The question of whether a worker is an employee or contractor is often a grey area of law but particularly relevant to direct selling companies and the salesforce they engage. This issue was considered in depth by the Full Federal Court (the Full Court) in Ace Insurance Limited v Trifunovski .
The Full Court upheld the decision made by Perram J,2 at first instance, which was that Mr Trifunovski and Mr Peries were in fact employees of Ace Insurance Limited (Ace Insurance) despite providing services to Ace Insurance through companies incorporated by each of them. Both the trial judge and the appeal judges considered the indicia relevant in determining whether a person is an independent contractor or employee.
We examine below the factors that are relevant in assessing whether a relationship is one of contractor/principal by drawing upon Ace Insurance v Trifunovski.
Facts of the Case
Ace Insurance engaged five sales representatives as “independent contractors” to sell insurance policies. The sales representatives were engaged by Ace Insurance for an extended period of time. One of the representatives had been “contracted” by Ace Insurance for over 24 years.
After termination of their contracts, the five sales representatives brought proceedings against Ace Insurance in the Federal Court for unpaid annual leave, sick leave and long service leave entitlements. Two of these sales representatives, Mr Trifunovski and Mr Peries, had provided services to Ace Insurance through their incorporated companies, Heraclea Pty Ltd (Heraclea) and Renham Pty Ltd (Renham) respectively.
In making the distinction between a contractor and an employee, Perram J examined all elements of the contractual and working arrangements between Ace Insurance and its sales representatives.
Perram J considered that the factors which indicated that the sales representatives were independent contractors included that:
- They were described as “independent contractors” in their respective contracts and therefore the sales representatives understood that they were independent contractors;
- They were paid a commission based on the number of insurance policies sold;
- No income tax was deducted from their earnings;
- They were required to use their own vehicles;
- Some of the sales representatives had employed administrative staff;
- They had the ability to choose work hours;
- They issued invoices to Ace Insurance for their services.
Conversely, the following elements were considered by Perram J as indicating that the sales representatives were employees:
- Any goodwill rested with Ace Insurance and not with the sales representatives’ own incorporated entity;
- Given the long hours involved in providing services to Ace Insurance, the sales representatives were not able to work for anyone else in practice;
- The sales representatives undertook training provided by Ace Insurance;
- Ace Insurance exercised control over the sales representatives’ day-to-day activities;
- The sales representatives only sold insurance policies issued by Ace Insurance.
After weighing up these factors, Perram J reached the conclusion that a single business was being conducted, namely that of Ace Insurance. As such, the relationship was ultimately one of employer and employee.
Decision on Appeal in the Full Court of the Federal Court
The Full Court agreed with Perram J’s analysis of the indicia which characterised the sales representatives as employees of Ace Insurance. Importantly, their Honours held that, although two of the sales representatives were contracted through corporate entities, this fact did not change the finding that Mr Trifunovski and Mr Peries were each employed by Ace Insurance.
In the leading judgment of the Full Court, Buchanan J provided further analysis of the relationship between Ace Insurance and its sales representatives. In respect of Mr Trifunovski, his Honour said that the following facts reinforced the characterisation of Mr Trifunovski as an employee of Ace Insurance:
- Although Heraclea, of which Mr Trifunovski was a director, entered into an agreement with Ace Insurance’s predecessor and the purpose of such agreement was to divert money to Heraclea, the agreement was not signed under the company seal of Heraclea;
- Instead, Mr Trifunovski signed the agreement in his personal capacity;
- Under the agreement, Mr Trifunovski was required to personally provide his services as the sales representative.
Similarly, in relation to Mr Peries, Buchanan J considered the following arrangements further supported the characterisation of Mr Peries as an employee and the determination that the agreements were entered into with Mr Peries and not Renham:
- Although Renham, of which Mr Peries was a director, entered into four agreements with Ace Insurance’s predecessor between 1990 and 2001, only one of the agreements was stamped with the company seal of Renham;
- The other three agreements were signed by Mr Peries in his personal capacity;
- Under the agreements, Mr Peries provided a personal indemnity to guarantee the performance of the services.
Accordingly, the appeal was dismissed and Ace Insurance was liable to make retrospective payments of annual leave, sick leave and long service leave, amounting to a total in excess of $500,000.
Take Home Message
A key lesson from this case is that, although a worker may be engaged as a contractor and the written agreement states that the relationship is not one of employment, the worker may still be deemed an employee at law.
Direct selling companies wishing to engage contractors should carefully review their written agreements and work arrangements with contractors to ensure that these contractors are not likely to be deemed employees. This case illustrates some factors that direct selling companies should be mindful of when engaging contractors, including:
The actual arrangements and the contractual agreement with the contractor should not prevent the contractor from working for other parties;
- Direct selling companies should refrain from controlling how services are to be performed by the contractor (but direct selling companies can specify, for example, what services are to be performed);
- The contractor should be paid for results, not just for the time spent in performing the services;
- Care should be taken that, where independent distributor and consultant agreements are entered into by companies, the agreements should be executed by a director in their capacity as a director;
- If the contractor is an incorporated company, then any agreement entered into with the contractor and any obligations set out in the agreement must be provided by the incorporated company and not by the worker personally.
Failure to characterise properly a worker can expose direct selling companies to serious risks and consequences, such as:
- obligations to pay the worker full employment entitlement benefits under legislation;
- tax liabilities and breaches of tax laws;
- compliance with the Fair Work Act 2009 (Cth), particularly in respect of unfair dismissal and penalties for “sham contracts”, as well as civil penalties for breaches and possible claims for compensation;
- actions for vicarious liability for the worker’s negligent acts.
Ultimately, the issue of whether a worker is a contractor or employee is a complex area of law and will be dependent not only on the agreement between the company and the contractor but also on the surrounding factual circumstances, such as actual work practices.