The Federal Court has found in favour of five sales agents who had been engaged as independent contractors by an insurance company, but argued they were in fact employees.
Despite the agents having signed contracts stipulating that they were contractors, the Court found that their employment was governed by the former Insurance Industry Award 1998 (the Award) and that they were entitled to annual leave and long service leave according to its provisions. Significant compensation was awarded to the employees.
Implications for employers
The decision highlights the significant risk for companies engaging individuals as contractors in circumstances where there is a possibility that the individual could be characterised as an employee according to common law tests.
This decision highlights the need to exercise caution in how relationships with workers are documented, as well as the practical effect of the relationship. Companies should consider taking the opportunity to review all contractor arrangement in light of the Court’s decision. Companies should be conscious that in cases of this type, courts are increasingly concerned with the substance of the working relationship, rather than the terms of the contract itself.
Incorrect classification of employees as independent contractors risks breach of the sham contracting provisions of the Fair Work Act 2009 (Cth). Civil penalties apply to such breaches. Compensation may also be awarded to employees for breaches of these provisions. Other risks include, for example:
- the employer being ordered to compensate workers for amounts not paid under applicable industrial laws, awards or agreements. Civil penalties may also apply here for breach of the relevant industrial law or instrument;
- workers may be entitled to protection under unfair dismissal laws;
- the company may be in breach of tax laws (for instance, income tax withholding obligations);
- the company may be denied indemnity by its workers compensation insurer for understating its wages bill; and
- the company could be vicariously liable for acts or omissions of those workers.
The applicant, ACE Insurance Ltd (ACE), is a general insurer which engaged a sales force of travelling agents to renew the policies of existing customers in regional areas. The respondents were engaged as agents under independent contractor agreements.
The respondents alleged that they were truly employees and sought various employment-related entitlements.
ACE argued that:
- the agents had engaged in misleading and deceptive conduct, by entering into the independent contractor agreements;
- the agents were estopped from claiming they were employees on the basis that for several years all parties had proceeded on the basis they were independent contractors;
- it was entitled to be indemnified by the agents for any liability it had to them (by reason of a contractual indemnity in the independent contractor agreement); and
- the agents were not entitled rely on the relevant award, as they were not employees within the meaning of the term as defined in that award.
Justice Perram of the Federal Court found in favour of the agents, holding that the true nature of the relationship between ACE and the agents was properly characterised as one of employee/employer. In particular, His Honour emphasized the following points:
- the agents did not generate goodwill for their own businesses tended heavily to suggest that they were in fact employees (in part due to the fact that the skills and knowledge of the agents was specific to selling ACE’s insurance policies);
- the conditions required, particularly their working hours, meant that the agents were in practicality unable to work for another principal;
- ACE exercised control over the agents in providing training and giving direction as to the way in which their work was undertaken in a fashion suggestive of an employment relationship; and
ACE encouraged the agents to hold themselves out as representatives of ACE.
This was so notwithstanding the fact that several of the indicia of a contractor/principal relationship were present, including:
- the contracts signed by the parties described the agents as ‘independent contractors’;
- the agents undertook work using their own vehicles;
- the agents were paid in accordance with the number of policies they sold or renewed, rather than receiving a set wage; and
- some of the agents contracted with ACE via incorporated entities, and even engaged other employees to assist them.
His Honour rejected all of ACE’s arguments in defence.
The agents variously obtained awards for back payment of entitlements such as annual leave and long service leave.
The matter of penalty was not dealt with at this stage of the proceedings.