The tax and legal implications of hiring

Determining whether someone is employed as an employee or a contractor is an important issue for SMEs to get right. Certainly there are tax and superannuation implications if it’s one way or the other, but there are also severe penalties if SMEs get it wrong.

The issue is a regular one before courts and tribunals and came up again recently before the full Federal Court – this time involving insurance agents. In its decision in January this year, the court dismissed a company’s appeal and found that insurance agents were employees and not contractors.

In July 2012, the Federal Court had imposed a civil penalty on the company, Combined Insurance Company of America Ltd (“Combined”), for treating insurance agents as independent contractors instead of employees (as the court had in 2011 found they were – see below). The case concerned the employment relationship and the assessment of annual and long-service leave entitlements, but obviously the finding of an employment relationship has tax and superannuation implications.

In October 2011, the Federal Court held that the relationship between Combined and five of its former insurance agents was one of employment and not one of independent contractors. That question arose as an issue in the agents’ claims against Combined for unpaid annual and long-service leave as well as in their pursuit of Combined for the imposition of civil penalties for failing to pay those entitlements.

Shortly before judgment was delivered, Combined’s insurance business (including its liabilities) was transferred to ACE Insurance Ltd under a scheme governed by the Insurance Act 1973 giving rise to the proceedings’ present title. The court concluded that the five agents involved in the matter were employees. It found:

• the company was able to exercise some control over how the insurance 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
• the agents were not conducting their own business but were instead enhancing the goodwill of the insurer.

ACE appealed the decision, arguing in part that the court had erred in finding the sales reps were employees not contractors because the judge failed to consider that working in another’s business was not inconsistent with working in one’s own business.

In dismissing the appeal, the full Federal Court noted that the earlier judgment had found the agents had no business of their own and worked only at Combined. The court said Combined had close control over the organisation of work and the deployment of sales agents. There was also no effective right of incorporation and no right to contract in partnership or appoint sub-agents.

The case again highlights the dangers that can arise when this employee/contractor relationship is not properly settled.

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