The Federal Court has fined Crystal Carwash Café Pty Ltd (Crystal Carwash), which operated its business by using a “sham” labour hire arrangement to avoid having to pay employment entitlements, $70,000 for breaching the Fair Work Act 2009 (Cth) (FW Act) and failing to comply with the applicable award. The company’s sole director, Mr Sahade, and a manager, Mr Khouri, were also found personally liable and fined $10,000 each.

Implications for employers

Courts will take a serious view of deliberate sham arrangements designed to avoid payment of lawful employment entitlements. High penalties are likely to be awarded against both the corporate entity and any director or senior manager found to be involved in the contravention.

Employers should ensure they have processes in place to ensure that arrangements for employing or engaging workers are lawful and that all legal requirements are being met. Particular care must be taken when entering into and structuring labour hire and independent contractor arrangements. Given that legal complexities often arise in differentiating such arrangements from employment situations, it is not unusual for these arrangements to be the subject of external scrutiny.

Background: law

The FW Act imposes a range of obligations upon employers, including (among other things) retaining adequate employment records and complying with the payment and associated obligations set down in applicable industrial awards. Failure to comply attracts potential penalties of up to $51,000 per breach for corporate entities and up to $10,200 per breach for involved individuals.

The applicable industrial award in the present case was the Vehicle Manufacturing, Repair, Services and Retail Award 2010 (Award), which, like awards generally, sets down minimum rates of pay and other requirements for those employees to whom the award applies.

Under the FW Act, the Fair Work Ombudsman (FWO) has the task of ensuring compliance with the FW Act and industrial awards.

Background: facts

Crystal Carwash operated a car washing business in a number of locations in Sydney. Crystal Carwash did not treat its workers as employees and did not comply with the Award or keep records as required under the FW Act. Its approach was as follows.

  • Labour hire companies were set up, at the direction of Mr Sahade and Mr Khouri. In each case, an employee of Crystal Carwash was the sole director of the relevant labour hire company.
  • On a weekly, fortnightly or monthly basis, the relevant labour hire company would pay the wages of its “employees” and would invoice Crystal Carwash roughly the same amount. The labour hire company invoices were prepared by a representative of Crystal Carwash.
  • Crystal Carwash received all the profits and takings generated by the operations of the labour hire companies.

The FWO commenced proceedings against Crystal Carwash, Mr Sahade and Mr Khouri, as well as the labour hire companies that purported to employ employees of the Crystal Carwash’s business (together the Respondents). The FWO alleged that:

  • Crystal Carwash had failed to keep employment records under the FW Act;
  • the contractors engaged by Crystal Carwash were employees of Crystal Carwash;
  • the use of labour hire companies was a sham and part of an avoidance system designed to hide the true identity of the employer of the carwash employees and avoid liability under workplace laws; and
  • Crystal Carwash was in breach of the FW Act and had contravened the Award, resulting in underpayment of the employees to the value of $177,077.59.

The Respondents initially maintained that the labour hire workers were the “true” employer of the employees and denied that the Award applied. However, they later admitted for the purposes of the proceedings that Crystal Carwash was the true employer of the employees and that, if the Award applied, it had been breached.

Justice Buchanan of the Federal Court determined as a preliminary matter that the Award did apply.

Decision

Justice Buchanan held that:

  • the labour hire arrangements concealed the true position of the employees and rendered enforcement of the Award obligations more difficult;
  • Crystal Carwash had committed the following contraventions:
    • failing to pay its employees the minimum rates of pay under the Award;
    • failing to pay overtime entitlements under the Award; and
    • failing to keep proper records in relation to overtime under the FW Act;
  • Mr Sahade and Mr Khouri bore direct responsibility for the breaches of Crystal Carwash and both had also committed the first two contraventions; and
  • the offences were serious and at the high end because:
    • the contraventions were deliberate and part of a pattern of conduct designed to avoid liability under the workplace laws;
    • the employees were vulnerable and the Respondents took advantage of them; and
    • the Respondents showed a lack of remorse or contrition.
  • By the time of the proceedings, the underpayment had been rectified. Accordingly, Justice Buchanan made no order in this respect. However, he ordered penalties close to the maximum to mark the Court’s disapproval of the Respondents’ conduct, to ensure compliance with the law and deter non-compliance. He ordered that:
  • Crystal Carwash to pay $70,000, which included $30,000 for each of the two underpayment contraventions and $10,000 for failure to keep records as required under the FW Act; and

Mr Sahade and Mr Khouri were each ordered to pay $10,000, which included $5,000 for the two underpayment contraventions.

Fair Work Ombudsman v Crystal Carwash Café Pty Ltd (No 2) [2014] FCA 827