The decision
A Full Court of the Federal Court has recently upheld a decision to order a company to pay unpaid leave entitlements and penalties after it was found to have wrongfully engaged five former insurance sales agents as independent contractors rather than as employees.1
The agents worked for an insurer (the Company) over an extended period of time, with one agent being engaged for over 24 years. After termination of the arrangements with the agents, the five agents claimed for payment of unpaid leave entitlements.
In August 2012, the Company was ordered by Justice Nye Perram to pay more than AUD490,000 in unpaid entitlements and AUD10,000 in penalties following His Honour's 2011 decision that the agents were employees and not independent contractors. On appeal, Justice Buchanan, with whom Justices Lander and Robertson agreed, upheld the decision and found that the agents were properly characterised as employees.
After providing a useful summary of the case law on the distinction between independent contractors and employees, Justice Buchanan held that the five agents were employees for the following key reasons:
- the Company exercised some control over how the agents performed their work
- in practice the agents could not carry on other businesses due to the hours worked for the Company
- the agents were not conducting their own business but were instead enhancing the goodwill of the company
- the high degree of organisational control exerted by the Company over the agents (for example, the agents were organised into hierarchical teams, were subject to training and development programs developed by the Company and had incentives for advancement through the organisation).
The Court held that these factors demonstrated that the agents were part of the company's business and were not running their own businesses, even in circumstances where the agents:
- considered themselves to be contractors
- were paid a commission and not salary
- used their own vehicles
- employed their own administrative staff (not all agents)
- were permitted to carry on other business
- had incorporated themselves (not all agents).
Contractor or employee?
This decision further reinforces that regardless of whether a person is considered an independent contractor or employee, a court will look beyond this characterisation to the true nature of the relationship. If the decision to characterise an arrangement is not made correctly at the outset, a company may expose itself to significant liability.
The decision acts as an important reminder that all companies should regularly review arrangements in place in relation to purported independent contractors. If you have any arrangements similar to the situation in this case, or of a similar nature in other contexts, it would be timely to have them reviewed to ensure your company is not exposed to significant liability for the back-payment of leave entitlements.
Companies are also exposed to the payment of penalties under the 'sham contracting' provisions of the Fair Work Act 2009 (Cth). These provisions make it unlawful for a company to claim a person is an independent contractor when they are in fact an employee. The maximum penalty for a breach of these provisions is AUD33,000 (per breach).
Footnotes
1ACE Insurance Limited v Trifunovski [2013] FCAFC 3.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
