The Federal Court has handed down its decision1 on compensation and penalty following its findings outlined in our previous eAlert, where the company was found to have wrongfully engaged five former insurance sales representatives as independent contractors rather than as employees.
The company has been ordered pay significant compensation to former insurance sales representatives for accrued leave entitlements and interest.
The Court also imposed a penalty of A$10,000 on the company, even though the Court found the company relied on the advice of Queen’s Counsel that the insurance sales representatives were not employees.
Last year, the Federal Court found that the five former insurance sales representatives were employees governed by the Insurance Industry Award 1998. While any claim for employee entitlements is usually limited to six years, the issue of payment of accrued leave entitlements arises at the termination of employment and usually at the “actual salary rate the employee was receiving immediately prior to termination”. Accordingly, a long serving sales representatives of seven years and on a salary deemed to be A$127,683 based on commission earnings in his last financial year of service was awarded A$325,671. The Court recognised accrued leave entitlements for his entire period of service.
The Court also awarded interest on the compensation calculated from when each sales representative ceased working for the company.
The Court found the company had sought advice about whether their sales representatives should be classified as independent contractors or as employees. The company then relied on advice prepared by a prominent Queen’s Counsel for another insurance company with a similar operational structure.
Even though the company did not “unreasonably rely” on that advice, the advice was no longer accurate after the High Court case of Hollis and Vabu in 2001. Accordingly, as a matter of general, rather than specific, deterrence the Court imposed a civil penalty of A$5,000 for each breach by the company.
The lesson to be learned from the case for all companies that engage independent contractors is that not only should proper contracting arrangements be implemented at the initial engagement stage, but any arrangement should be regularly reviewed, as a risk mitigation strategy, to reduce the likelihood a Court or a regulatory body such as the Fair Work Building & Construction or a Court determines such an arrangement to be employment and therefore, sham contracting.
Companies should also be aware that compensation awarded to persons wrongfully engaged as independent contractors can be significant.
1 ACE Insurance Ltd v Trifunovski(No 2)  FCA 793
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