Beware of inadvertently turning your contractors into employees

Numerous companies are exposing themselves to serious risk, consequences and penalties for breaches of the Fair Work Act after findings that the “independent contractors” they have hired as their sales force are in fact employees.

It is unlawful for an employer to represent a person who is its employee that under their contract for services, they are performing work as an independent contractor. This is known as “sham contracting”.

The difficulty employers face is that there are no clear indicators to determine that an “independent contractor” is in fact a “disguised employee” or a dependent contractor.

Recent cases such as Tattsbet v Sharyn Morrow have confirmed the courts must use a multifactorial test to determine whether a person is an employee or independent contractor. The Federal Court upheld an appeal by Tattsbet, finding that Ms Morrow was an independent contractor.

Not all companies have been as lucky. The multifactorial test was considered by the Federal Court in Ace Insurance v Trifunovski, with the court upholding the first instance decision characterising five former sales representatives of Ace Insurance as employees.

At first glance the sales reps appeared to be independent contractors of the company. They had their own incorporated business, invoiced the company for their services, did not receive an income tax deduction for payment for their services and received a commission dependent on the number of products sold.

The sales reps were required to use their own vehicles, hired their own administrative staff and chose the hours they worked. Their contracts specifically stated that they were “Independent Contractors” and they understood their position to be that of independent contractors (one of the sales reps had been contracted under this agreement for 24 years).

Despite these factors, the court found that the reps were better categorised as employees. Critically, part of the rationale was that they utilised sales training and techniques developed by and provided to them by the company. They were expected to attend daily and weekly sales meetings with the company, which provided them with sales leads.

The court also considered the fact that any goodwill rested with the company and not the sales rep’s own entity. Further, the hours worked by the reps for the company meant they were unable to enter into a contract for services with any other company and they did not have capacity to delegate their work to third parties.

The company was ordered to make retrospective payments to the sales reps for their employee leave entitlements, which amounted to a total of approximately $500,000.

Cathryn Prowser and Amy Goricanec, Colin Biggers & PaisleyClearly decisions of this nature can have a devastating effect on a business, especially as companies may also be subject to a $51,000 penalty per contravention of the Fair Work Act. Courts will look past the engagement of a labour hire entity or other corporate vehicle to assess the proper characterisation of a relationship.

In order to avoid expensive litigation, the risk of penalties and liability to “employees”, it is strongly recommended that contracts of engagement with sales representatives, as well as the performance of the contract and the relationship, are carefully considered and reviewed. Strategies can be implemented to ensure the intended relationship prevails.

Cathryn Prowse and Amy Goricanec are lawyers in the Melbourne office of Colin Biggers & Paisley.

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