In the late 1990s Microsoft Corp. ran afoul of the IRS when auditors discovered it had used thousands of “temporary” contract engineers who worked alongside regular employees for indefinite periods under similar conditions but didn't receive employee benefits. IRS auditors determined that the company supervised and controlled the engineers' work just like employees, and said they had to be treated as such for the purpose of withholding Social Security, Medicare and unemployment taxes. Microsoft admitted the error to the IRS, and was required to pay back taxes and overtime wages. Some employees were shifted to employee status.

After learning of the tax decision, however, some independent contractors also demanded to be included in the company's benefits plans, including its 401(k) and stock options plans. When Microsoft refused, they filed a suit in federal district court, which was dismissed. But upon appeal to the Ninth U.S. Circuit Court of Appeals, a three-judge panel decided in favor of the plaintiffs in Vizcaino v. Microsoft, 97 F3d 1187. The court en banc later reheard the case, and the 15-judge panel issued a decision in 1999 that mostly upheld the first appeal in Vizcaino v. Microsoft, 120 F.3d 1006.

The ruling and eventual $97 million settlement after years of litigation underscored the importance of companies distinguishing between contingent workers and employees; making sure that employee benefits plans specifically exclude contingent workers, and making certain that employment agreements with contingent workers have specific benefits waivers, according to employment law experts.