Misconceived employment arrangement comes with $450k price tag

by Stephanie Zillman29 Aug 2012

A company has been orderd to pay $450k in compensation to five wrongly classified insurance salesman after the Federal Court found that the employer had wrongly classified the workers as independent contractors instead of employees.

The court found that despite the company having sought and relied upon high-level legal advice before making the classification, the company was nonethless liable for the error. According to workplace law experts at Middletons, in addtion to the compensation payout, which was for accrued leave entitlements and interest, the company was also slapped with a $10k fine.

Even though the court agreed the company had not ‘unreasonably relied’ upon the advice of a prominent Queen's Counsel, who had previously provided legal advice to another insurance company with a similar operational structure, the court also awarded interest on the compensation calculated from when each sales representative ceased working for the company.

According to Middleton’s, the advice the company had received was inaccurate because it failed to take into account the 2001 High Court case of Hollis and Vabu. This case involved bike couriers who were engaged by a courier company as contractors. When considering the question of whether the bike couriers were in fact contractors or employees, the High Court looked at the totality of the relationship between them and the appointing entity and concluded that the bike couriers were really employees. According to workplace law specialists at CBP Lawyers, the core distinction between contractors and employees is whether a worker is in a relationship of personal service, or is a business person.

The following questions set out by CBP may be asked before appointing contractors:

  • Who owns the business?
  • Who controls the operation / work?
  • Who owns the office space?
  • Who owns the tools?
  • Who does the contractor provide duties to?
  • Does the independent contractor bear a risk of profit or loss?
  • Is there a creation of goodwill?
  • How is the independent contractor paid?

In Hollis and Vabu, the bike couriers had only some features of an independent contractor, and were ultimately classed as employees because they were not operating a business.

Key takeaway: All companies that engage independent contractors should not only ensure proper contracting arrangements be implemented from the very beginning of the employment relationship, but any arrangements should be regularly reviewed as a risk mitigation strategy. There can be significant penalties for employers found to have engaged in sham contracting.

For more information on independent contractors vs employees, click here to read the Fair Work fact sheet.


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