Getting the legalities right around your contingent workforce – what you need to know

Nick Duggal

Partner

Employee & Workplace Relations

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Contents

An update on the ‘Ace’ case

The FWCFB clarifies casual arrangements

How to get the legalities right

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Lessons from sham contracting prosecutions

ACE Insurance Ltd v Trifunovski [2013] FCAFC 3

The Facts:

• Five insurance agents engaged as independent contractors

• The agents were paid commission, had limited rights to employ others, were not prevented from performing other work, able to hire people to assist them with the work and were described in their agreements as independent contractors. Two of the agents were paid via corporate entities.

• On the other hand, the insurer gave the agents sales leads and training, published manuals on how to carry out their services and were obliged to undertake the services themselves.

• After termination of their engagement, the agents claimed payment of their leave entitlements by the insurer

ACE Insurance Ltd v Trifunovski (cont.)

At first instance:• Despite these indicators, Justice Perram ruled against the insurer after

considering the following factors that indicate a relationship of employment:

− the insurer was able to exercise some control over how the agents did their work

− as the insurer required long hours of work the agents were unable to realistically carry on other businesses

− the agents were able to use their vehicles for personal and business purposes

− most importantly, the agents were not conducting their own business but were instead enhancing the goodwill of the insurer

• A key reason given by the Court for the decision was the degree of organisational control that the insurer exerted over the agents, by way of:

− organising them into hierarchical teams− developing and maintaining all training and development

programs for them− introducing incentives for advancement

• The Court found that the agents were not conducting their own business but were clearly part of the insurer's business. The company was consequently found to have wrongfully engaged the agents as independent contractors rather than employees

ACE Insurance Ltd v Trifunovski (cont.)

• There may be many good reasons why it might suit an individual worker to be treated as an agent or a contractor rather than as an employee.....However, it is increasingly necessary that parties conduct themselves (in their relations with regulatory agencies, and not just each other) in accordance with a correct appreciation of the nature of their relationship, not just as it may suit them (or one of them). The parties may agree the terms of their contract, but any statement by them about the character of their relationship, or of their contract, has consistently been held not to be decisive of the true legal character of either

• .....it is worth mentioning that, increasingly, alternative forms of provision of labour are being used in Australia which do not involve direct employment by the enterprise in whose business the labour is provided.....The individuals whose personal service is thereby provided may be engaged as the employee of the labour provider, or as contractors to it.

ACE Insurance Ltd v Trifunovski (cont.)The importance of incorporation

• The contract authorised sales representatives:“To conduct business pursuant to this Agreement through any corporation of which the Representative is a director, and to assign to any such corporation, the Representative’s rights and benefits under this Agreement provided that the Representative shall first give to the Company not less than forty-five (45) day’s advance written notice and that the Company may levy such charges as it considers reasonable to compensate it for the costs of the proper administration of the agency relationship created under this Agreement and may also impose such other conditions as it considers reasonable.”

• The Court held:“...the trial judge was correct to conclude that the arrangements, whilst perhaps made to enable money to be channelled through Heraclea, did not represent an independent contract whereby Heraclea provided Mr Trifunovski’s services as its employee to Combined as the other party to the contract. The existence of this contract does not denote, therefore, that Mr Trifunovski was not an employee of Combined. In my view the trial judge correctly found that he was.”

ACE Insurance Ltd v Trifunovski (cont.)

On Appeal:

• The Full Court upheld the 2011 decision (3:0)

• Important elements: • The activity, selling insurance, is required to be carried out by the

personal efforts of individual agents, and only by them • Right of the employer to control the work of agents • Trained by the employer in particular techniques of selling which

were constantly reinforced • No real independence of action • A representation of the engagement as a contractor does not suffice

to make it one

“a basic (but often unstated) premise is that a contract of service requires discharge of duties by the personal service of the employee, whereas in a

contract for services that is only one of the possibilities” – Justice Buchanan

• The employees received over $500,000 in accrued annual lease and long service leave

Telum Civil (Qld) Pty Limited v CFMEU [2013] FWCFB 2434

The facts:

• Telum engaged a number of casual employees on a construction project. Upon completion of the project, their employment was terminated.

• These employees were engaged as casual employees, treated as casual employees and paid causal loadings.

• The Union brought the application on the employees’ behalf, arguing the employees were not casual and were therefore entitled to redundancy pay.

Telum Civil (Qld) Pty Limited v CFMEU (cont.)

Clause 3.3 of the Agreement provided:

“Employees under this Agreement will be employed in one of the following categories:• permanent employees; or• casual employees.

At the time of their engagement, Telum will inform each employee of the terms of their engagement and, in particular, whether they are to be a permanent employee or casual employee.Casual employees will be engaged by the hour. A person engaged as a casual will be paid a loading of 25% on the permanent employee ordinary time wage rates prescribed in clause 6 of this Agreement. The casual loading will be paid in lieu of and compensate for all benefits such as leave, notice, redundancy and other full-time entitlements that do not apply to casual employees.”

The Agreement set out the entitlements of notice of termination and redundancy benefits to permanent employees only.

Telum Civil (Qld) Pty Limited v CFMEU (cont.)

At first instance:

• The Commissioner applied the common law definition of ‘regular and systematic’ employment and found that they were not casual employees.

• Factors: • Equivalent full-time hours• Regular hours with consistent start and finish

times• Specific direction to attend work was not

necessary

The Full Bench found:

• It is unlikely the legislature intended that outcome

• It is an outcome that is inconsistent with the purposes and objects of the FW Act which intended that any reference to 'casual employee' in the FW Act is a reference to an employee who is a casual employee for the purposes of a Federal industrial instrument e.g. EBA or Modern Award

• It is an outcome that would tend to impede productivity and flexibility

• All of the entitlements of permanent employees were compensated for in casual loading

Telum Civil (Qld) Pty Limited v CFMEU (cont.)

FWO Prosecutions 2012-2013

• 10 Fair Work Ombudsman (‘FWO’) prosecutions relating to sham contracting

• Record penalties

• Fines for companies and directors

• Clear intention of general deterrence from the decisions

E A Fuller & Sons Pty Ltd

• NSW Fruit and Vegetable store fined over $166,000 and their company director fined a further $27,000 for sham contracting and underpayment of $60,000

• Where a company engages, over a long period of time, both employees and independent contractors, it will be unlikely that it has not developed knowledge of the different obligations arising from each

• The company has an obligation to inform the employee of the “true status” of their employment relationship – Judge Driver

Maclean Bay Pty Ltd

• Resort in Tasmania engaged in unlawful sham contracting campaign to convert all employees to contractors in order cut costs

• Penalty of over $280,000 for the company and $13,000 for part-owner.

• Justice Marshall described the action as “an appalling abuse of power” which deserved to be met with the full force of the law

Fair Work Ombudsman v Contracting Solutions Australia Pty Ltd [2013] FCA 7

The Agreement:• Blue Steel conducted a retail fast food franchise in Adelaide called

‘Wetzels Pretzels’ (‘the shop’)

• CS and LCS are companies which supply contracting labour. Both use a contracting model, the ‘Odco system’, designed for contractors to receive above Award rates.

• In January 2004 CS and Blue Steel entered into a hire agreement whereby CS would supply retail services and assume responsibility for the administration of statutory requirements and Blue Steel would pay CS for the supply of personnel on an agreed schedule of hourly rates.

• CS ceased trade in November 2007, and LSC entered into a similar agreement with Blue Steel.

• At all times, the schedule of rates given by CS/LCS to Blue Steel which set rates of pay at the shop were below the minimum award rates and conditions for an employee under the relevant Award.

Engagement of employees:• Blue Steel advertised at the shop for casual staff.

• Two 15-year old applicants completed a trial and were offered the job.

• Mr Lenkic instructed the successful applicants to meet with Mr Wright from CS/LCS, as Blue Steel engaged their staff through them.

• The Odco system was not suitable for minors. Both the applicants were not bona fide self-employed independent contractors running their own businesses.

• The actual nature of the engagement was as a casual employee.

Contracting Solutions (cont.)

The respondents:

• Contracting Solutions Pty Ltd (in liquidation) (CS)

• Labour Contracting Solutions Pty Ltd (LCS)

• Michael Wright – director of CS and LCS

• Blue Steel Corporation Pty Ltd (Blue Steel)

• Daryl Lenkic – director of Blue Steel

Contracting Solutions (cont.)

• The contracting-labour company was fined $14,000 and director/part-owner fined $5,900

• The fast food company was fined $13,000 and director $2,600

Contracting Solutions (cont.)

Happy Cabby Pty Ltd

• A transport shuttle company in Newcastle as been fined over $286,000 and the sole director fined $47,000 for underpaying their employees $26,000

• High penalties were appropriate as the respondents were put on notice on multiple occasions of the difference between employment and independent contracting relationships

How to get the legalities right...

Lessons from the ‘Ace’ case• Contract with a corporate entity, with labour

provided from multiple personnel

• Draft an appropriate contract that characterises the engagement as an independent contracting arrangement

• Limit the degree of control which you exercise in day-to-day performance of duties

• Outsourced labour can eliminate the risk of sham contracting and limit the liability

• Review the relationship over time to ensure a genuine engagement hasn’t become a potential sham

Tell ‘em ‘Telum’

• Review your EBA and Modern Award – does it exclude your casuals from accessing additional NES entitlements?

• Be specific in your contract and engage your casuals on a very ‘casual’ basis

• Perform it! Mirror the terms of the contract

• Reevaluate the nature of your ongoing relationships as they progress

Prosecution risks

• Wilful blindness or deliberate misclassification will not be a defence to a sham contracting prosecution by the FWO

• Using a labour-contracting company may not always absolve you of liability

• Acknowledge the warning signs of a sham relationship

• Seek professional advice at the first sign of a potential prosecution

Suggestions

• Carefully assess what relationship is appropriate for the type of engagement you desire

• Obtain advice if you are uncertain about the proper characterisation of the engagement

• Draft an agreement clearly setting out the context, nature and terms of the engagement

• Act strictly in accordance with the written terms

Questions?

Nick Duggal

Partner

Employment & Industrial Relations

Nicholas_Duggal@tresscox.com.au

Direct telephone: (03) 9602 9744

Contact Us

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