In another recent Federal Court decision concerning the vexed question of employment status of workers, the court has held that independent contractors were in fact employees (Ace Insurance Ltd v Trifunovski [2011] FCA 1204).

What does this mean for employers?

  • This case, which follows a line of recent Federal Court decisions in this area, means that it is becoming increasingly difficult to sustain a genuine independent contractor relationship, particularly with workers who do not contract through a corporate entity and who have worked full time for the principal over extended periods.
  • For a worker to be characterised as an independent contractor, they must be 'carrying on a trade or business of their own'. The answer to this question is found by applying a number of indicia to the facts of the relationship, regardless of the label put on it by the parties.
  • Any business that engages contractors should consider these issues now, rather than waiting for a claim for unpaid entitlements by a worker or an investigation being conducted by a regulator, which can result in significant penalties and orders for back pay.

The case in brief

Ace Insurance engaged workers as independent contractors to sell income protection policies, principally to rural customers.

Five agents, some of whom had been working for Ace Insurance for almost 30 years, brought a claim against Ace Insurance for unpaid long service and annual leave. They argued that they had incorrectly been treated as independent contractors, when they were in fact employees.

Despite strong indications of a contractor relationship including:

  • a contract describing them as 'independent contractors';
  • payment according to number of policies sold;
  • use of their own vehicles; and
  • a few being incorporated and engaging other employees (their wives) as administrative assistants.

The court found that the agents were in fact employees of Ace Insurance. The court was persuaded in particular by the following factors:

  • the agents did not generate goodwill for their own business but rather for Ace Insurance's business;
  • the agents were not in practice able to work for other principals because they were required to work very long hours;
  • Ace Insurance provided training, including scripts for use with customers, so exercised control over the agents; and
  • the agents were encouraged to hold themselves out as representatives of Ace Insurance.

By way of defence, Ace Insurance argued (amongst other things) that the agents had engaged in misleading and deceptive conduct contrary to the trade practices legislation by signing contracts which described them as 'independent contractors'. The court rejected that argument and said that at best the representation was simply that the agent understood himself or herself to be an 'independent contractor' at that time which was not misleading and deceptive.

Accordingly, the workers were entitled to annual leave and long service leave entitlements for the period that they had been engaged by Ace Insurance, which included in one case, an entitlement which dated back to 1981.

Tips for employers

  • In addition to potential claims for back pay and penalties for non payment of tax and superannuation, sham contracting is unlawful under the Fair Work Act 2009 (Cth). The maximum penalties for a contravention of these provisions of the Fair Work Act are $6,600 for an individual and $33,000 for a company.
  • Employers should audit their contracting arrangements to determine the risk of an employee relationship being found to exist, particularly with individual contractors. If in doubt, seek legal advice.
  • Employers should ensure their contractual arrangements as far as possible reflect the reality of the relationship, bearing in mind however that the contract itself is not determinative.
  • In particular, where a risk is identified, employers should consider offering long serving contractors casual or permanent employment instead of contractor agreements.
  • Employers should also ensure they are aware of the deemed employee provisions under superannuation legislation and the potential application of applicable workers' compensation legislation to their contracts.

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.