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The Federal Court recently had to consider whether door-to-door insurance salesmen engaged by Combined Insurance were actually employees, despite contracts which asserted (strongly and repeatedly!) that they were contractors. Some of the engagements in question went back almost 20 years.

In what is becoming something of a trend, Justice Perram found that the various factual matters which have to be weighed up to decide this question could be pretty much summed up as “Were they really working in their own businesses? Or were they actually working in the business of the insurance company?

He decided, emphatically, that they worked in the business of the insurance company and that it was a sham to regard to them as conducting their own businesses, even where they formally contracted to Combined through companies. Those companies were merely a way to receive payment, but it was the individuals who were actually engaged, as employees. As a result the insurance company owed substantial amounts of annual leave and long service leave.

As a picturesque detail, the weekly reporting meetings included warm-up exercises in the form of rhythmic chants (“1 2 3 4, let’s go selling door to door”), and motivational songs (“Owned by AON we might be, but Combined will be at the top of the tree.”).The judge felt that this showed the salesmen were being required to ‘dance to the insurer’s tune’, rather than acting independently.

More substantively, the salesmen did not accumulate any goodwill because the insurer had the customer contacts, the legal relationships were all between the insurer and the customer, and the turnover of policies and salesmen were such that the chance of future business rested entirely with the insurance company: the salesmen generated nothing that they could sell as an ongoing business. The insurer regulated every level of operation by detailed contracts, rigorously controlled the way they went about their work, and held the power to dismiss the salesmen.

The salesmen were also encouraged to represent themselves as being from the insurer, even though they wore no uniform. While their contracts theoretically allowed the salesmen to engage in business other than Combined, in actual fact this was not practically possible. Combined Insurance also provided scripts that the reps should use when dealing with customers, and disciplined salesmen who departed from those scripts.

These points overrode the factors going strongly the other way, such the salesmen paying some of their own expenses, and employing administrative staff (their wives). The insurer deducted no tax, and the salesmen looked after their own tax affairs – but this didn’t count for much when the insurer issued tax invoices to itself on behalf of the salesmen.

What lessons can be drawn from this case?

This case reiterates that whatever the parties involved call their relationship will not inhibit a court from finding that the substance of the relationship is employment.

It also emphasises that whether someone is a contractor or not is as much a question of how the relationship is managed, day to day, as it is about the contractual structure around it.

A lot actually hangs on this: it is not only about possible liability for employment entitlements. It is often overlooked that even if the person is a contractor, the principal may still bear liability for on costs (such as workers compensation, superannuation and pay roll tax).

These risks mean that it is important to be clear about the implications:

  • If your particular contractor is, in fact, a contractor – what will you be liable for anyway? What is the real cost to your business of engaging this person?
  • If you are to avoid the contractor being classed as an employee, what do you need to do to manage that risk, both contractually and in managing that person over time?

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