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18 February 2013 Employee? Or not employee? Why is it not clearer?

By Warwick Ryan, Partner

After 200 hundred years of legal decisions on the question of who is an employee and who is a subcontractor, the courts still surprise us.

A recent Full Federal Court decision on the issue provided a very adverse outcome for the hapless employer.  It involved 5 insurance sales representatives operating in 3 different roles for an insurer – one for 20+ years.  Significantly, they were employed pursuant to a detailed contract that stated explicitly that they were independent contractors.  At least 2 of the contracts were in the name of a family company and not even the individual.

They generally worked in a particular geographical area.  They reported to a Regional Manager who was an employee of the company and they were rewarded exclusively on commission.  Leads were provided by the company and they were not remunerated for any administrative work they did, just their sales activities.

The court found the key elements in determining that these workers were employees was the right of the company to control the organisation of their work and the deployment of the various agents in their team.  They also had some training provided by the company. Importantly, the workers were not entitled to engage anyone else who sells insurance on their behalf.

Therefore, the court found, their duties were "…to be carried out through the personal effort of the individual agent and only by them."

Ultimately, the two factors which were determinative were the inability of the worker to delegate his work and with significant involvement the company in the day-to-day activities of the worker.

The court ultimately found that they had "…no real independence of action or true independence of organisation."

Importantly, the court overrode the fact that two of the contracts were between the insurance company and a family company set up by two of the workers as the preferred structure to operate their affairs.

The result of this finding was that the company became responsible for the retrospective payment of annual leave, sick leave and long service leave.  These entitlements amounted to approximately $500,000.

If you want to ensure that the relationship is found to be one of principal/subcontractor (ie. not employment), the simple messages to be learnt from this case are: 

  • even where there are written contracts that state that the relationship is not one of employment – that will not determine the issue;
  • the work referred to in the subcontract should be able to be carried by a third party engaged by the sub-contractor (albeit with your approval of the particular individual);  
  • you are entitled to control what work is to be done and the time limits and cost involved, but not as to how the work is to be carried out;
  • preferably, the worker will be required to provide their own plant or equipment; and/or
  • the worker will be paid on the result and not merely for the time spent working.

Ultimately, when engaging contractors it remains a complex issue and we recommend that careful advice be sought.

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This article is not legal advice and the views and comments are of a general nature only. This article is not to be relied upon in substitution for detailed legal advice.

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