but it has resolved those difficulties by making certain pay-
ments and by taking other actions. The mistake has also
brought it difficulties with the Workers, and the time has
come to resolve those.
Therefore, we now determine that the reasons for rejecting
the Workers' participation in the SPP and the ESPP were
invalid. Any remaining issues regarding the rights of a partic-
ular worker in the ESPP and his available remedies must be
decided by the district court upon remand. However, any
remaining issues regarding the right of any or all of the Work-
ers to participate in the SPP must be decided by the plan
administrator upon remand.
REVERSED and REMANDED to the district court as to
the ESPP. REVERSED and REMANDED to the district court
for further remand to the plan administrator as to the SPP.
_________________________________________________________________
FLETCHER, Circuit Judge, with whom Chief Judge Hug, and
Circuit Judges Pregerson, Hawkins, and Thomas join, concur-
ring in part and dissenting in part:
We concur in the substance of Judge Fernandez' opinion
except that we would not remand the issue of eligibility to
participate in the SPP to the Plan Administrator and would
hold that the Workers are eligible to participate. Remand is
inappropriate and further unnecessary in that we conclude that
interpretation of the phrase "on the United States payroll of
the employer" is not required.
In its denial of the Workers' claim, the administrative panel
convened by the Plan Administrator stated:
The denial is affirmed for the reasons that: (1) claim-
ants had agreed and/or acknowledged upon first
working for Microsoft that they would not receive
employee benefits; (2) claimants specifically waived
(by contract) any rights to benefits and (3) even if
claimants had been employees and had not "waived
rights to benefits," they were not "regular, full-time
employees" in an approved headcount position.
We agree with Judge Fernandez that these determinations
were arbitrary and capricious. On appeal, as Judge Fernandez
has also properly noted, the Plan abandoned all of its prior
positions in favor of a new tack: that the Workers are not eli-
gible for SPP benefits based on a construction of the phrase
"on the United States payroll of the employer. " Our disagree-
ment with Judge Fernandez, therefore, concerns (1) whether
the Plan can properly raise a theory on judicial review not
raised in the administrative process, and (2) if a new theory
can be raised, whether the appropriate course is for the court
to remand to the Plan Administrator to interpret the phrase in
the first instance or for the court to decide the issue de novo.
We would hold that the Plan waived any arguments not raised
in the administrative process. Second, we conclude that
because of their conduct in this litigation the defendants
should be estopped from asserting that remand is appropriate.
Third, were we to reach the U.S. payroll question, we would
conclude that the issue was resolved by the administrative
panel's factual determinations. Finally, were we required to
interpret the phrase, we would affirm the interpretation of the
original three-judge panel of our court.
I.
Remand to the Plan Administrator to determine the mean-
ing of the phrase "on the United States payroll of the
employer" is improper because a plan should not be permitted
to assert on judicial review reasons for denial that were not
contained in the plan administrator's decision. Because it was
raised for the first time before the district court, the Plan
Administrator waived this argument.
An ERISA plan is required to:
provide to every claimant who is denied a claim for
benefits written notice setting forth in a manner cal-
culated to be understood by the claimant: (1) The
specific reason or reasons for the denial; (2) Specific
reference to pertinent plan provisions on which the
denial is based; (3) A description of any additional
material or information necessary for the claimant to
perfect the claim and an explanation of why such
material or information is necessary; and (4) Appro-
priate information as to the steps to be taken if the
participant or beneficiary wishes to submit his or her
claim for review.
29 C.F.R. S 2560.503-1(f).
We recently construed this requirement:
In simple English, what this regulation calls for is a
meaningful dialogue between ERISA plan adminis-
trators and their beneficiaries. If benefits are denied
in whole or in part, the reason for the denial must be
stated in reasonably clear language, with specific ref-
erence to the plan provisions that form the basis for
the denial; if the plan administrators believe that
more information is needed to make a reasoned deci-
sion, they must ask for it. There is nothing extraordi-
nary about this; it's how civilized people
communicate with each other regarding important
matters.
Booton v. Lockheed Med. Benefit Plan, 110 F.3d 1461, 1463
(9th Cir. 1997).
These regulations "are designed to afford the beneficiary an
explanation of the denial of benefits that is adequate to ensure
meaningful review of that denial." Halpin v. W.W. Grainger,
Inc., 962 F.2d 685, 689 (7th Cir. 1992). The requirements
"enable the claimant to prepare adequately for any further
administrative review, as well as appeal to the federal courts."
Id. (internal quotation marks omitted).
In concluding that "no plan can provide discretion to deny
benefits for reasons identified only years after the fact," the
Seventh Circuit noted that "[t]his Court would emasculate
ERISA's disclosure requirement if it were to defer to reasons
that the Board first identified on appeal in the District Court,
years after the decision at issue." Matuszak v. Torrington Co.,
927 F.2d 320, 322-23 (7th Cir. 1991).
This reasoning is sound. One of the fundamental precepts
of appellate analysis is review based on a closed record. To
allow a plan to raise new reasons for denial on judicial review
could subject the plan participant to a cycle of multiple
appeals. It would also effectively eviscerate the requirements
of ERISA regulations.
In a similar context, we have held that administrative agen-
cies are bound by the reasons stated in their FOIA denial let-
ter and cannot conjure up new reasons on judicial review.
Friends of the Coast Fork v. United States Dep't of the Inte-
rior, 110 F.3d 53, 55 (9th Cir. 1997). Because the Plan may
not properly raise the U.S. payroll issue for the first time on
judicial review, that issue has been waived and it is improper
to remand to the Plan Administrator. Accordingly, because
the Plan abandoned its other reasons for denying eligibility,
the Workers should be entitled to participate in the SPP.
II.
Even if the U.S. payroll issue can be raised on judicial
review, the court should decide the issue de novo rather than
remanding to the Plan Administrator. We conclude that
through their conduct in the litigation the defendants should
be estopped from asserting that the issue is properly before
the Administrator in the first instance. The defendants raised
their argument that the Workers were not eligible because
they were not on the "United States payroll of the employer"
for the first time before the district court and urged that court,
initially over the objections of the Workers, to decide the
issue. The district court obliged. The defendants not only did
not object to the district court deciding the question but affir-
matively urged it to do so, and the Workers withdrew their
objection. The Workers appealed the decision of the district
court to this court. Once again, the defendants urged the court
to interpret the phrase and to affirm the district court. The
original panel did so but reversed the ruling of the district
court and held for the Workers. Only then, after losing on the
merits on appeal, in their petition for rehearing and suggestion
for rehearing en banc, do the defendants for the first time
argue that we should remand the question of the interpretation
of the phrase "on the United States payroll of the employer"
to the Plan Administrator if we are unwilling to affirm the dis-
trict court. The defendants make this argument despite their
failure to raise the issue during the administrative process,
despite their sua sponte raising the issue and urging that it be
decided by the district court, and despite their urging that this
court reach the issue on appeal. After proceeding through four
years of litigation urging at every turn that the issue be
decided by the court, the defendants should be estopped from
asserting otherwise. See Voliva v. Seafarers Pension Plan,
858 F.2d 195, 197 (4th Cir. 1988) ("the party who introduced
new evidence in the district court . . . cannot argue that the
district court was foreclosed from considering the Plan's alter-
native argument").
Even today the defendants are willing to have us interpret
the phrase, but only if we defer to the Administrator. The
defendants contend that their willingness to have the court
decide the issue all along was contingent upon the court giv-
ing deference to their interpretation of the phrase because they
represent the Plan. This argument is specious. Although we
defer to the reasonable interpretations of a plan administrator
when the plan grants the administrator discretion to construe
its provisions, see Firestone Tire & Rubber Co. v. Bruch, 489
U.S. 101, 111 (1989), we do not grant the same discretion to
the position taken by a plan as litigant. Where a plan adminis-
trator has not exercised his discretion to construe a provision
in a plan, our review is de novo. Nelson v. EG & G Energy
Measurements Group, Inc., 37 F.3d 1384, 1389 (9th Cir.
1994) (de novo interpretation of plan is appropriate when,
although administrative committee had discretion to do so, it
failed to interpret the plan after repeated requests from partici-
pants). When conducting de novo review we "construe [the
terms of a plan] without deferring to either party's
interpretation." Firestone, 489 U.S at 112.
III.
Were we to reach the U.S. payroll issue on de novo review,
we would hold that the Workers are eligible to participate in
the SPP. The case can be resolved without interpreting the
Plan language. A careful review of the record before the
administrative panel convened by the Plan Administrator
reveals that while the administrative panel had no occasion to
construe the U.S. payroll language, it did find that the Work-
ers had been "recharacterized, for payroll purposes only, . . .
as `employee[s].' " (Emphasis added.) The administrative
panel described this recharacterization as follows:"The effect
of the IRS's recharacterization is that individuals who had
worked in recharacterized positions were issued W-2 forms
and they became eligible to refile their income tax returns for
the relevant years as `employees' rather than as`independent
contractors.' "
Because the administrative panel's determination is sup-
ported by ample evidence in the record, we should accept its
factual determination that the Workers were placed on the
payroll of the employer, albeit retroactively, for the relevant
period. Snow v. Standard Ins. Co., 87 F.3d 327, 331 (9th Cir.
1996) (reviewing courts must accept the factual determina-
tions of the administrator unless they are clearly erroneous).
In light of the administrative panel's finding of fact that the
Workers were on the payroll, they are eligible under the SPP
regardless of how the "on the United States payroll" phrase is
construed. If, as the Workers suggest, the phrase refers to
those employees who are United States residents paid from
United States sources, then the Workers would be eligible to
participate in the Plan. Alternatively, if the defendants' con-
struction is correct and the phrase limits benefits to those
employees who were "on the payroll," then the Workers also
prevail. The pleadings establish that the Workers were all
United States residents and worked in the United States, and
the administrative decision established that they were reclassi-
fied as employees on the payroll of the employer. Therefore,
under either interpretation the Workers are eligible to partici-
pate in the SPP.
IV.
Finally, were we called upon to interpret the phrase we
would agree with the conclusion of the original three-judge
panel of our court that the Workers are "on the United States
payroll of the employer" for substantially the same reasons
advanced by the panel. Vizcaino v. Microsoft, 97 F.3d 1187,
1196 (9th Cir. 1996).
Accordingly, we respectfully dissent from the decision to
remand this aspect of the appeal back to the Plan Administra-
tor.
_________________________________________________________________
O'SCANNLAIN, Circuit Judge, joined by HALL, and T.G.
NELSON, Circuit Judges, concurring in part and dissenting in
part:
I respectfully dissent from all but Part II-A of the court's
opinion because Microsoft and the plaintiffs never formed a
valid contract under Washington law for the benefits now
claimed. I concur in the result of Part II-A of the court's opin-
ion but not in its analysis.
I
I do not disagree with the court's statement of facts, but it
has failed to mention some and may leave a mistaken impres-
sion of others. Thus, I suggest that the following additional
facts from the record be taken into account.
The plaintiffs were temporary "freelancers" for Microsoft.
Instead of calling them by this label--which was ubiquitously
used within the Microsoft community and by the plaintiffs
themselves--the court styles the plaintiffs as "workers." It
then engages in a long discussion of why they were in fact
"common law employees" of Microsoft. Both labels may be
true--the plaintiffs did work, and Microsoft has conceded that
the plaintiffs satisfy the definition of common law employees
for some purposes. Neither of these labels are relevant to the
question before us, however, and both are potentially mislead-
ing. Both labels imply that the plaintiffs were just like any
other regular Microsoft employees, and hence should be eligi-
ble for the same benefits as regular staff. The evidence in the
record, however, points to the contrary. I will refer to the
plaintiffs by the same term the plaintiffs themselves use--
"freelancers".
Before going further, it is also important that the statement
of facts identify precisely what period of activity is at issue
in this case. All plaintiffs were hired before 1989. In the fall
of that year, the IRS determined, for employment tax pur-
poses, that the freelancers were common law employees.
After that, in late 1989 and during 1990, Microsoft directly
hired some of the freelancers as "staff"1 (with Microsoft bene-
fits) and arranged for the remainder to become employees of
unrelated employment agencies (without Microsoft benefits)
who had contracts with Microsoft.2 For the sake of clarity, I
note that all we decide today is whether the freelancers should
have been allowed to participate in the ESPP and the SPP dur-
ing the period leading up to the 1989-90 conversion. All agree
that those freelancers who were converted into employees of
outside employment agencies have no valid claim for partici-
pation in the ESPP and SPP after the date of their conversion.
When the freelancers were originally retained by contract
with Microsoft, they were expressly told that they were not
eligible for any Microsoft employee benefits, and that they
would have to provide their own benefits. Indeed, the named
plaintiffs admit that they did not think they were entitled to
benefits, and did not think benefits were a part of their com-
pensation package.
Moreover, the freelancers each signed contractual docu-
ments which expressly stated that they would not receive any
benefits, and would have to pay their own taxes and benefits.
Specifically, Microsoft required that each plaintiff sign an
"Independent Contractor Agreement" ("ICA"). I think it is
appropriate to set out the complete text of the relevant ICA
provision:
CONTRACTOR is an independent contractor for
MS [Microsoft]. Nothing in this Agreement shall be
construed as creating an employer-employee rela-
tionship, or as a guarantee of a future offer of
employment. CONTRACTOR further agrees to be
responsible for all federal and state taxes, withhold-
ing, social security, insurance and other benefits.
Attached to the ICA was a one-page document entitled
"independent contractor/freelancer information, " which the
freelancers also signed. It stated:
[A]s an Independent Contractor to Microsoft, you
are self-employed and are responsible to pay all your
own insurance and benefits.
In the district court, Microsoft's uncontested extrinsic evi-
dence established that the plaintiffs were told, and knew, that
benefits were not a part of their compensation. Instead of pro-
viding benefits, Microsoft paid the freelancers at a higher
hourly rate than Microsoft's regular employees. The free-
lancers were also treated differently in a host of other ways.
They had different color employee badges, different e-mail
addresses, and were not invited to company parties and func-
tions. Instead of receiving a regular paycheck from Micro-
soft's Payroll department (like Microsoft's regular
employees), freelancers submitted invoices for their services
to the Accounts Payable department.
With these additional relevant facts in mind, we may con-
sider the merits.
II
As I see it, this is a simple contracts case. The Washington
law of contracts governs the freelancers' claim of entitlement
to benefits under the Employee Stock Purchase Plan
("ESPP"). No law, state or federal, mandates that Microsoft
provide such benefits even to its employees. Plaintiffs are eli-
gible to participate in the ESPP only to the extent that they
entered into a valid contract with Microsoft for such participa-
tion.
Offer, acceptance, and consideration are requisites to con-
tract formation under Washington law. Thompson v. St. Regis
Paper Co., 685 P.2d 1081, 1087 (Wash. 1984). In order to be
entitled to benefits under the ESPP, therefore, Microsoft must
have offered the benefits to the freelancers, and the free-
lancers must have accepted that offer.
The court claims that Microsoft's board of directors offered
ESPP benefits to the freelancers when they promulgated the
ESPP, reasoning that an offer of benefits in a pension plan
extends to and may be accepted by employees who do not
know its precise terms, as long as they generally know of its
existence, citing Dorward v. ILWU-PMA Pension Plan, 452
P.2d 258, 261 (Wash. 1969). The ESPP is not a pension plan,
however, and, therefore, standard principles of contract law
govern. Even so, as a matter of contract law, Dorward might
have supported the result in this case if Microsoft's board had
merely promulgated the ESPP and the freelancers, knowing of
its existence, satisfied the ESPP's eligibility requirements.
But in a line of general employment law cases apparently
ignored by the court's opinion, Washington courts have held
that an employer revokes a generally promulgated offer when
it enters into a specific agreement with an employee which is
inconsistent with the offer. Thompson v. St. Regis Paper Co.,
685 P.2d 1081, 1087 (Wash. 1984); Hill v. J.C. Penney, Inc.,
852 P.2d 1111, 1117 (Wash. Ct. App. 1993); Grimes v. Allied
Stores Corp., 768 P.2d 528, 529-30 (Wash. Ct. App. 1989);
see also Swanson v. Liquid Air Corp., 826 P.2d 664, 672
(Wash. 1992) ("It is generally recognized that an employer
can disclaim what might otherwise appear to be enforceable
promises in handbooks or manuals or similar documents.").
As a matter of standard contract law, that principle is unas-
sailable: an offer can be revoked by giving specific notice to
the offeree at any time prior to acceptance or substantial per-
formance. Collins v. Morgan Grain Co., 16 F.2d 253, 255
(9th Cir. 1926), cited with approval in 1 Arthur L. Corbin &
Joseph M. Perillo, Corbin on Contracts, S 2.18, at 217 n.7
(rev. ed. 1993). And, after all, the Washington Supreme Court
has clearly proclaimed that the traditional requisites of con-
tract formation apply with full force to modern, unilateral
employment contracts. Thompson, 685 P.2d at 1087.
Exactly such a revocation occurred here. Microsoft's board
offered the ESPP to employees generally, and then Microsoft
told the freelancers: "We aren't offering the ESPP to you;
ESPP benefits are not included in your contract." Knowing
that they wouldn't get ESPP benefits, the freelancers never-
theless agreed to work for Microsoft. Their contract therefore
does not include ESPP benefits because the offer of those
benefits was revoked.
Likewise, there was no mutual assent (or "meeting of the
minds") as is required for the formation of a unilateral con-
tract. See Multicare Medical Center v. State, 790 P.2d 124,
132-33 (Wash. 1990). Microsoft did not think it was offering
ESPP benefits to the freelancers, and the freelancers did not
think they were accepting an offer of ESPP benefits. Had the
parties known that a court would force them to include ESPP
benefits in their contract, the bargain undoubtedly would have
been different.
If this is not enough, the court's alleged contract suffers
from another defect: a lack of consideration. There was no
detrimental reliance on the ESPP by the freelancers--they did
not think they would get ESPP benefits, and they still chose
to work for Microsoft on Microsoft's terms. Indeed, it is hard
to imagine what consideration the freelancers could have
given for the ESPP benefits since they chose to work for
Microsoft for several years without benefits. If anything, the
freelancers received consideration (a higher hourly rate) for
their agreement that they would not get ESPP benefits.
The court conjures up two reasons to disregard the express
and unambiguous revocation of the offer of benefits to the
workers, and to find a contract for benefits where none exists.
First, the court says, the statements in the employment con-
tracts were the result of a mistake since Microsoft's officers
incorrectly thought the freelancers were independent contrac-
tors. The statements were not meant to have independent legal
significance, but were "simply a helpful disclosure" explain-
ing the meaning of independent contractor status--a status, it
later turns out, that the freelancers did not have. I am unper-
suaded.
The court makes this simple contracts case unnecessarily
complicated, obfuscating the obvious meaning of the agree-
ments. When one sets the ESPP side-by-side with the agree-
ment signed by the freelancers, one realizes that no brumes
obscure the court's view of a solution to its manufactured
mistake; it vainly scans the horizon for a solution which is sit-
ting right under its nose. Microsoft drafted the ESPP and the
agreements using the same terminology ("employee") to
ensure there could be no mistaking that ESPP benefits were
not part of the bargain. The signed agreements say:"Nothing
in this Agreement shall be construed as creating an employer-
employee relationship . . . . CONTRACTOR further agrees to
be responsible for all . . . benefits." These provisions are not
simply a "helpful disclosure." Quite the contrary, the agree-
ment says "CONTRACTOR further agrees . . . ." How much
clearer could it be that this is an independent, legally binding
part of the bargain? By "burning off" this inconvenient con-
tract language, the court may as well have set fire to the con-
tracts themselves.
To top it off, Washington courts have already rejected the
court's reasoning. In Daniel v. Pacific Northwest Bell Tele-
phone Co., 580 P.2d 652, 654 (Wash. Ct. App. 1978), a
worker signed a written agreement with the telephone com-
pany stating that he was an independent contractor, although
under the common law definition, the worker was in fact an
employee. The Washington court ruled that the common law
definition was inapposite:
It is well settled that one is bound by the contract
which he voluntarily and knowingly signs. It has
been said that "the whole panoply of contract law
rests on . . . [that] principle . . ." National Bank of
Washington v. Equity Investors, 81 Wash.2d 886,
912-13 (1973). For 18 years, the contract under
which Mr. Daniel performed his work declared that
he was an independent contractor. He does not claim
that he did not understand the meaning of that term,
nor does he contend that the contracts were the result
of overreaching or fraud by the telephone company.
In these circumstances, the characterization of Mr.
Daniel's employment as that of an independent con-
tractor is binding as between Mr. Daniel and the tele-
phone company.
Id. This court's discussion of common law employees and
mutual mistakes should be seen for what it is--a smokescreen
which both confuses and conceals. Regardless of whether
Microsoft and the freelancers were mistaken about the free-
lancers' employment status, their agreement stands on its own
and ought to be enforced according to its terms.
The court's second argument, albeit not fully developed, is
that under Delaware's corporations law, Microsoft's officers
did not have authority to modify or to revoke the offer of the
ESPP made by Microsoft's board of directors. There are two
problems with this analysis.
First, as an entity without a physical existence, Microsoft
can only act through its agents. Conklin Bros., Inc. v. United
States, 986 F.2d 315, 318 (9th Cir. 1993). Under Delaware's
corporations law, however, the board of directors directs the
affairs of the business but is not an agent of the corporation.
Arnold v. Society for Savings Bancorp, Inc., 678 A.2d 533,
539-40 (Del. 1996); see also Restatement (Second) of Agency
S 14C (1958) ("Neither the board of directors nor an individ-
ual director of a business is, as such, an agent of the corpora-
tion or of its members."). The only way to enter into a
contract with Microsoft, therefore, was through Microsoft's
officers and employees as agents of the corporation. It may be
that the officers and employees did not have the actual author-
ity to make a "no ESPP benefits" offer to the freelancers.
They certainly had the apparent authority to strike such a bar-
gain, however. In any event, under standard principles of
agency law, if the principal ratifies unauthorized acts of its
agent, the ratification relates back to the time of the acts and
is equivalent to original authority. Hannigan v. Italo Petro-
leum Corp., 47 A.2d 169, 172 (Del. 1945). By accepting the
freelancers' performance under the contract, and by choosing
to defend against the freelancers' claim from 1990 until now,
Microsoft's board of directors, and Microsoft itself, has
impliedly ratified the "no ESPP benefits" offer. See id.
Delaware law is therefore no obstacle to a contract for no
ESPP benefits.
Second, even if the officers did not have the actual author-
ity under Delaware corporations law to make a "no ESPP
benefits" offer to the freelancers, the contract formed by the
freelancers' acceptance of the offer exists nonetheless. The
"no benefits" provision is an important term of the overall
contract and should not be treated apart from the bargain as
a whole. The freelancers cannot, with perfect hindsight, pick
and choose among the parts of the contract they want to
enforce while discarding the provisions they don't like, prem-
ised upon the notion that the officers lacked authority to form
the contract. Furthermore, a contrary ruling undermines Dela-
ware's carefully crafted rule that only the corporation (or a
shareholder suing derivatively) can seek a remedy for unau-
thorized acts of corporate officers. See Dieter v. Prime Com-
puter, Inc., 681 A.2d 1068, 1072 (Del. Ch. 1996).3
III
The freelancers also claim that Microsoft should have
allowed them to participate in its Savings Plus Plan ("SPP"),
which is governed by ERISA. The SPP provides that"[e]ach
employee who is 18 years of age or older and who has been
employed for six months shall be eligible to participate in this
Plan." It then defines "employee" as "any common law
employee who receives remuneration for personal services
rendered to the employer and who is on the United States pay-
roll of the employer." The freelancers argue that they fit this
definition of employee; Microsoft retorts that the freelancers
were not "on the United States payroll of the employer." Our
first task, therefore, is ascertaining what that phrase means.
We cannot immediately set about this task, however,
because the SPP grants discretion to the plan administrator to
construe the plan. The Supreme Court has instructed us that
when the plan vests discretion in the administrator, principles
of trust law require that we leave the plan administrator's
interpretation undisturbed if reasonable. Firestone Tire &
Rubber Co. v. Bruch, 489 U.S. 101, 111 (1989). Indeed,
ERISA encourages plan fiduciaries to exercise properly the
discretion they have been granted; courts should not be
second-guessing the discretionary decisions of fiduciaries
without a very good reason. Thus, we are not to impose our
view of a provision on the plan, but are confined to reviewing
the administrator's construction to determine whether it is rea-
sonable.
In order for this rule protecting a plan administrator's dis-
cretion to be meaningful, however, the administrator must be
given an opportunity to interpret the meaning of plan provi-
sions before the court rules. In this case, the plan administra-
tor did not overtly construe the phrase "on the United States
payroll of the employer," at least so far as I can tell from the
record. The district court believed that the administrator
impliedly rested its decision on a particular interpretation of
that phrase. Although there is a colorable argument in support
of the district court's belief, I believe that the judicially stated
preference that the plan administrator interpret the plan, sub-
ject to a limited review by courts, requires us to remand to the
plan administrator explicitly to construe the meaning of that
phrase. I agree with the court's conclusion on this point.4
I write separately to clarify that I do not concur in the
court's analysis of the meaning and implications of "on the
United States payroll of the employer," and, as dicta, the
court's statements do not bind the plan administrator in any
way. In my view, that phrase is a term of art with significance
within the Microsoft community. Further, I do not agree with
the ill-advised suggestion that Microsoft might not have been
able properly to classify employees for participation or non-
participation in an ERISA plan based on whether the employ-
ees were regular hires paid through the Payroll department or
"freelancers" paid through the Accounts Payable department.
Microsoft could choose to offer the SPP to whichever classes
of employees it wishes. It is certainly free to decide not to
offer positions satisfying the SPP's criteria to these plaintiffs.
I respectfully concur in the result of Part II-A of the court's
opinion but otherwise dissent.
_______________________________________________________________
FOOTNOTES
1 See Employee Retirement Income Security Act of 1974, Pub. L. No.
93-406, 88 Stat. 829 (1974).
2 We fully agree with the panel's disposition of Microsoft's asthenic
claim that the Workers are attempting to remedy a violation of S 423
itself; we need not repeat the panel's discussion here. See Vizcaino I, 97
F.3d at 1197.
1 "Staff" was the term Microsoft and the plaintiffs use for regular
employees.
2 As the court's opinion notes, a few of the freelancers refused to accept
jobs with outside employment agencies. As a result, their relationship with
Microsoft ceased altogether.
3 Similarly, that the board's ratification might have adverse tax conse-
quences for the ESPP does not allow us to ignore the overwhelming evi-
dence that the officers and the board did not offer ESPP participation to
the freelancers.
4 Judge Fletcher contends that a remand is inappropriate because (1) the
Plan has waived any claim that the provision might bar benefits for the
freelancers by not interpreting the Plan provision in the first instance, and
(2) the Plan is estopped from arguing for a remand.
With respect, her first argument overlooks the fact that the Plan Admin-
istrator had no need to reach the question of the meaning of "on the United
States payroll" since it had already determined that the freelancers were
not entitled to benefits on several other grounds. I am not persuaded that
by failing to interpret expressly a provision in the Plan the Administrator
rendered the provision a nullity. Moreover, Judge Fletcher reads this con-
currence and dissent too broadly; it does not hold that the Plan or Micro-
soft should prevail on the merits of an argument never raised before, but
only that the Plan Administrator should be given an opportunity to con-
strue a phrase it thought unnecessary to reach.
Judge Fletcher's second argument misapprehends, in my view, the
nature of our review in this case. It is not a question of whether the Plan
or Microsoft wishes us to decide the question or to remand it; a party can-
not, by waiver or estoppel, change the applicable standard of review. Prin-
ciples of trust law and ERISA limit our review of the Plan Administrator's
discretion. We must give the Administrator an opportunity to exercise that
discretion by remanding the case. Our conclusion has nothing to do with
whether Microsoft urges us to decide the merits.