Employ­ee? Or not employ­ee? Why is it not clearer?

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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