Employer company was a ‘sham’

The Federal Court has confirmed in a recent decision the principle that the employer/employee relationship is to be assessed by the scope and purpose of the relationship as opposed to the categorisation of such relationship by the employer.

The business structure which the Court examined was as follows:

Company A, as employer, terminated all of its employees.  The management of Company A at the same time set up Company B, which then employed each of the terminated employees.  The services of the employees were then provided to Company A in the same way that they had previously.

Company B, on paper, was an independent contractor, providing the services of its employees at Company A’s premises.  Company B also invoiced Company A for the employee wages and costs.  However, the ability for Company B to meet any other obligations and to remain solvent was dependent upon funds being provided by Company A.

Company B operated for a period of two years before ceasing operations and terminating the employees.  Company B owed the employees some $40,000 in unpaid entitlements including accrued leave and severance payments.  The employees claimed those entitlements from Company A on the grounds that it was the ‘real employer’ and not Company B.

The Court considered which company had the day-to-day control over the employees.  It found that Company B did not have actual control over the work the employees performed or the engagement or the dismissal of those employees.

The Court distinguished the status of Company B from that of a labour hire business because Company B did not operate its own business for profit and merely used funds invoiced to Company A to pay the employees.

In its determination, the Court took into account two particular elements of the relationship.  Firstly, by Company A initially terminating the employees and setting up Company B, Company A had avoided its obligations to the employees by Company A.  Secondly, the creation of Company B allowed Company A to remove itself from direct liability over the employees’ accrued entitlements.

The Court found that the attempts to interposition Company B between Company A and the employees was legally irrelevant to the identification of the true employer.  The Court concluded that Company A had created a 'sham' arrangement in order to deceive the employees and the Court and shirk its responsibilities.  It was held that the contract between Company A and Company B, and the relationship of independent contractor, was unenforceable.

Whilst this decision deals with a particular employer in specific circumstances, it illustrates the complexity of labour hire arrangements and the need to ensure structures are genuine and legally sustainable.

For more information on this case or your labour arrangements, please contact:

The Federal Court has confirmed in a recent decision the principle that the employer/employee relationship is to be assessed by the scope and purpose of the relationship as opposed to the categorisation of such relationship by the employer.

The business structure which the Court examined was as follows:

Company A, as employer, terminated all of its employees.  The management of Company A at the same time set up Company B, which then employed each of the terminated employees.  The services of the employees were then provided to Company A in the same way that they had previously.

Company B, on paper, was an independent contractor, providing the services of its employees at Company A’s premises.  Company B also invoiced Company A for the employee wages and costs.  However, the ability for Company B to meet any other obligations and to remain solvent was dependent upon funds being provided by Company A.

Company B operated for a period of two years before ceasing operations and terminating the employees.  Company B owed the employees some $40,000 in unpaid entitlements including accrued leave and severance payments.  The employees claimed those entitlements from Company A on the grounds that it was the ‘real employer’ and not Company B.

The Court considered which company had the day-to-day control over the employees.  It found that Company B did not have actual control over the work the employees performed or the engagement or the dismissal of those employees.

The Court distinguished the status of Company B from that of a labour hire business because Company B did not operate its own business for profit and merely used funds invoiced to Company A to pay the employees.

In its determination, the Court took into account two particular elements of the relationship.  Firstly, by Company A initially terminating the employees and setting up Company B, Company A had avoided its obligations to the employees by Company A.  Secondly, the creation of Company B allowed Company A to remove itself from direct liability over the employees’ accrued entitlements.

The Court found that the attempts to interposition Company B between Company A and the employees was legally irrelevant to the identification of the true employer.  The Court concluded that Company A had created a 'sham' arrangement in order to deceive the employees and the Court and shirk its responsibilities.  It was held that the contract between Company A and Company B, and the relationship of independent contractor, was unenforceable.

Whilst this decision deals with a particular employer in specific circumstances, it illustrates the complexity of labour hire arrangements and the need to ensure structures are genuine and legally sustainable.

For more information on this case or your labour arrangements, please contact: