Federal Court slaps penalty on Ace Insurance for sham contracting

The Federal Court has imposed a $10,000 penalty on Ace Insurance, after it found five former insurance sales representatives of Combined Insurance Company of Australia were wrongly engaged as independent contractors rather than as employees.

Ace Insurance, which acquired Combined Insurance Company of Australia, has also been ordered to pay significant compensation to the former insurance sales representatives for accrued leave entitlements and interest, even though the Court found Combined Insurance relied on the advice of Queen’s Counsel that the insurance sales representatives were not employees.

The case is the latest in a string of cases before the courts considering the distinction between employees and contractors, as employers have different responsibilities for superannuation, tax and payroll tax depending on whether staff are employees or contractors.

The contractual provisions covering the Combined Insurance reps had several factors indicating that they were independent contractors, including: the agents understood themselves to be contractors; payment by commission; the agents used their own vehicles and some employed their own administrative staff; the agents were permitted to carry on other businesses; and some agents had incorporated themselves.

However, the court ruled against the insurer on the basis that Combined Insurance was able to exercise some control over how the agents did their work, required long hours of work so the agents were unable to realistically carry on other businesses, the agents were able to use their vehicles for personal and business purposes and, most importantly, the agents were not conducting their own business but were instead enhancing the goodwill of the insurer.

The Court determined that payment of accrued leave entitlements should arise at the termination of employment and usually at the “actual salary rate the employee was receiving immediately prior to termination”.

On this basis, a long-serving sales representatives at Combined Insurance of seven years and on a salary deemed to be $127,683 based on commission earnings in his last financial year of service was awarded $325,671 and the Court recognised accrued leave entitlements for his entire period of service.

However ACE Insurance says the award of accrued leave entitlement is in error and has made an application to the court in relation to the award. 

Sarah Yu, special counsel at law firm Freehills, told SmartCompany businesses that engage independent contractors should implement proper contracting arrangements at the initial engagement stage and these arrangements should be regularly reviewed.

“I think for employers, just because you call a person an independent contractor and indeed you may call them that in the contract, that is definitely not necessarily the case under the superannuation guarantee legislation,” Yu says.

“It’s a timely reminder for employees to review the individuals they call independent contractors and whether they are actually independent contractors.”

Yu says the status of independent contractors in a business is particularly important in light of the recent Phoenix legislation being considered by Parliament, which makes directors personally liable for unpaid superannuation guarantee contributions.

She also identifies this as a concern for businesses involved in mergers and acquisitions.

“I think potential purchasers need to be very wary of how people called independent contractors have been engaged and what has happened with their superannuation and whether there is any potential liability for the purchaser,” Yu says.

“There is a due diligence defence under the new Phoenix legislation and we are encouraging our clients to take advantage of that.”

Yu says the penalties imposed by the Federal Court appear “quite fair”, particularly given the ability of the Australian Taxation Office to impose penalties of up to 200% of the Superannuation Guarantee contribution.