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Australia – Independent contractor or employee?

27 March 2013

A recent decision by the Australian Full Court of the Federal Court highlights the need for employers to regularly review their on-boarding processes and existing ‘independent contractor’ engagements.

This comes after the court upheld a decision that five sales agents engaged as “independent contractors” were in fact employees of an insurance company, Ace Insurance Limited. Employees that are incorrectly characterised as contractors exposes the employer to costly litigation, penalties and claims for compensation.

Companies which incorrectly characterise employees as independent contractors could be responsible for the retrospective payment of annual leave, sick leave and long service leave. In this case, the firm had to make retrospective payments of AUD 500,000 (USD 524,000).

The case involved five insurance sales agents who were contracted via a detailed contract stating explicitly that they were independent contractors. The sales representatives, two of them were contracted via a company, worked in a particular geographical are, reported to a regional manager and were rewarded exclusively on commission.

The court ruled that the independent contractors were employees of the company, despite two of the sales agents having been contracted by an external company. It held that the key factors that point toward an employment relationship include where there is no capacity for the worker to delegate their work to third parties, and where the worker is paid for time worked rather than for achieving a particular outcome.

Employers have been advised to review existing contractor arrangements and develop on-boarding processes, a strategic process of bringing a new employee to the organisation and provide information, training, mentoring and coaching.

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