In a recent Federal Magistrates Court decision, a Human Resources manager was found liable for breaches of employment laws regarding non-payment of wages and engaging in a "sham contract" arrangement. In Fair Work Ombudsman v Centennial Financial Services Pty Ltd (2010) 245 FLR 242, even though the HR manager was simply "following instructions", and had limited control over the employer, it was found that he had a responsibility to ensure that the company complied with workplace relations laws.

It is evident that HR managers may not be able to rely on their lack of authority or influence over the actions of the company in order to avoid liability over breaches of employment laws. HR managers should at least ensure that they attempt to advise the employer on their legal obligations.

It should also be noted that under the Fair Work Act 2009 (Cth), an individual may be fined up to $6,600 for each contravention.

Facts

Rolf Mertes was the sole director and shareholder of Centennial Financial Services Pty Ltd and was responsible for the day-to-day management and operation of the business. Christopher Chorazy was employed as Centennial's HR manager. In 2007, Centennial employed a number of "Corporate Associates" to perform sales duties while being paid a salary at the federal minimum wage level.

After a period of financial difficulty, the Corporate Associates were asked to become contractors by signing a "Sales Consultancy Agreement". The agreement provided commission-only remuneration, and stripped the Corporate Associates of other employment benefits.

The Fair Work Ombudsman (FWO) commenced proceedings against Centennial, the director, and the HR manager alleging that the parties breached the Workplace Relations Act 1996 (Cth) by:

  • underpaying the Corporate Associates, and failing to recognise other statutory employment entitlements;
  • misrepresenting to the individuals that the agreement was a contract for services, when in fact it was a contract of employment; and
  • dismissing employees for the purpose of engaging them as independent contractors to perform substantially the same work they had previously performed as employees.

The last two claims are known as "sham contracting" or "sham arrangements", and while the prosecutions were brought under the Workplace Relations Act 1996, similar prohibitions are contained in the Fair Work Act 2009 (Cth), namely Part 3-1, Division 6.

Liability proceedings

In Centennial, the FWO argued that the employer directly breached the employment laws relating to underpayment and sham contracts, and that the director and the HR manager were liable as accessories to the employer's breach.

The claims against the company and the director were less controversial. The court found that the Corporate Associates were constructively dismissed by virtue of the employer's conduct and that the dismissal was for the purpose of engaging the Corporate Associates as independent contractors. As the company was evidently in breach of various provisions of the Act, the director, as the maker or producer of the relevant representation, was taken to be involved in aiding and abetting Centennial in committing the contraventions.

However, the claims against the HR manager were somewhat novel and surprising. Mr Chorazy argued that he did not understand the legal effect of the changes and did not have control over the actions of the company or Mr Mertes.

Federal Magistrate Cameron, although accepting the argument, confirmed that ignorance of the legal effect of one's conduct was not a valid defence.

Mr Chorazy also argued that he was not consulted by Mr Mertes, nor was his opinion sought in relation to the proposed changes to the contracts; rather, he was simply told what was going to happen. He argued that he had no reason to consider the legality, or otherwise, of the plans.

Federal Magistrate Cameron found that being reckless as to the true nature of the contracts may be a defence to the allegations against Centennial, but was not available to Mr Chorazy for accessorial liability.

The court held that the HR manager's involvement in the contraventions was sufficient for him to be liable as an accessory as he was knowingly concerned in Centennial's contraventions. Federal Magistrate Cameron found that the HR manager:

  • was aware before the meeting that Mr Mertes proposed putting the Corporate Associates on contracts;
  • took part in a meeting where the Corporate Associates were told about the changes to their contract;
  • actively participated in getting the Corporate Associates to sign up to the agreement;
  • explained the terms of the new agreement to the Corporate Associates; and
  • was aware that under the terms of the agreement, the Corporate Associates' roles were essentially unchanged.

Penalty proceedings

In Fair Work Ombudsman v Centennial Financial Services Pty Ltd [2011] FMCA 459, with Centennial having gone into liquidation, Federal Magistrate Cameron determined the appropriate penalties which should be imposed on Mr Mertes and Mr Chorazy.

In relations to Mr Mertes' contravention, he determined that a fine of $13,200 was appropriate give the fact that he was the sole shareholder and director and he was the principal beneficiary of any advantage which Centennial gained from its failure to pay its employees their full wages and entitlements.

Mr Chorazy contended that his position was a "mere title", he was simply "following instructions" and that he had no authority beyond what was approved by Mr Mertes, and hence should not be fined for the contraventions. While the court agreed that Mr Chorazy did not exercise any independent judgment in the actions which led to the contraventions, Federal Magistrate Cameron found that as an HR manager, Mr Chorazy should have been aware of, and at least attempted to give Centennial advice on its obligations under the relevant employment laws. Mr Chorazy was fined $3,750 for his involvement in the contraventions.