Whether a person is an employee or a contractor, and if an employee, who is the employer, can be important, in many contexts, including when the employer or a corporate group become insolvent.
Insolvency law offers employees particular payment priorities, and because those employees may also be protected by the FEG scheme, the status of a person as an employee or a contractor is important to government. If an employee, in an insolvent corporate group, the employer company may or may not have more remaining assets to pay the employee than others in the group.
These can raise difficult legal and factual issues, and in a recent case, one that a Judge was needed to determine.
Branded Media Group
Liquidators of Holdings and deed administrators of BNM in the Branded Media Group had varied legal advice from lawyers and counsel as to the employer of certain employees. Holdings was nominally the employing company but it had no money and BNM paid their wages.
The Commonwealth had paid advances of just over $1m for unpaid entitlements under the FEG scheme and would receive a significantly larger dividend if BNM were the employer rather than Holdings. Employees with unpaid employee entitlements not covered by the FEG scheme were also affected, along with ordinary creditors.
Given the uncertainty, the liquidators sought directions from the Court. In reviewing the extensive evidence, including the history of the companies’ operations, Justice Black agreed that “there was good reason for that uncertainty”.
The Judge referred to the decision in Gothard[1] which identifies several matters relevant to identifying the employing entity, including who had practical and legal control and direction of the employees and made decisions about hiring and disciplinary issues and remuneration; who actually paid remuneration; who communicated with employees in respect of leave; and who made decisions about the termination of employment.
Adopting substantially the same reasoning as that adopted in Gothard, Black J concluded that BNM rather than Holdings was the true employer of the employees.
“ … a structure by which Holdings was the employing entity, where it had no assets or revenue from which it could meet employees’ entitlements, and did not charge for its services, would have had no intelligible business purpose, or at least no proper purpose. The documentation of the relationship is consistent with Holdings being an “employer of record” and is less significant in identifying the true employer than the fact that BNM incurred the costs of paying employees for entities across the group and on-charged other subsidiaries in respect of those costs. The question of direction or control is, at best, neutral where the issue arises in respect of a corporate group; and those said to have exercised that control were either employed by BNM … or otherwise had involvements with both Holdings and BNM in different capacities”.
In the matter of Branded Media Holdings Pty Limited (in liq); In the matter of Brand New Media Pty Limited (subject to DOCA) [2020] NSWSC 557.
Legal advice
Given that insolvency law requires determination of the status of employee creditors and their employer, insolvency practitioners are wise to seek legal advice or court directions in appropriate cases.
Some years ago, a liquidator acted on “his understanding of what he described as ‘the case law’”, that as certain employees were under “the control” of one company in a group they were its employees, and he paid out termination payments accordingly. The Judge found the liquidator had misconceived the law as to the contractual relationship between the relevant companies, an issue which did “not appear to have been considered, let alone investigated, by the liquidator”.[2]
At the same time, insolvency practitioners and others might question whether the law in question is unnecessarily complex, and so dependent on the particular arrangements of engagement of workers.[3] The loose governance of those arrangements by business might also be questioned.
[1] Gothard (recs & mgrs of AFG Pty Ltd) (in liq) v Davey [2010] FCA 1163
[2] City & Suburban Pty Ltd v Liquidator of Conpac (Aust) Pty Ltd (in liq) [1998] FCA 822
[3] See WorkPac Pty Ltd v Rossato [2020] FCAFC 84
