Australia: I got proceedings, they're multiplying – sham contracting employer may be the one that regulators want

The Court's decision to issue a direction for the judgment to be provided to ASIC and the ATO could mean the exposures arising for employers from Fair Work Act breaches are significantly broadened.

A recent case involving numerous breaches of the Fair Work Act 2009 (Cth) provides a useful lesson to employers of what not to do when engaging workers - and the serious consequences of getting it wrong.

The decision in Fair Work Ombudsman v Grouped Property Services Pty Ltd [2016] FCA 1034 highlights a number of traps for employers, including incorrectly classifying employees as contractors, engaging in sham contracting, contraventions of Awards and the National Employment Standards, as well as accessorial liability for those with management or control of the company.

Critically, the broad range of orders and directions made by Justice Katzmann in this case demonstrates the significant consequences of contravening conduct, including potential exposure to further investigation and/or prosecution by other regulators, such as ASIC and the ATO, where (as occurred in this case) the Court considers it appropriate to put them on notice of the conduct.

FWO alleged over 580 contraventions

In this case, the Fair Work Ombudsman (FWO) took action against a contract cleaning business, Grouped Property Services Pty Ltd (GPS) for numerous alleged breaches of the Fair Work Act in respect of workers it purported to engage as contractors through a company called National Contractors Pty Ltd) (which was apparently established by GPS's principals). The FWO also took action against National Contractors in the alternative.

The alleged contraventions involved:

• a failure to pay basic employment entitlements, including under the relevant Modern Award, to 51 workers, including minimum wage, penalty rates, annual and personal leave, superannuation and notice of termination;
• a failure to keep proper employment records or provide payslips to those workers;
• engaging in adverse action against a worker by terminating her employment because she made repeated inquiries about why she had not been paid;
• engaging in sham contracting, by making representations to a number of workers that they were contractors rather than employees.

Given that the contraventions involved 51 employees, the FWO's case effectively asserted over 580 breaches of the Fair Work Act.

The FWO also pursued the principals (who were involved in the management of GPS), Mr Enrico Pucci and his brother Rosario Pucci, as accessories to GPS's alleged contraventions. Enrico Pucci was GPS's sole director and Rosario Pucci was its Chief Operating Officer.

Were the 51 workers employees or independent contractors?

Given that obligations under the Fair Work Act are imposed on employers and owed to employees, a critical issue in this case was whether the 51 workers were, in fact, employees of GPS or independent contractors.

GPS and Enrico Pucci denied that GPS employed the 51 employees, maintaining that they were engaged through a labour hire arrangement with National Contractors, an entity that was the latest in a line of a number of companies which were established and managed by the Pucci brothers to supply labour to GPS (and which the Court considered evidenced a practice of phoenixing).

The FWO (with whom Justice Katzmann agreed) argued that GPS's purported labour hire arrangements were not genuine and that the workers were, in fact, employees.

Justice Katzmann considered a range of factors, including (but not limited to):

• that the workers had little if any latitude over their work;
• they had no control over the allocation, manner or hours of work;
• they were not able to delegate their work to others;
• they did not supply their own equipment or materials; and
• they did not carry their own insurance or advertise their services,

and held that it would be "unrealistic" to describe any of them as independent contractors, notwithstanding that many of them were required to have ABN's or invoice for their services.

In reaching her decision, she held that:

• rather than revealing an independent relationship between National Contractors and GPS, the evidence showed that National Contractors (like the other purported labour hire companies) did not function as an independent business but as "an instrument of GPS"; and
• all the evidence pointed to the conclusion that the designation of workers as contractors was "merely a device to enable GPS to avoid its legal obligations".

The alleged contraventions, including adverse action and sham contracting

Given the finding that the workers were employees of GPS (not contractors), GPS therefore owed employment obligations to each worker under the Fair Work Act and applicable Modern Award.

Justice Katzmann found that the evidence supported majority of the FWO's allegations of contravention in this regard, although not always in relation to every employee, including the allegations that GPS had:

• taken adverse action against one particular employee by unlawfully dismissing her for exercising her workplace rights when she inquired about her pay; and
• engaged in sham contracting by making representations to employees, namely that they were independent contractors.

Accessorial liability of the Pucci brothers

In relation to the Pucci brothers, the FWO submitted that they were each "involved in" GPS's contraventions, including because they were aware of a system producing certain unlawful outcomes and therefore should be liable as accessories to those contraventions under section 550 of the Fair Work Act.

Justice Katzmann stated that for a party to be one who is "involved in a contravention", there must be proof that that party "knew of the elements of each contravention and, by act or omission, knowingly and intentionally participated in it". She ultimately held that:

• Enrico Pucci was an accessory to GPS's adverse action against an employee because he was the one who received the employees inquiries and ultimately took action against her; and
• Rosario Pucci was an accessory to most of GPS's other contraventions because he knew of the contraventions but took no action to address them.

Orders: audits, training, and other regulators get involved

The Court made a number of very broad and significant orders against GPS and the Pucci Brothers, including that:

• GPS undertake (or at its expense engage a third party with qualifications in accounting or workplace relations to undertake) an audit of its compliance with the Fair Work Act and the applicable Awards; and;
• GPS engage (at its own expense) a person or organisation with professional workplace relations qualifications, to provide training in relation to GPS's obligations under the Fair Work Act and Awards;
• GPS be restrained from further conduct that contravenes the Fair Work Act and Awards; and
• Rosario Pucci and Enrico Pucci both be restrained from being involved in such conduct.

Given the matters disclosed in this proceedings concerning GPS and the Pucci brothers' methods of operation, Justice Katzmann also directed the Court Registrar to forward a copy of her judgment to ASIC and the ATO.

At this stage, it is unclear if ASIC and/or the ATO will take any further action against GPS or the Pucci brothers. The issue of penalties and compensation is set down for a hearing in early 2017.

Lessons for employers: classify your workers properly

While the respondents in this case were found to have demonstrated "a flagrant disregard for the law", the issues raised and the breadth of the orders made serve as a reminder for employers of a range of issues, including:

• the importance of properly classifying workers according to the inherent character of their relationship to the employer, including to avoid sham contracting and underpayment claims/proceedings. This is particularly important as in every case where a person who should have been an employee is wrongly classified as a contractor, the employer will be likely to have breached the Fair Work Act on multiple occasions;
• the risk of potential accessorial liability for those who are involved in Fair Work Act contraventions by the employing entity;
• the broad powers of the Court to not only require employers to undertake (at their own cost) onerous compliance training and audits, but to also restrain employers and accessories from engaging in future contraventions of the Fair Work Act.

In addition, the Court's decision to issue a direction for the judgment to be provided to ASIC and the ATO could certainly result in further investigations and/or prosecutions by such regulators for potential contraventions arising from the same factual matrix. While this approach was clearly warranted in this case, if adopted more broadly in future FWO proceedings, the exposures arising for employers from Fair Work Act breaches may be significantly broadened.

RELATED KNOWLEDGE

• High Court extends sham contracting provision to triangular arrangements

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.