- HR manager to be personally penalised for 'sham' independent contractor arrangements
- A $300,000 lesson for employers on misleading and deceptive conduct
- The importance of complying with employment contracts
HR manager to be personally penalised for 'sham' independent contractor arrangements
In a recent decision of the Federal Magistrates Court of Australia, the director of a financial services company, and the company's human resources manager, were held to have contravened various provisions of the Workplace Relations Act 1996 (Cth) (WR Act) in relation to independent contractor arrangements.
Prior to mid 2007, the company had employed its sales team as employees however, in mid 2007 the company started to experience financial difficulties. As a result, the director of the company informed the human resources manager that he wanted all employees to become 'consultants' on a commission-only basis, rather than continuing to receive a salary as had been occurring previously. The director gave the human resources manager a document he called a 'consultancy agreement', and directed him to type it up and give it to all the sales staff.
The terms of the consultancy agreement were very similar to the employment contracts that had previously been used for the sales staff. The key performance indicators and duties were basically the same, and the principal difference between the employment contracts and the consultancy agreement was the manner in which the sales staff were remunerated.
The consultancy agreement was distributed to all of the sales staff. Further, although it was not expressly stated to the sales staff, it appears that the intention of the company would be to terminate the employment of any member of the sales staff who did not agree to sign the consultancy agreement.
A bit over a month later, one of the sales staff engaged by the company made a complaint to what is now the Fair Work Ombudsman, claiming that he was not receiving appropriate minimum remuneration and was not being provided with appropriate leave entitlements. As a result of the complaint, what is now the Fair Work Ombudsman conducted an investigation.
Why would the human resources manager be in the firing line?
During the hearing, it became clear that the human resources manager had no exposure to independent contractor arrangements before he started employment with the company. Further, when the director decided to change the manner in which the sales staff were engaged, the human resources manager gave no advice as to the legalities or otherwise of the new relationship. The court acknowledged that, at least with respect to some of the contraventions of the WR Act it was alleged had occurred, the human resource manager 'was little more than [the director's] typist'.
Despite this, under the WR Act, a person who was involved in the contravention of a penalty provision was treated as having contravened that provision. Being involved in a contravention includes aiding or abetting the contravention, or being 'in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention'. In this case, by facilitating the employee's entering into the independent contractor arrangements, the human resources manager had been involved in the contravention.
Importantly, equivalent provisions which deem an individual to have contravened the relevant provisions apply under the Fair Work Act 2009 (Cth) (FW Act), where a person who has been involved in a contravention of a penalty provision is also guilty of the contravention.
What did the court decide?
The court held that the employer, and by virtue of the deeming provisions, the director and the human resources manager, had breached a number of provisions of the WR Act, including:
- a prohibition on misrepresenting an employment relationship as an independent contracting relationship (the equivalent of which exists under the FW Act)
- a prohibition on misrepresenting a proposed employment relationship as a proposed independent contracting relationship (the equivalent of which exists under the FW Act)
- a prohibition on dismissing an employee with the sole or dominant purpose of engaging them as an independent contractor (the equivalent of which exists under the FW Act).
The matter will be further considered by the court to determine appropriate penalties to be imposed on the director and the human resources manager. As a result of its liquidation, however, no penalty will be imposed on the company.
Implications for employers and managers
Although these offences were prosecuted under the WR Act, there are equivalent offences under the FW Act, with penalties of up to $33,000 for a corporation, or of up to $6,600 for an individual, remaining available. Despite this, under the FW Act, there is now scope for orders for damages to be paid by an individual, such as a human resources manager, in addition to the penalties. Accordingly, the personal exposure for an individual is now much greater.
This decision is a timely reminder for human resource managers, and other business managers, to review their independent contractor arrangements to ensure that they are complying with their legal obligations.
A $300,000 lesson for employers on misleading and deceptive conduct
The Federal Court of Australia recently awarded an advertising consultant over $300,000 in damages as a result of misleading and deceptive conduct engaged in by his employer prior to and during the consultant's employment.
The advertising consultant alleged that misleading and deceptive conduct involving representations that were made to him prior to and during his employment misled him about the financial position and success of his employer's business. The consultant claimed that the employer's representations lured him away from his own business, only for him to be made redundant 18 months later.
The Group Managing Director of the agency when courting the consultant was alleged to have made a number of representations about the agency's attractiveness as an employer. The representations, which were both express and implied, included that:
- the company was a financially successful agency in Australian advertising at the time
- the company was in a great position and was likely to be financially successful in the future, implying that it was a desirable employer
- redundancies which occurred just prior to the consultant commencing work placed the company in a very healthy financial position
- savings made would result in a $1,000,000 operating profit.
These representations, along with a failure to disclose information, misled if not deceived the consultant into entering a contract of employment and remaining an employee.
The Group Managing Director admitted to making the first two representations, but disputed the other two. The agency conceded that the true financial position of the company was not disclosed to the consultant however, it argued that there was no obligation of disclosure. Further, the employer submitted that any misleading and deceptive conduct was not 'in trade or commerce' and therefore did not fall within the ambit of the Trade Practices Act 1974 (Cth) (TPA).
The case addressed the issue of whether it is misleading or deceptive to describe a business as successful when it would be insolvent without the continued support of its parent company, which was also experiencing financial difficulty. Justice Katzmann found that it was. It was also submitted that the extended definition of 'in trade or commerce' in the Fair Trading Act 1987 (NSW) (FTA) incorporates 'any business or professional activity'. Her Honour agreed that the breadth of this definition encompassed the employer's conduct.
In relation to the non-disclosure, Justice Katzmann held that disclosure was necessitated by the circumstances in which the consultant found himself, particularly given that he had made specific inquiries. She stated that 'keeping him in the dark was apt to lead him into an erroneous view about his job security'.
The Federal Court found that it was unlikely that the consultant would have accepted the offer of employment without the repeated assurances about the strength of the business and the implicit representations regarding the company's financial security. The consultant was awarded $306,740 in damages representing the difference between what the consultant's business would have earned if he had not left it to join the agency as an employee and his actual wages.
Implications for employers
Employers should exercise caution when making statements to prospective employees to ensure that they are not misleading. While employers may not want to advertise their financial difficulties when trying to attract new employees, statements made in trade and commerce are subject to the provisions of the Competition and Consumer Act 2010 (Cth) (which now incorporates the relevant provisions of the TPA) and FTA. Care should therefore be taken when making pre-contractual and post-contractual representations.
The importance of complying with employment contracts
A recent decision of the NSW Supreme Court of Appeal has highlighted the importance for employers to ensure they are familiar with, and comply with, the contractual obligations they have to employees.
An employee had taken up employment in 2003 with a business as a business development strategist. Under the terms of her employment contract, the employee was entitled to an annual salary of $210,000 which was to be reviewed annually, however the employer was not obliged to increase the employee's salary at any time.
In addition, the employee was entitled to an annual performance bonus of up to $40,000 each year based on the employee's 'performance against set objectives at the end of each quarter', with the decision as to whether the employee should receive the performance bonuses being 'entirely within the discretion' of the employer.
The employee's employment with the employer ceased in 2008, and about a month after the employee's employment ceased, the employer paid the employee an ex gratia payment of around $48,000.
Throughout the course of the employee's employment, the employer never increased the employee's salary, and never set any agreed performance criteria. Following the employee resigning from her employment, she commenced litigation against her former employer seeking damages for the non-payment of the performance bonuses, and for the employer's failure to increase her remuneration.
During the trial, the employer claimed that it was not obliged to increase the employee's salary and that the payment of bonuses was entirely at the employer's discretion. The employer also led evidence that it had chosen not to award the employee a salary increase or to award the employee a bonus.
The case was initially bought in the District Court of NSW, where the trial judge held that the likelihood of the employee receiving a salary increase was negligible however, the likelihood of the employee receiving a bonus payment was greater. The District Court of NSW awarded approximately $74,000 in damages as an estimate of the bonuses the employee would have received during the first three years of her employment. In making the order, the District Court of NSW held that the ex gratia payment should not be used to off set the damages paid to the employee.
The employer subsequently appealed the decision on various grounds including the quantum of damages, and the refusal by the District Court of NSW to set off the ex gratia payment.
On the appeal, the Chief Justice of the NSW Court of Appeal commented on the rights of the employer to withhold bonuses relying on the term of the employee's employment contract that the payment of the bonus was entirely at the employer's discretion. The Chief Justice found that the clause 'should receive a reasonable construction and not permit the [employer] to choose arbitrarily or capriciously or unreasonably that it need not pay money the set objectives having been satisfied'.
The NSW Court of Appeal ultimately reduced the damages awarded to the employee, primarily as a result of the ex gratia payment made to the employee one month after her employment ceased.
Implications for employers
Employers should carefully review the employment contracts in place in their organisation to ensure that they are complying with their contractual obligations. In addition, this decision highlights the importance of an employer exercising its rights under an employment contract in a fair and reasonable manner.
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