A Full Federal Court has upheld a decision that five sales agents engaged as “independent contractors” were in fact employees of an insurance company, despite the “employer’s” and agents’ belief that they were not employees and their structuring of their financial affairs to that effect.

Implications for employers

This decision is the latest to consider the vexed question of the independent contractor/employee distinction.

This decision emphasises the long-held principle that the way in which parties have represented or categorised their relationship may be given some weight, but will not be determinative of whether a worker is truly an employee or an independent contractor. Measures adopted as a consequence of an assumption that a worker is an independent contractor, such as tax arrangements, are also not likely to carry significant weight.

A company which incorrectly characterises a worker as an independent contractor rather than an employee is exposed to a number of legal risks. The company may:

  • be in breach of tax laws;
  • be ordered to pay workers for accrued entitlements under industrial laws, awards or agreements, and to pay civil penalties for any breaches of the relevant law or instrument;
  • may be vicariously liable for the acts or omissions of those workers; and
  • be denied indemnity by its workers’ compensation insurer for understating its wages bill.

Accordingly, companies need to ensure that they have regard to the circumstances of the relationship to discern its true character. This decision confirms that among the many factors which may indicate an employment relationship, key issues for consideration are whether:

  • there is control (actual or theoretical) by the company over the manner in which a worker conducts their work;
  • there is a requirement that work be personally exercised by the worker and an inability to delegate or subcontract that work to another; and
  • the worker is working only in the business of the company and cannot pursue an independent business.

Background

The appellant, ACE Insurance Limited (ACE), was an insurer who had taken over a business which had traded as Combined Insurance Company of Australia (Combined). Five insurance sales agents had been engaged by Combined under contracts in which they were described as “independent contractors”, and were rewarded with commission. It was argued that they were in fact employees and were entitled to payments for periods of untaken annual leave, and in some cases for untaken long service leave, earned in the service of Combined.

Decision at first instance

At first instance, Justice Perram of the Federal Court found in favour of the individual agents, holding that they were properly characterised as employees of Combined (see further the examination of this decision in our Employee Relations & Safety Update October 2012 bulletin). In reaching this conclusion, his Honour emphasised the following points:

  • the agents did not generate goodwill for their own businesses and were at all times working in the business of Combined;
  • the conditions required, such as the working hours, meant that the agents were unable to work for another principal; and
  • combined exercised significant control over the agents by providing training and directing the way in which their work was undertaken.

ACE appealed Justice Perram’s decision, arguing that Justice Perram had erred:

  • in his approach to the principal issue of whether the agents were employees, by:
    • observing that the common law is concerned with the identification of an employment relationship only for the purpose of attributing vicarious liability; and
    • having too much regard to the identification of whose business the sales agents worked, as the primary question to be answered;
  • concluding that the relevant indicia showed that the agents were employees. ACE argued that a number of matters arising under the relevant contracts with the sales agents in fact indicated that they were independent contractors.

Decision on appeal

The Full Court, comprised of Justices Buchanan, Lander and Robertson, rejected ACE’s arguments and confirmed Justice Perram’s decision.

Justice Buchanan (with whom Justices Lander and Robertson agreed) conducted an exhaustive survey of the case law in which the courts had distinguished between an employee and someone who carries out work in some other capacity. His Honour noted the following:

  • there is no single or unifying test to determine whether an employment relationship exists;
  • contractual terms which deny any requirement for personal service or represent clear indications of the pursuit of an independent business are principal factors which weigh against the conclusion of an employment relationship. These are fundamentally inconsistent with the basic requirements of an employment contract as a contract for personal service;
  • a right of control remains an important consideration. It may be found in a right of organisation and allocation of work, as much as in some theoretical right to say how actual work should be done;
  • Justice Perram’s observation that the common law is concerned with identifying employment relationships in the vicarious liability context was historically accurate, and did not affect his conclusions as his Honour still applied the relevant tests laid down in subsequent cases;
  • Justice Perram did not err in concluding that the sales agents were at all times working in the business of Combined. This finding was consistent with emphasis in the High Court case of Hollis v Vabu Pty Limited (2001) 207 CLR 21 that it is critical to identify the business in which work is conducted and to assess whether the alleged contractors are in business on their own. The trial judge had not overlooked the fact that a contractor may work in the business of another and still on his or her own account;
  • the facts of this case indicated that there were no features strongly against a characterisation of employment and that work was done, organised and allocated in a way substantially consistent with that characterisation;
  • many of the matters identified by ACE as indicative of non-employment were manifestations of the prior assumption by the parties that the agents were contractors, and did not of themselves dictate non-employment. These included claims for business expenses, preparation of financial statements and tax arrangements. In addressing those matters that his Honour viewed as the strongest indications against an employment relationship, Buchanan J observed:
    • permission under the contracts to hire administrative and secretarial staff did not extend to permission to delegate the burden of work, and the rights and benefits under the contract assignable to corporations were subordinated to personal obligations owed by agents; and
    • these permissions were not incompatible with a relationship of employment. The selling of insurance was an activity which was required to be carried out through the personal efforts of individual agents and only by them.

Buchanan J held that Justice Perram was correct to conclude that the sales agents lacked the independence to be regarded as independent contractors of Combined.

Justice Lander agreed with Justice Buchanan, though in a separate judgment emphasised that the agents’ own belief that they were not employees and their structuring of their financial affairs to that effect was not of itself determinative. His Honour held that Justice Perram was right in concluding that, this factor aside, there were no other indicia to support ACE’s contention that the agents were independent contractors.