Australia: Independent contractor or employee: the court's assessment of the costs when an organisation gets it wrong

Last Updated: 23 August 2012
Article by Kristen Lopes

In brief - Insurance agents awarded accrued annual leave and long service leave

In a decision of released on 25 October 2011, which we highlighted in November 2011, Justice Perram of the Federal Court decided the issue of whether five insurance agents were independent contractors or employees over a time period from 1981 to 2006.

In a further decision released on 31 July 2012, Justice Perram awarded the insurance agents just shy of half a million dollars in accrued annual leave and long service leave as a result of his determination last year that the agents were employees, not independent contractors of an insurance company, Combined Insurance ("Combined").

In addition, Justice Perram imposed a civil penalty of $5,000 against Combined for its failure to pay annual leave and a further $5,000 for its failure to pay long service leave to the insurance agents. The civil penalties were awarded to the five insurance agents, resulting in a total award of in excess of half a million dollars.


Combined was acquired by ACE Insurance Ltd ("ACE") and was integrated into ACE's business in 2010. Combined has subsequently ceased trading.

Prior to this, Combined provided income protection policies to Australian customers located primarily in non urban areas since 1959. The policies had been sold by travelling insurance sales agents. All sales agents had been retained as independent contractors under detailed written contracts.

Based on the evidence adduced at trial, His Honour found that the sales agents only sold Combined's policies and were trained by Combined on business systems developed by and maintained by it. Sales agents earned commission on new policies placed by them and earned commission on any premiums collected in relation to existing policies placed by them.

Sales agents used their own vehicles, did not have income tax deducted from earnings and issued tax invoices to Combined for services provided. That said, His Honour noted that the tax invoices were generated by Combined, the sales agents accrued no goodwill in their own businesses and were, in practical terms, unable to work for any other insurer

Claims lodged

Five sales agents lodged claims for payment of accrued annual leave and long service leave.

In response, Combined claimed that some of the claims for annual leave and long service leave were time barred.

In addition Combined asserted that the agents were estopped from asserting that they were employees by way of their own conduct in executing contracts under which they had represented that they would provide services to the company as independent contractors.

Further, in a separate proceeding, Combined alleged that it suffered loss by reason of misleading and deceptive conduct engaged in by the agents consisting of their execution of the written contracts under which they agreed that they were independent contractors. The damages sought by the company was the quantum of whatever liability was assessed in the claims brought by the agents for annual leave and long service leave.

25 October 2011 decision

The Federal Court concluded that the five agents were employees after considering the "totality" of the relationship between the insurance agents and Combined. In doing so the Court outlined a number of indicia which it considered to be relevant in determining the outcome (without any particular indicia being determinative), including:

  1. the terms of the contract
  2. the intention of the parties
  3. whether tax is deducted
  4. whether subcontracting is permitted
  5. whether uniforms are worn
  6. whether tools are supplied
  7. whether holidays are permitted
  8. the extent of control or the right to control
  9. whether wages are paid or whether there exists a commission structure
  10. what is disclosed in tax returns
  11. what one party represents to the other
  12. for the benefit of whom does goodwill in the business enure, and
  13. how businesslike is the alleged business of the worker, etc.

The Federal Court found that on the issue of control, appearance and goodwill all factors favoured the conclusion that the sales agents were employees despite the fact that they drove their own vehicle, were required to remit their own income tax and despite the written terms of the contract executed by each sales agent or that they actually considered themselves to be independent contractors whilst they were engaged with Combined.

The contracts signed by the sales agents required them to incur their own business expenses, provided them with the ability to incorporate, provided them with the ability to engage other staff and stated that compensation was by way of commission. Each contract further contained an appointment clause which provided that the agent would operate as an independent contractor and that nothing would create the relationship of employer and employee. That said, it was found that these contractual terms were not indicative of an employment relationship being discounted.

What appears critical to the Federal Court's finding was the fact that the sales representatives were organised into teams under a territory representative. This, the Federal Court found, demonstrated the company's organisational control over the sales agents. The Federal Court also found that this control was further emphasised through Combined's control of all training within the organisation, placing little weight on Combined's argument that as an insurance company and an Australian Financial Services Licencee, it needed to exercise a high degree of control from a quality perspective.

31 July 2012 decision

Subsequent to the decision released on 25 October 2011, the parties sought clarification on the assessment of the entitlements of each insurance agent to annual leave and long service leave, in addition to the determination of an appropriate civil penalty arising from the company's failure to pay these entitlements.

One of the insurance agents was awarded $325,671.38 in accrued annual leave and $7,459.87 in long service leave. This is an odd outcome, as the agent himself only claimed an entitlement to annual leave of just over $60,000. As at the date of this article, we understand that this error has been brought to the judge's attention and we may hear further on this.

The other four insurance agents were awarded $53,656.85, $56,092.91, 14,759.21 and $11,416.43 in accrued annual leave and two were awarded $8,771.49 and $12,564.59 in long service leave.

After assessing the entitlements of the five insurance agents, in determining the appropriate civil penalty, the Court noted that Combined had not paid out the relevant entitlements based on legal advice, which although correct at the time, has been overtaken by later High Court authority. On that basis the Federal Court found that the company's conduct did not amount to a disregard for the law and as such did not assess the civil penalty at the high end of the range, being $33,000 for each breach. Although the Court highlighted that the company behaved reasonably by obtaining legal advice, it noted that the company did not keep itself abreast of significant developments in the law, noteably the Hollis v Vabu decision of the High Court of Australia.

In terms of claims other Combined agents might make, it is interesting to note His Honour found that on the question of long service leave entitlement, former agents have no ability to make a claim for such entitlements. His Honour found that the applicants should fail entirely in their claim for long service leave payments due to the fact that they had no "actual rate of pay" as required by the long service leave provisions. It was only a lack of notice of that possibility in these proceedings that resulted in the agents being made an award for long service leave.

On the question of annual leave entitlement, based on changes to the legislation, former agents would be limited in any claim they make to the period prior to 26 March 2006.

It is further noted that Combined incurred approximately $1.656 million in defending against the claims. Combined has ceased trading as a company in Australia, with ACE having taken over the business. As a result of the Federal Court's determination that the insurance agents were employees of Combined, if ACE has not changed the business model since acquisition, it will need to reconsider its business model going forward. We understand that both the liability and quantum judgments will be the subject of an appeal.

Kristen Lopes
Workplace relations
Colin Biggers & Paisley

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.

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Kristen Lopes
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