The Federal Magistrates’ Court has ordered that a director and HR manager personally pay penalties for forcing employees to enter into sham contracting arrangements, despite the HR manager arguing that he was unaware that the arrangements were unlawful.

Implications for employers

This decision highlights the importance of strict compliance with the sham contracting provisions in the Fair Work Act 2009 (Cth) (FW Act) and also acts as a reminder of the potential for human resources managers (HR managers) to be liable for FW Act breaches in which they are involved.  HR managers should remain vigilant and seek advice where necessary, as they can attract personal liability by being involved in contraventions of the FW Act, even where they are simply acting on directions issued to them by others and may not be aware of the unlawfulness of what they are doing. 

Background

At the initial hearing of this matter, Federal Magistrate Cameron found that Centennial Financial Services Pty Ltd (Centennial) had engaged in sham contracting.  Sham contracting occurs where what is truly an employment relationship is mischaracterised as an independent contractor arrangement. 

Centennial was found to have breached sections 901 and 902 of the Workplace Relations Act 1996 (Cth) (WR Act), which prohibit misrepresentation of an employment relationship as a contracting one, as well as dismissing or threatening to dismiss an employee for the sole purpose of rehiring them as an independent contractor.  The case concerned the relevant WR Act provisions, as the events occurred before the repeal of that Act.  However, as the (new) FW Act contains equivalent provisions (see sections 357-359), the case remains directly relevant. 

Centennial had one sole director and shareholder, Mr Mertes, who employed a HR manager, Mr Chorazy, and a number of staff known as ‘corporate associates’.  To reduce costs, Mr Mertes decided to change the remuneration structure of the staff by changing their characterisation from that of employees to that of contractors, with remuneration being solely on the basis of commission.  The duties of the corporate associates under this arrangement remained substantially the same.

Mr Mertes directed Mr Chorazy to prepare and present new ‘consultancy’ agreements to the corporate associates.  Mr Chorazy did so and explained the new structure to staff. 

Federal Magistrate Cameron found both Mr Mertes and Mr Chorazy personally liable for their involvement in Centennial’s breaches.  He reached this conclusion despite Mr Chorazy claiming he did not know that the arrangements were unlawful.  According to His Honour, the fact that Mr Chorazy knew the terms of the consultancy agreements was enough to find him liable. 

Federal Magistrate Cameron found that Centennial (which by this time had collapsed) had failed to pay the corporate associates $39,533.52 in wages and annual leave entitlements. 

Decision

In his recent decision on penalties, Federal Magistrate Cameron considered the question of what civil pecuniary penalties Mr Mertes and Mr Chorazy should pay by reason of their involvement in Centennial’s contraventions of the WR Act.   Federal Magistrate Cameron fined the two a total of $16,950.

Mr Chorazy again made submissions to the Court disputing his involvement in the contraventions of the WR Act.  He argued that he had merely been following the instructions of Mr Mertes and had not had any input into the decisions which lead to the proceedings.

Federal Magistrate Cameron accepted that it was Mr Mertes who sought to find a way to have the corporate associates work at a lower cost, resulting in Mr Chorazy being ‘overborne by Mr Mertes’.  Nevertheless, Federal Magistrate Cameron considered that HR managers such as Mr Chorazy should remain aware of, and at least attempt to give advice on, the obligations of their employers under the WR Act.

The magnitude of Centennial’s operation lead Federal Magistrate Cameron to conclude that it could afford proper advice ensuring its employment practices complied with the law.

Federal Magistrate Cameron felt that an element for specific deterrence should be included in the penalties imposed on Mr Mertes and Mr Chorazy and held that he should discourage repetition of such contraventions by imposing ‘meaningful’  penalties.

Federal Magistrate Cameron found that Mr Mertes had contravened, amongst other things, both sections 901 and 902 of the WR Act four times. The maximum possible penalty for each breach was $6,600.

Federal Magistrate Cameron ordered Mr Mertes to pay a $1,100 fine with respect to each contravention (a total of $13,200).  Federal Magistrate Cameron found Mr Chorazy had committed the same number of contraventions, however each contravention attracted a $250 fine (a total of $3,750).

Fair Work Ombudsman v Centennial Financial Services [2011] FMCA 459