FEG: Who is the ‘true employer’ and liable for unpaid employee entitlements in a group of companies?

FEG: Who is the ‘true employer’ and liable for unpaid employee entitlements in a group of companies?

01 June 2020 Authored by: Claudia Levings, Graham Roberts   |   Topics: Litigation and dispute resolution, Insolvency and restructuring

In a recent decision, a holding company of a group of companies was held to be the ‘true employer’, despite its subsidiary being documented as the ‘employer of record’. In reaching this decision, the Court looked at all the circumstances surrounding the relationship of the parties. For corporate groups, the case highlights the importance of properly structuring, documenting and implementing dealings between members of the group.

In this case, the holding company was subject to a deed of company arrangement and the subsidiary was in liquidation. There was more than $1 million payable for employee entitlements under the Fair Entitlements Guarantee Act 2012 (Cth).

The Commonwealth intervened in the court proceedings, contending that the holding company was the ‘true employer’ and that it was liable for the payment of the employee entitlements.

If the holding company was the employer, the Commonwealth could potentially receive a larger dividend from the holding company as the subsidiary had no assets.

The decision in Re Branded Media

In Re Branded Media Holdings Pty Ltd (In Liq); Re Brand New Media Pty Ltd (Subject to A Deed of Co Arrangement) [2020] NSWSC 557, the holding company had made a number of acquisitions where the subsidiary would enter into written employment contracts with the employees working in the businesses.

The sole purpose of the subsidiary was to provide employees to the holding company and related companies in the group. The subsidiary did not conduct any business that generated income and was wholly dependent on the holding company to meets its financial obligations.

Identifying the true employer: who’s liable?

Key characteristics of each company and dealings were as follows:

Subsidiary Holding company
• named as employer in offers of employment
• not the recipient of the employees’ services
• did not conduct any business by which it generated any income
• maintained the payroll system identifying the company as the employer
• recorded pay slips, PAYG payment summaries and workers’ compensation insurance policies in its accounts
• recorded liabilities for leave, pay roll tax, superannuation and liability to remit income tax in its accounts
• did not pay any wages or payroll tax, remit any income tax or make any superannuation contributions
• did not operate any bank account
• wholly dependent upon the holding company to meet its financial obligations
• no written contract of employment with the employees
• recipient of the employees’ services (with other companies within the group)
• paid the salaries and wages of the employees, remitted income tax, paid payroll tax and made superannuation contributions
• operated the bank account from which employee entitlements were paid
• charged the other entities in the group for the services of the employees
• company logo on some employment forms, other employee documents and employee business cards
• named in sign-off section of emails sent by the employees
• named in website referencing the employees

Applying the legal principles

In identifying the true employer, the Court will take a wide view of the putative relationship, beyond the contractual documentation, to examine how the parties conducted themselves in practice. It will look at whether the reality of the situation accords with the terms of the documentation or whether it points to another entity being the employer.

Adopting the reasoning in Gothard (recs & mgrs. Of AFG Pty Ltd) (in liq) v Davey (2010) 80 ACSR 56, the Court held the holding company was the true employer.

The Court observed:

  • a structure by which a company was the employing entity, where it had no assets or revenue from which it could meet employee entitlements, and did not charge for its services, would have no intelligible business purpose, or at least no proper purpose
  • the documentation of the relationship was consistent with the subsidiary being an ‘employer of record’, however this was less significant in identifying the true employer than the fact that the holding company 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.

Comments

Not surprisingly, identifying the employer within a group of companies depends on the facts.

The circumstances in Re Branded Media were different to what ordinarily occurs where there is an asset owning entity and a trading entity.

The decision highlights that dealings between companies in a group must be appropriately structured, documented and implemented. When determining who is the real employer, the Court will scrutinise the totality of the circumstances surrounding the relationship of the various parties including conduct subsequent to the creation of an alleged employment relationship.

If you would like more information regarding these issues, please contact Graham Roberts on +61 7 3231 2404 or another member of our litigation and dispute resolution team.

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