EMPLOYEE OR INDEPENDENT CONTRACTOR – ACE INSURANCE VS TRIFUNOVSKI

[2013] FCAC 3 (‘ACE Insurance’).

Upholding the first instance decision that five persons who had been classified as contractors were in fact employees at common law.

ACE Insurance is one of the more recent cases of a growing list illustrating the significant difficulties faced by employers today in classifying a worker as an independent contractor.

ACE Insurance saw five life insurance agents engaged as independent contractors for the purpose of door to door insurance sale claim employee entitlements based on the fact that they were employees rather than independent contractors. After much consideration the Full Court of the Federal Court determined that despite the fact that the agents had each executed contracts stating that they were independent contractors, and not employees, they were nonetheless deemed employees of Combined Insurance Company of America (‘Combined’) at common law.

Considerations in ACE Insurance indicating independent contractor status:

• The agents signed contracts specifically stating their engagement as independent contractors.
• The agents issued tax invoices for their services.
• They had the ability to hire support staff.
• Agents were reimbursed for the number of policies sold.
• Agents used their own vehicles for transportation.
• Some of the agents were contracted through their entities, engaged other employees and were registered for GST.

Considerations in ACE Insurance indicating employee status:

• Each agent was trained by Combined at Combined’s expense.
• The agents worked under the supervision and direction of Combined.
• Agents were unable to work for other parties due to the significant hours required for Combined.
• The agents lacked independence.
• The agents did not generate goodwill for their own business.
• The agents worked in a specified geographical area.

Ultimately, the Court determined that the agents were employees of Combined under common law. Subsequently the agents were entitled to annual and long service leave entitlements. The Court’s decision turned on the fact that Combined ultimately had control of how and when work was to be performed and that their work enhanced the goodwill of Combined’s business. That is, they were seen to be working in Combined’s business rather than working in their own independent businesses. This ‘entrepreneur test’ is the one which has been adopted in recent cases over the last two years, including the Roy Morgan Research case and the On Call Interpreters and Translators case. They were both superannuation cases where the Tax Office was successful before the Federal Court in proving that superannuation should have been paid in respect of persons who had been classified as contractors, but who the Court found were employees at common law.

As a result Combined was ordered to pay more than $500,000 in unpaid entitlements to the agents and $10,000 in penalties for ‘sham contracting’.

When engaging persons or entities as independent contractors as opposed to employees one must proceed with extreme caution. Although it may be tempting, due to the perceived flexibility, avoidance of responsibility for employee entitlements and reduced statutory obligations pertaining to Work Cover, superannuation and payroll tax, to engage an individual as an independent contractor as opposed to an employee, the consequences of ‘getting it wrong’ can be catastrophic to a businesses’ survival.

In the event that an individual is wrongly engaged as an independent contractor the following consequences may apply:

• Liability for employee entitlements such as award wages, annual leave and long service leave;
• Potential breach of PAYG withholding legislation including personal liability for directors;
• Potential underpayment of workers compensation premiums and payroll tax;
• Liability for underpaid superannuation including personal liability for directors;
• Liability for penalties for ‘sham contracting’, prohibited under the Fair Work Act 2009;
• Potential access to unfair dismissal jurisdiction which wasn’t contemplated at the time of engagement or termination.

Employers must be aware that specifying an individual to be an independent contractor in written contracts does not then preclude them from being deemed an employee at common law by the courts. It is imperative that employers engage in an in depth analysis of all engagements of independent contractors and employment of employees in their respective businesses to ensure each individual and/or entity is accounted for in the correct manner.

Pointon Partners has extensive experience in advising on the above issues.

If you have any queries or require any assistance in this area please feel free to contact Michael Bishop or Sophie Ware.

Michael Bishop – Partner, Pointon Partners