Lifting the corporate veil
Tax Telegraph, April 2013
Organisations that rely heavily on the use of contracting labour through companies and are under the impression that these relationships are with contractors and not employees should be very careful. The recent decision of ACE Insurance Limited v Trifunovski  FCAFC 3 raises some significant concerns for persons who engage contractors.
This case impacts organisations in industries that engage contractors (e.g. IT, insurance brokers and other professional labour) who operate via the use of companies.
What is important to note from this decision is that the structure is not determinative of the relationship between the two parties and the obligations of the entity contracting out the services. Accordingly, even if an agent provides its services through their company (using their own ABN) this does not mean that a company has hired a contractor. The courts may ‘lift the corporate veil’ and look through the structure to the underlying relationship between the parties.
The ACE Insurance Limited v Trifunovski  FCAFC 3 decision is discussed in detail below, as well as the key decisive factors and themes from the case.
ACE Insurance Limited v Trifunovski 
Issues of the case
ACE Insurance Limited v Trifunovski was an appeal lodged by ACE Insurance Limited in the Full Federal Court of Australia from the prior decision in the Federal Court of Australia which found in favour of Trifunovski. At the original single judge decision, Perram J held that the agents were employees. This appeal considered the question of whether five insurance sale agents were “employees” of the general insurance company, Combined Insurance Company of America (“Combined”) and therefore entitled to receive payments for periods of unused annual and long service leave.
The agents were responsible for the selling of insurance products of Combined and they were rewarded by way of a commission. These agents provided their services through a company of which they were a director. They earned commissions on new policies, renewals and premiums and on override commissions. However, no agents were entitled to trailing commission in respect of the renewals of policies originally written by them.
Each agent was engaged under a contract that specifically stipulated that they were not employees. The agents sold only Combined’s policies to Combined’s customers and were trained by Combined in line with Combined’s procedures. No income tax was withheld from their earnings and tax invoices were issued to the insurance company for the services provided.
The structure of the sales force at Combined was arranged in a pyramid structure and each tier was dependent on the other levels. Movement from on level to another, termination and hiring other agents were all within the control of Combined.
The courts dismissed the appeal as the agents in the case lacked independence and were under the control of Combined. Additionally, the structure of the contract and of the contractors’ operations was deemed to have no bearing on the true underlying relationship between the agents and Combined. In effect the Court decided to look beyond the fact that Combined had engaged a company to provide services and looked to other factors.
The key decisive factors and themes of this case are:
- Structuring of agents operations
- Control and independence
- Structuring of remuneration
- Terms of the contract.
Operations of the agents
The previous mindset that where a person sets up a company and provides services to another entity under the umbrella of that company, makes that person a contractor, no longer appears to be true. The courts will look at other factors, such as control and independence, in deciding what the actual relationship between the parties is.
In the event that the agent is later deemed to be in an employment relationship, there will be potential difficulties for these individuals to retrospectively account and comply with the appropriate regulatory requirements.
Control and independence
In this case, the supervision of the job as carried out by the agents was deemed to be indicative of an employer/employee relationship. The agents lacked independence as a command relationship in the hierarchical structure existed between all levels, with the highest contracted out level reporting directly to an employee of Combined.
The manner in which the job was carried out was controlled by Combined. Whilst Combined argued that its training manuals were not compulsory, it was held that this was an untenable position as it was Combined which controlled who got promoted within the sales force pyramid. Accordingly, the idea that the training manuals could be ignored was deemed by the courts to be unrealistic position.
The agents were remunerated by way of a commission. However, they were not entitled to trailing commission. This is an important point as upon ceasing to be an agent the representative was no longer entitled to further commissions. As the agent’s remuneration was purely dependant on their contract as an agent with Combined this factor was more indicative of the existence of an employer/employee relationship.
An important factor which was used to determine that an employer/employee relationship existed was that the sales representatives had no goodwill in the activities that they were carrying on. The agents sold only Combined’s policies to Combined’s customers and were trained by Combined in line with Combined’s procedures. The agents accrued no goodwill in their own business and as such had no business which could be sold. They were in practical terms unable to work for any other insurer.
Terms of the contract
The contract in this case specifically stipulated that the agents were not employees and it did not include any leave entitlements. However, the courts looked beyond the contract and assessed the true character of the underlying relationship. Accordingly, due to the reasons discussed above the relationship was deemed to be an employer/employee relationship.
In many respects the court has considered the substance of the transaction and did not place much weight on the fact that Combined had engaged a company to provide the services. Rather the arrangement was placed on the same footing as it were a “sham” transaction.
The key points from the case are:
- Control and independence of the agents was the key factor to deciding whether or not an employer/employee relationship existed. The hierarchical structure and the agent’s sole reliance on Combined for employment were key reasons for the appeal being rejected
- If the relationship is later deemed to be an employer/employee relationship there will be potential difficulties to retrospectively account and comply with the regulatory ramifications for agents who have established their own entities and structures
- The contract between two parties is not in of itself determinative as to whether the individual is a contractor or an employee. It is the true underlying relationship that will be the deciding factor
- If a relationship is deemed to be one of employment, the company hiring the individual has a number of requirements imposed by law (as detailed above)
- This case shows that it is increasingly necessary that parties conduct themselves in accordance with the underlying nature of their contract and not just as it may suit them. Whilst the parties may agree on the terms of their contract and make a statement as to the character of their relationship, this decision shows the contract will not be decisive of the true legal character of the relationship.
In instances where company contractors are used (e.g. IT and insurance) this case will requires closer consideration.
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