Fair Work Commission finds advisor was startup employee in unfair dismissal claim

A recent decision by the Fair Work Commission (FWC) should serve as a warning to the startup community, with an informal arrangement between a new tech business and a sales advisor being deemed employment.

Startups are naturally focused on starting up. A lot of hard work is required, often at a time when the business is barely operational and not in a position to employ anyone given the costs and complexities involved. Startups will often seek to attract talent and motivate hard work through less formal arrangements for sweat-equity, commissions, or other rewards. 

With pie in the sky expectations and a focus on survival and growth, the use of informal arrangements is understandable. But as one startup, Wavin Technologies, recently learned, it can be costly.

As part of its efforts to get off the ground and grow, Wavin brought in a sales advisor. The arrangement was loose.

The details were limited and mostly set out in a broad proposal that included promises of commissions and equity. The proposal, while agreed “in principle”, did not lead to any written agreement. The sales advisor worked on this basis for 16 months until he was let go. An unfair dismissal claim followed.

Wavin’s director relied on his years of experience in the startup community in response to the sales advisor’s assertion that he was an employee. Referring to the informal arrangement as common practice, the director argued that the sales advisor was not an employee and, at best, was a contractor. The FWC disagreed.

Seeing the high level of control Wavin had over the sales advisor’s work, it was easy for the FWC to deem the relationship as employment. There was heavy reliance on the two recent High Court decisions from earlier this year, CFMMEU v Personnel Contracting Pty Ltd and G Operations Australia Pty Ltd v Jamsek, that held that the terms of the contract, and not conduct between the parties, is determinative of the relationship.

However, the FWC pointed out that this test applies when the parties have set out their relation in a comprehensive written agreement. The terms between Wavin and the sales advisor was anything but comprehensive. This left the door open for the FWC to give character to the engagement through an assessment of the parties’ conduct.

With the chaos, excitement, and challenges that come with starting a new business, it is easy to overlook how and on what basis people are performing work in the early months or even years. With much more weight now given to written agreements, startups have the tools to solidify these arrangements with confidence.

But as Wavin learned, startups need to make use of these tools. Handshake agreements and loosely structured arrangements, while common, are risky.