Australia: Sales staff put on commission – sham contracting

Workplace Directions
Last Updated: 4 July 2011
Article by Emma Reilly

Fair Work Ombudsman v Centennial Financial Services Pty Limited & Ors [2011] FMCA 459 (21 June 2011)

Penalties levelled against Director and Human Resources Manager of liquidated company

The first respondent ('Centennial') was in the business of providing financial services. The second respondent, Mr Mertes, was Centennial's sole director and shareholder and was responsible for the day to day management and operation of its business. The third respondent, Mr Chorazy, was employed by a company in the Centennial group of companies as Centennial's human resources manager.

In 2007 Mr Chorazy recruited certain sales staff known as 'Corporate Associates' on behalf of Centennial. The Corporate Associates were employed on terms conforming to the Commercial Travellers Award. It was alleged that some of the Corporate Associates did not accrue and were not paid all their statutory entitlements during their initial period of employment.

In April 2007, Centennial changed the Corporate Associates' relationship with it to commission-only payments and asked them to sign agreements entitled 'Sales Consultant Agreement'. The Ombudsman contended that this action represented an attempt to re-badge the Corporate Associates as independent contractors, and to pay them on that basis, although their duties changed in no substantial way. The Ombudsman alleged that the purported independent contracting arrangement was a sham and that the relationships between Centennial and the Corporate Associates remained one of employer and employee. It was alleged that, in such circumstances, some of the Corporate Associates did not accrue and were not paid their statutory entitlements during the alleged sham contracting period.

The Ombudsman succeeded and the respondents were found on 15 November 2010 to have breached various provisions of the Workplace Relations Act 1996 (Cth) ('the WRA') – sections 182, 235, 901 and 902: Fair Work Ombudsman v Centennial Financial Services Pty Limited [2010] FMCA 863.

Those provisions related to underpayment of employees' statutory entitlements, coupled with the failure to accrue annual leave; engaging in conduct in contravention of the WRA's sham contracting provisions; and a threat to dismiss employees for the dominant purpose of rehiring them as independent contractors to perform the same, or substantially the same, work as they had been doing.

The subsequent case decided on 21 June 2011 related to whether Messrs Mertes and Chorazy should be ordered to pay civil pecuniary penalties by reason of their involvement in Centennial's contraventions of the WRA and, if so, in what amounts.

The Ombudsman submitted that Mr Mertes was involved in 13 contraventions of the WRA and that Mr Chorazy was involved in 15 contraventions. The contraventions were not isolated incidents as they occurred over a period of approximately 13 months and involved numerous employees. He submitted that they were wide ranging and substantial in nature and included failures by the respondents to pay appropriate wages to employees, contraventions of the WRA's sham contracting provisions and failures to pay accrued annual leave. He submitted that the respondents' contraventions of ss901 and 902, which involved changing the Corporate Associates' status from 'employees' to 'independent contractors', were of particular concern because they effectively deprived the Corporate Associates of their employment rights under the WRA. Centennial's contraventions involved underpayments amounting to $44,069.25 of which $39,153.10 (excluding superannuation) remained outstanding due to liquidation of the company.

In considering the appropriate penalties to impose, the Ombudsman submitted that the respondents' financial circumstances were of limited relevance.

He further submitted that Mr Mertes, as Centennial's sole shareholder, had obtained a direct financial benefit as a result of Centennial's contraventions.

He submitted that any suggestion that Mr Mertes would suffer financial hardship because of the imposition of a pecuniary penalty should not, therefore, be regarded as a matter of significant relevance. With respect to Mr Chorazy, the Ombudsman submitted that even if it were accepted that the imposition of a pecuniary penalty would cause him some financial difficulty, this should not dissuade the Court from imposing a penalty that would otherwise be appropriate in the circumstances.

The Ombudsman submitted that the contraventions in which Mr Mertes and Mr Chorazy were involved may not have been wilful but were, nevertheless, deliberate in the sense that they were committed with the knowledge that the Corporate Associates would be deprived of certain of their entitlements. He submitted that, to date, neither Mr Mertes nor Mr Chorazy had expressed any degree of contrition in respect of their contraventions and again emphasised that most of the underpayments remained outstanding. He also submitted that both Mr Mertes and Mr Chorazy had adopted an unco-operative approach during the Workplace Ombudsman's investigation of Centennial's contraventions.

Mr Mertes made no submissions.

Mr Chorazy disputed the Court's findings that he had been involved in various contraventions of the WRA. He submitted that he had merely been following the instructions of Mr Mertes and had not had any input into the decisions which gave rise to the contraventions. He submitted that his position as the human resources manager was 'a mere title' and that he had no authority beyond what was approved by Mr Mertes. He also submitted that the Ombudsman had been selective in choosing who it would 'pursue legally' and that there were others, besides Mr Mertes, who had occupied decision-making roles in the company and who were equally responsible for the contraventions committed by Centennial.

Mr Chorazy submitted that the negative publicity generated by the proceedings had effectively ruined his career in human resources.

He submitted that, despite applying for thousands of positions, he had not been able to secure a permanent role.

Federal Magistrate Cameron set out the matters relevant to this case to be considered in determining whether particular conduct calls for the imposition of a penalty, and if it does the amount of the penalty:

  • The nature and extent of the conduct which led to the breach
  • The circumstances in which the conduct took place
  • The nature and extent of any loss or damage sustained as a result of the breach
  • Whether there has been similar previous conduct by the respondents
  • Whether the breaches are properly distinct or arose out of the one course of conduct
  • The size of the business enterprise Involved
  • The deliberateness of the breaches
  • Whether the first respondent had a culture of compliance
  • Whether the respondents exhibited contrition
  • Whether the respondents have taken corrective action and have co-operated with the enforcement authorities
  • The need for specific and general deterrence.

In looking at the facts with reference to the above matters it would appear that ignorance was taken into account as an explanation but not necessarily an excuse. In respect of the Mr Mertes, the total penalty imposed was $13,200 ($1,100 each employee plus penalty) and in respect of the Mr Chorazy the total penalty was $3,750 ($250 each employee plus penalty). Messrs Mertes and Chorazy were ordered to draw bank cheques in the relevant amounts and provide them to the Ombudsman for distribution to the individuals concerned.

For further information, please contact: Emma Reilly, Partner
T: +61 2 6262 6922

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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