Insurance agents found to be employees, not independent contractors

In brief - hierarchical structure, specialised training and opportunity for advancement seen as key factors

The Federal Court has determined that five insurance agents were employees, not contractors, given that the company maintained organisational control, had control over all training and utilised advancement through the organisation as an incentive.

Five insurance agents file annual leave and long service leave claims 

In a decision released on 25 October 2011, ACE Insurance Ltd v Trifunovski [2011] FCA 1204, the court determined the issue of whether five insurance agents engaged by a general insurer were employees or independent contractors. The agents filed annual leave and long service leave claims, seeking entitlements over the period from 1981 to 2006.

Although clearly of significance to the insurance sector, this decision is important to any organisation which provides services to the public through the engagement of independent contractors.

Travelling insurance sales agents retained as independent contractors

Since 1959, the company has provided income protection policies to Australian customers through its healthcare accident divisions. The policies of these two divisions have been sold by two distinct sales forces, comprised of travelling insurance sales agents. The sales agents were traditionally retained as independent contractors under detailed written contracts.

Three-tiered hierarchy of independent contractors

Each division of the company has consisted of a hierarchy of three tiers of sales agents, territory representatives and sub regional representatives.

Under the three-tiered hierarchy, sales agents have been required to travel door to door collecting premiums from customers whose policies were up for renewal and have been responsible for selling new insurance policies to customers.

Under this structure, sales agents have earned commission on new policies and on any premiums collected. In doing so, sales agents used their own vehicles, did not have income tax deducted from earnings and issued tax invoices to the company for services provided.

However, tax invoices were generated by the company, the sales agents accrued no goodwill in their own businesses and were, in practical terms, unable to work for any other insurer, given that they sold only the company's policies and were trained by the company on business systems developed by and maintained by the company.

Each sales team administered by single territory representative 

Each territorial sales team has had a single territory representative assigned to it who was responsible for the team's administration. The territory representative organised meetings, was responsible for packaging policies and distributed leads amongst the sales agents.

Company rejects agents' claims and alleges misleading and deceptive conduct

In response to the claims lodged, the company asserted that some of the claims for annual leave and long service leave were time barred. In addition, the company asserted that the agents could not claim to be employees because they had signed contracts stating that they would provide services to the company as independent contractors.

Further, in a separate proceeding, the company alleged that it has suffered loss by reason of misleading and deceptive conduct engaged in by the agents, consisting of their execution of the written contracts under which they agreed that they were independent contractors. The damages sought by the company was the quantum of whatever liability was assessed in the claims brought by the agents.

Agents entitled to annual leave and long service leave if found to be employees

After conducting an exhaustive review of the statutory framework in place during the period covering 1981 until 2006, governing annual leave and long service leave entitlements, the court concluded that if found to be employees, the agents would have an entitlement to the claims lodged.

Difference between an employee and an independent contractor 

The court then turned to the common law question of employment, noting that the distinction between an employee and an independent contractor is fundamentally rooted in the difference between a person who serves his employer and a person who carries on a trade of his own (Hollis v Vabu Pty Ltd [2001] HCA 44).

The Federal Court held that the answer to the question of whether an individual is an "employee" must be determined by reference to the "totality" of the relationship. The court then outlined a number of indicia which have been developed and which are viewed as relevant, to varying degrees, to the outcome (without any particular indicia being determinative), including:

• the terms of the contract
• the intention of the parties
• whether tax is deducted
• whether subcontracting is permitted
• whether uniforms are worn
• whether tools are supplied
• whether holidays are permitted
• the extent of control or the right to control
• whether wages are paid or whether there exists a commission structure
• what is disclosed in tax returns
• what one party represents to the other
• for whose benefit goodwill in the business enures
• how businesslike the alleged business of the worker is

Control, appearance and goodwill suggest that agents are employees 

In considering the totality of the circumstances, the court concluded that the five agents were employees and that apart from some of the limitation defences, the company's defences were to be dismissed.

The court concluded that the agents were employees, despite the fact that they drove their own vehicle and were required to remit their own income tax and despite the written terms of the contract executed by each sales agent, which required the agent to incur their own business expenses, gave them the ability to incorporate and permitted them to engage other staff. The contract further contained an appointment clause which provided that the agent would operate as an independent contractor and expressly stated that nothing would create the relationship of employer and employee.

Hierarchical structure 

A key factor for the court was the fact that the sales agents were organised into teams under a territory representative. This, the court found, demonstrated the company's organisational control over the agents.

The court also found the company exerted control through developing and maintaining all training within the organisation. Lastly, the incentive of advancement through the organisation was found to be a further form of control exerted by the company.

Liability for annual leave and long service leave resulting from incorrect decision

Although of specific interest to the insurance industry, this decision is a useful restatement of the factors which should be taken into consideration when deciding whether an individual should be retained as an independent contractor or hired as an employee.

This decision further demonstrates that one of the issues that can arise if the determination is incorrect is liability for annual leave and long service leave entitlements.