The Federal Circuit Court has found that a kitchenware retailer contravened the sham contracting provisions of the Fair Work Act 2009 (Cth) (FW Act) when it engaged four sales representatives as independent contractors1.

In addition, in finding that the sales representatives were in fact employees, the Court found various contraventions of the FW Act relating to applicable hourly rates, overtime, allowances and accrued annual leave.

Facts

Metro Northern Enterprises Pty Ltd (Metro) traded under the business name “Nutrimax International” selling kitchenware products in shopping centres and by door-knocking.

In early 2010, the four sales representatives responded to job advertisements for sales positions at Metro. The complainants each signed a number of documents including an ‘Independent Agent Agreement’ and elected to be paid by Metro per sale as opposed to per demonstration.

Before starting to sell Metro’s products, each sales representative completed a period of training and thereafter followed Metro’s sales approach, set out in scripts, as well as using Metro’s promotional material. The sales representatives did not invoice Metro for their work and none of them engaged other persons to carry out work for Metro.

After they ceased work for Metro, the sales representatives each lodged a complainant with the Fair Work Ombudsman (FWO) claiming they had not been paid as they should have been.

The three issues for the Court to determine were whether:

  • the sales representatives were employees or independent contractors;
  • Metro misrepresented the sales representatives’ employment as an independent contracting arrangement under the FW Act; and
  • the sales representatives had an entitlement to payments in accordance with the FW Act

Decision

In reviewing recent case law relating to determining a worker’s employment status,2 Judge Barnes noted the principles set out by the Full Court of the Federal Court in ACE Insurance3 that there is no one single criterion that will necessarily determine the relationship, and that it is necessary to examine the various facets and circumstances of the relationship as a whole to discern its true character.

In determining the relationship between Metro and the sales representatives, Judge Barnes examined a number of criteria, including:

  • the content of Metro’s training, where the participants had to attend, pass a test, and obtain a sales kit;
  • Metro’s training manual, which had a very strict 16 step presentation format and selling technique;
  • the contractual documents, particularly the Independent Agent Agreement;
  • the intention of the parties;
  • the requirement of on-going training and contact with the Metro office;
  • delegation and control; and
  • whether the sales representatives served Metro’s business or their own business.

Judge Barnes was satisfied that the sales representatives were under the control of Metro in significant respects, both directly in the manner in which they were directed, and supervised, in the performance of their tasks, as well as indirectly through the use of suggested Metro scripts and instructions as to what they “should” do.

In considering the totality of the relationship, Judge Barnes found that, although some factors tended to indicate against an employment relationship, she was satisfied that the proper characterisation of the arrangements was that Metro was the employer of the four sales representatives.

Judge Barnes also found that by providing the sales representatives with the Independent Agent Agreement, Metro had contravened the FW Act by misrepresenting employment as an independent contracting arrangement.

The FW Act does provide employers with a defence for misclassifying the employment relationship, if the employer can prove that when it made the offer of employment, it:

  1. did not know; or
  2. was not reckless as to whether; the contract was a contract of employment rather than a contract for services.

However in this case, although Judge Barnes accepted that Metro’s director and secretary, Mr Bizimovski, did not know that the contracts were of employment rather than contracts for services, she found that Metro had acted in a manner that was careless as to whether the contracts with the sales representatives were in fact contracts of employment. Mr Bizimovski was or should have been aware that there was a real risk that the contracts with the sales representatives were contracts of employment, and he was aware of the possibility of ramifications if the relationship was wrongly categorised.

As a result, Judge Barnes found that Metro had breached its obligations to the sales representatives under the Commercial Sales Award 2010 in relation to wages, overtime, vehicle allowance and annual leave.

Bottom line for employers

To avoid falling foul of the sham contracting provisions of the FW Act, and breaching any applicable award obligations, an employer must not misrepresent employment as an independent contracting arrangement.

Determining whether a relationship is one of employment or independent contractor can be a difficult exercise and, while the terms of the contract are relevant as is the intended relationship between parties, the court will always consider the totality of the relationship.

  • When classifying a worker’s employment status, some of the issues that employers should keep in mind are:
  • whether wages are paid and tax deducted;
  • whether sub-contracting is permitted;
  • whether uniforms are worn or tools supplied;
  • whether holidays are permitted;
  • the extent of control of, or right to control, the putative employee;
  • whether one party ‘represents’ the other;
  • and for whom does any goodwill in the business arise.