You are being compensated for flying whether you see it that way (for the flight time) or not. The private pilot employee is getting paid in flight time for his (illegal) work as a commercial pilot. He needs a commercial license, that's the main thing I see wrong here. Of course no insurance agent is going along with a private pilot flying for pay either, but that's another issue. To the FAA there is just about no way this pilot can pass off his work there as a pilot as anything except what it is, work for pay in money or flight hours, or both.