A recent decision of the Full Federal Court reminds employers about incorrectly engaging workers as independent contractors, rather than employees (see Ace Insurance v Trifunovski and ors [2013] FCAFC 3). Just because workers are providing their services through an incorporated structure, there's no guarantee that a court will not find them to be employees.

Background

Five insurance agents claimed annual leave and long service leave from Combined Insurance (Combined), later to be acquired by Ace Insurance.  Two of the agents, Mr Peries and Mr Trifunovski, for at least part of the period of their claim contracted with Combined through companies, according to the trial judge.  The remaining agents were individuals directly engaged by Combined.

The trial judge considered in detail the manner in which the insurance agents carried out their work by reference to the usual indicators of whether a person is an employee or an independent contractor.  Overall, the court held that these factors indicated an employment relationship for the 5 agents. One of the factors which suggested a contractor relationship was the right of an agent, under their terms of engagement, to conduct their business through a corporation.

Incorporated contractors

The trial judge concluded that Peries and Trifunovski were employees despite providing services through their companies.  The judge found that the companies existed to receive commission and for the incurring of expenses by agents.  The Court on appeal upheld this decision and provided more detail regarding the contractual arrangements involving Peries and Trifunovski and their companies.

In relation to Trifunovski:

  • he started working as an agent in 1994;
  • he was a director of Heraclea Pty Ltd;
  • Heraclea Pty Ltd was named as party in a contract but it was not clear to the Court whether this was in fact the case.  The contract was not executed under seal by Heraclea Pty Ltd but it was signed by Trifunovski in a personal capacity as the agent; and
  • he was required under the contract to personally provide his services as the agent to Combined.

The Full Court held that the contract was not one under which Heraclea Pty Ltd provided the services of its employee, Trifunovski to Combined.  It seemed to agree with the trial judge that the purpose of the contract may have been to divert money to Heraclea Pty Ltd.

In relation to Peries:

  • he started working for Combined in 1981;
  • he was a director of Renham Pty Ltd;
  • Combined entered into 4 contracts with Renham Pty Limited between 1990 to 2001;
  • one contract entered into in 1992, (treated by the court as representative of the other contracts) was stamped with the seal of Renham Pty Ltd and Peries signed the contract personally as the insurance agent; and
  • under the contract, Mr and Mrs Peries provided a personal indemnity to Combined to guarantee performance of the contract.  The contract was otherwise in the standard form entered into by individual agents.

The Full Court held that the contract was not made with Renham Pty Ltd and it could not discharge the obligations under the contract, this was a matter for Peries personally. The Renham contracts were a device to divert money to the company.

Further, the Full Court said that the interposing of a company in some of the financial arrangements for Peries and Trifunovski was not determinative of whether they were employees or contractors.

Lessons from the case

This case highlights that the engagement of staff through an interposed entity does not guarantee that a court will not find that an employment relationship exists.  Companies need to be mindful that a court may look beyond the legal structure and examine the substance of the relationship with a staff member. 

The following factors in this case increased the risk for Combined:

  • the existence of a relationship between Combined and the individual agents before the interposition of the company; 
  • the uncertainty in relation to the Heraclea contract as to whether the agent's entity was in fact a party to the contract at all; and
  • the obligations which appear to have been imposed on the individual agents by the contracts.

The lesson from the case is that this contracting model should be approached with caution and emphasises the need for a well drafted consultancy agreement where a sole individual may be providing services to a principal with the involvement of an interposed entity.