The software giant is trying to allay fears of layoffs when its new contractor policy is implemented in January, but some companies that supply workers to Microsoft are skeptical.

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New rules for Microsoft contractors have some concerned that layoffs are coming, a fear the software giant is trying to allay.

In a letter sent to contracting companies and posted online Thursday, the Redmond company said it expects “the significant majority” of them won’t be subject to new mandatory six-month breaks from company property.

But with that review still ongoing, some companies that supply workers to Microsoft are skeptical, and bracing for job losses at the end of the year.

Microsoft’s new vendor policy

Microsoft in January will implement a mandatory six-month break from access to the company’s property and network for contractors who have worked there for 18 consecutive months.

There are a few exceptions.

• Contractors may receive a one-time, six-month extension of access for a “critical business need” if approved by senior Microsoft management.

• Contractors who don’t need company access can keep working as usual.

• Staffers who work on defined projects and are managed by contractor staff rather than Microsoft managers aren’t subject to a time restriction.

“There are tens of thousands of contractors,” said an executive at a Seattle-area contracting firm that does business with Microsoft. “A large portion of them are going to walk out the door. We’re going to take a huge hit come December.”

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People inside and outside the company say Microsoft’s new policy is part of a broader effort to impose order on its massive network of contract workers and clarify the distinction between work done by regular employees and contractors.

Microsoft doesn’t disclose how many contractors work on the company’s behalf, but figures from its human-resources software estimated about 80,000 worldwide in 2009.

“Their mindset now is if you’ve had a contractor for more than a year, hire that person,” a manager at a Seattle technology contracting firm said of the new policy. “If not, move on.”

Many contractors interviewed, who didn’t want to be named for fear of jeopardizing future business with Microsoft, say the new rules also may be aimed at reducing the risk Microsoft will face renewed claims that contractors are functionally full-time employees, and potentially eligible for added benefits.

In 1989, the Internal Revenue Service determined Microsoft had misclassified some employees as independent contractors. The company in 2000 agreed to pay a $97 million settlement to thousands of workers who subsequently sued Microsoft for the benefits awarded to full-time employees.

After the “permatemps” lawsuit, Microsoft put in place rules designed to reduce the risk that temporary workers would slide toward de-facto employee status. For example, staff provided by temp agencies would be required to take a 100-day break after a year of service at Microsoft.

“That was the solution to the lawsuits, but that really crippled groups that needed that talent,” said Joe Rogel, a technical recruiter with WideNet Consulting.

During the decade since, recruiters and contractors say some Microsoft managers have used the vendor system to skirt limits on hiring regular employees. Vendor staff, typically brought on to complete a specific project, weren’t subject to the mandatory break, and their contracts could be renewed for years on end. In some cases, they have little contact with the person who, on paper, is their manager at their contracting firm and were not eligible for the same benefits as regular employees.

One Eastside contracting manager who has worked with Microsoft for decades says the rolling contracts resemble the way the company operated before the permatemps lawsuit.

Legal risks are “forcing Microsoft [to] work with their [contracting] agencies in the way that they should have in the first place,” said a recruiter at a Seattle-area contracting firm. “Specific work, not ‘give me a guy who’s going to do all my crap so I can sit in meetings all week.’ Ultimately, it’s a good thing for Microsoft.”

Microsoft in July 2014 sent a memo announcing that contractors who had worked at the company for 18 months would have to take a six-month break from access to company property. Because many jobs require access, contractors feared thousands of them would need to find other work in January 2016.

Instructions from Microsoft that employees refrain from discussing the policy with contractors didn’t help matters. And some contracting managers, themselves residents of an opaque industry, weren’t in a hurry to clarify the situation for their employees.

Microsoft says it doesn’t expect such a sudden, giant reduction in vendor staff, in part because project-based work managed day-to-day by contracting-firm staff is exempt from the time limit.

A shift toward that kind of arrangement is already taking place.

One longtime contractor said her team worked at the Redmond campus up until June 30.

On July 1, the start of Microsoft’s fiscal year and the date when vendor contracts begin, a new agreement took effect. The work the group was doing would largely stay the same. But the team, which used to include employees of multiple contracting firms, was consolidated under one company and moved off site.

Because she didn’t work for the firm that won the consolidated bid, the contractor found herself looking for a new job.

Microsoft started re-examining the role of vendors around the same time it was digesting its purchase of Nokia’s phone unit, company officials say. Then, Microsoft had mushroomed to 128,000 employees.

In July 2014, Microsoft announced its largest ever layoff, cutting 18,000 full-time jobs, as well as the new contractor policy.

Several Puget Sound-area providers of temporary staff have spent much of the last year shuffling their business model to try to fit their workers under Microsoft’s outsourcing exemption.

For workers, the impact is unclear. A Microsoft spokeswoman said she didn’t have an estimate of how many contractors were likely to run into the mandatory break at the end of the year, but that the company didn’t design the new policy with the goal of slashing its contract workforce.

Vendor staff not eligible for the outsourcing exception, Microsoft’s letter said, will primarily be on tasks based on seasonal fluctuations in staffing needs or short spikes in work on a specific product.

The company is also phasing in a requirement for vendors to offer paid leave to their employees.

And in March, Microsoft said it would prohibit vendors from employing workers at Microsoft under “1099” independent contractor arrangements that come without payroll taxes, wage guarantees or unemployment benefits.

The new approach, Microsoft said in its letter, is designed to “ensure that Microsoft managers are making thoughtful choices about how and when to use external staff.”