More than underpayments and civil penalties – Taking a strategic approach to regulatory workplace relations litigation

Yogurberry

Yogurberry involved four Korean backpackers, working pursuant to subclass 417 (Working Holiday) visas. They were employed by Yogurberry World Square Pty Ltd (YWS), a Yogurberry franchise in World Square Shopping Centre, Sydney. An FWO investigation uncovered underpayments, unlawful deductions from wages, and various pay slip and record-keeping failures.

Upon investigation, it became apparent that YWS and the World Square Store were controlled by YBF Australia Pty Ltd (YBF), the Yogurberry brand’s Australian head office. YBF originally ran the World Square store and employed its staff until late 2013, when YBF no longer operated the World Square store but instead created a complex set of group companies run by various members of the Oh family. Despite the interposition of YWS, YBF continued to control the activities of the World Square store through its shareholders Mr Young Seok Oh and his wife, Mrs Soon Ok Oh. From January 2015, Mr and Mrs Oh’s son, Mr Taek Oh, took over as CEO of Yogurberry and had control over the YWS employees through CL Group Pty Ltd (CL), an entity of which he was a director. Mrs Oh was a shareholder of YBF and director of CL Owner Pty Ltd (a company which owned YWS and CL). However, Mrs Oh admitted that she was a de facto director of YWS, YBF and CL and the person who made decisions on behalf of all three companies (notwithstanding that her husband and children were on record as directors of those companies) (Figure 1). OPEN IN VIEWER

The FWO commenced proceedings against YWS, YBF, CL and Mrs Oh for various contraventions. All respondents eventually admitted liability and the matter proceeded by way of the parties filing a Statement of Agreed Facts (SOAF). Flick J handed down penalties of $146,000, nearly half of which were imposed on the accessories, including YBF. In addition to penalties, his Honour agreed to orders requiring YBF and CL to undertake an audit to assess wage and record-keeping requirements for all employees engaged within Yogurberry stores (both franchised and company-owned). His Honour found that such audits were appropriate where the full extent of the contraventions were unknown or where an audit could ‘identify the deficiencies of a respondent which need to be remedied’.

While Yogurberry proceeded by way of a SOAF, it is an important case that flags the very real potential for those in a franchising or supply chain to be liable for the conduct of others in the chain. In the light of recent high-profile cases involving non-compliance in franchised businesses (Fair Work Ombudsman, 2016), the FWO will continue to explore the limits of s 550 in this respect and will consider similar orders to the audit where appropriate. Should legislative amendments be made to the FW Act in relation to liability of franchisors who are involved in contraventions by franchisees (as foreshadowed in the 2016 Election Policy of the current government), the FWO will take steps to apply these where possible.

FWO v Oz Staff

This contested matter involved an employer, Oz Staff Career Services Pty Ltd (in liq.) (Oz Staff), making unlawful deductions from the wages of cleaners it employed and hired out to third-party entities. In response to a targeted audit conducted by the FWO, which included a focus on deductions from wages, the employer created, and then presented to the FWO, false pay records in an attempt to conceal the unlawful deductions. The FWO brought proceedings against Oz Staff, alleging that the company’s director (Mr Blom) and the human resources manager (Mr Linossi) were knowingly concerned in Oz Staff’s contraventions pursuant to s 550.

Both Mr Blom and Mr Linossi initially denied accessorial liability for all contraventions and asserted their right to claim penalty privilege, electing not to call any evidence at the close of the FWO’s case. Mr Blom had admitted involvement in the deductions practices at the beginning of the trial.

The FWO argued that the Court was entitled to infer, based on the combined weight of the evidence presented of the accessories’ roles in the business, participation in the matters subject of the FWO’s investigations and prior engagement with the regulator, that they possessed the requisite knowledge of the material facts comprising the disputed contraventions and were intentional participants (relying on the principles set out in cases such as Australian Competition and Consumer Commission (ACCC) v Air New Zealand Ltd [2014] FCA 1157, Transport Industries Insurance Co. Ltd v Longmuir (1997) 1 VR 125 and United Group Resources Pty Ltd v Calabro (No 5) [2011] FCA 1408).

His Honour Judge Burchardt found Mr Blom and Mr Linossi were involved in the creation and production of the false records, and further that Mr Linossi was involved in the deduction practices. In relation to Mr Linossi, in the absence of him propounding an alternative hypothesis and in light of all of the circumstances, his Honour was prepared to infer that Mr Linossi knew the deductions were unlawful:

He thus had knowledge of the constituent parts of the contravention, albeit that he may not have known which section of the FW Act, if any, was capable of being contravened. This state of knowledge, in my view, is sufficient, if nothing else, to constitute involvement within the meaning of s.550(2)(c) of the FW Act. A person who knows of the contravention and takes no steps to correct it is clearly in some way, at least indirectly, a person who has ‘in any way, by act or omission, directly or indirectly, knowingly concerned in or party to the contravention’ (at [150]).

In relation to Mr Linossi’s involvement in the false records contraventions, he stated that:

I simply do not accept that the person running the Human Resources activities of the first respondent and intimately involved, as he clearly was, with Award matters was not aware not only that the deductions were being made but that the records which were forwarded to the applicant not showing those deductions were false and misleading. He was clearly involved within the meaning of s.550 of the FW Act (at [158]).

The outcome in FWO v Oz Staff demonstrates that a court will be prepared to draw inferences of knowledge where the FWO is able to present cogent circumstantial evidence of a person’s knowledge and involvement in the relevant contraventions. It also confirms that individuals who are in a position of knowledge and can influence a corporate entity’s contraventions, but who take no steps to correct them, may find that personal liability is attracted by their conduct. It reinforces the principle from Yorke v Lucas (1985) 158 CLR 661 that such persons need not know that the matters they have knowledge of amount to a contravention of the law. The Oz Staff case did not involve contraventions of an award, and therefore questions of whether knowledge of a particular instrument is required, such as arose in the matters of Potter v Fair Work Ombudsman [2014] FCA 187 and FWO v Devine Marine Group Pty Ltd [2014] FCA 1365, did not require consideration by the Court. The FWO is currently seeking to have that particular issue determined by a Full Court of the Federal Court.

MUA v FWO

In June 2012, the FWO commenced proceedings in the Federal Court against the Western Australian branch of the Maritime Union of Australia (MUA) and one of its senior officials, William Tracey. In December 2011, the MUA, through Mr Tracey, organised for employees of Fremantle Port Authority (FPA) to take protected industrial action to support enterprise bargaining negotiations. A small number of employees elected to work during the strike. As a result, the strike failed to shut down Fremantle Port. Following the industrial action, Mr Tracey, authorised by Chris Cain, secretary of the Western Australian branch of the MUA, disseminated posters in public locations across the Fremantle Port Harbour facilities, naming four of these employees as ‘scabs’. The posters also named a fifth employee, who had not worked during the strike but who communicated for less than a minute with the incoming crew on the next shift.

Relevant provisions of the FW Act

Section 346 (c) of the FW Act states that:

A person must not take adverse action against another person because the other person:

is or is not, or was or was not, an officer or member of an industrial association; or

Section 347(b)(iii) relevantly defines ‘industrial activity’ as including (among other things) a situation where a person elects to not participate in a lawful activity organised or promoted by an industrial association.

Section 342(1) of the FW Act defines ‘adverse action’. Relevantly, this includes action taken by an industrial association or an officer or member of that association that ‘has the effect, directly or indirectly, of prejudicing the person in the person’s employment or prospective employment’ (s 342(1)(7)(b)).

The FWO’s case and the MUA’s response

The application of s 346 in the context of the employer–employee relationship has been well tested. However, in the litigation leading to the MUA v FWO appeal, the FWO asked for the first time that a court consider whether action taken by a union in breach of s 346 could be ‘prejudicial’ within the meaning of s 342(1)(7)(b).

The FWO argued that the MUA and Mr Tracey, in organising publication and/or dissemination of copies of the ‘scab’ posters, took prohibited adverse action. This was because the action had the effect of prejudicing the affected employees in their employment and it was taken because the affected employees refused to engage in s 347 industrial activity (being the MUA-organised industrial action). The ‘prejudice’ asserted by the FWO was detriment to the affected employees’ emotional wellbeing at work and their ongoing relationships with colleagues. Further, the conduct led the employees to hold genuine fears for their safety and that of their families.

The FWO also alleged that the distribution of the scab poster was in breach of s 348 of the FW Act because it coerced the employees to participate in adverse action.

Mr Tracey and the MUA contended that there was no evident prejudice, direct or indirect, to the employment of the affected individuals. They relied on the authority of CFMEU v BHP Coal Pty Ltd (No 3) [2012] FCA 1218 (BHP Coal (No 3)). That matter concerned the dismissal of an employee who, while not at work, held up a sign while standing on a road outside the entrance of a workplace. That sign read: ‘No Principles Scabs No Guts’ and was held up as a protest in relation to employees who worked while protected industrial action was under way. One of the issues for resolution was whether display of the sign constituted taking adverse action against the employees within the meaning of Item 7(b) of s 342(1). Jessup J held that the concept of prejudicing an employee in their employment ‘covers not only legal injury but any adverse affection of, or deterioration in, the advantages enjoyed before the conduct in question’ (at [110]), but that the holding of the sign did not fall within Item 7(b) of s 342 of the FW Act, as what was required was for the prejudicial effect to occur in the employment. Here, there was no evidence of prejudice, direct or indirect, to any employee who continued to work during the period of industrial action (at [111]). These findings were not overturned in the appeals in relation to this matter.

Judicial consideration at first instance

At first instance, Siopis J of the Federal Court ruled in favour of the FWO, finding Mr Tracey liable for five separate counts (one for each employee) of adverse action for his role in organising and perpetrating the impugned conduct. The MUA was also found to be directly liable for the contraventions of Mr Tracey.

Siopis J held that the question of whether the adverse action has the effect of prejudicing an employee directly or indirectly in their employment is a question of fact (at [244]). He distinguished the matter from BHP Coal (No 3) by finding that:

a limited number of employees were specifically named as scabs in the scab poster;

Siopis J made the finding that the scab poster action had the effect of prejudicing each of the affected employees in their employment because on discovering that each had been named in the scab poster, each felt emotional distress, anger and marginalisation in the workplace. They knew that their co-workers had been invited to regard them as unworthy of being treated with the respect and dignity that would otherwise be accorded to co-workers and fellow human beings. Further, after learning of the scab posters, the named employees became fearful that a co-worker, influenced by the content of the scab poster, would visit violence upon them, their families or their property. Prior to the dissemination of the poster, the employees had not been burdened by such distress or fear. As such, Siopis J concluded that Mr Tracey’s actions prejudiced each of the employees in their employment (at [252]–[255]).

In determining a contravention of s 346 of the FW Act, Siopis J also found that Mr Tracey took adverse action against each of the affected employees because they did not participate in the strike (at [263] and [279]). Finally, Siopis J held that the MUA was liable for the conduct of Mr Tracey and had therefore contravened s 346 of the FW Act (at 353).

Subsequently, penalties of $80,000 and $15,000, respectively, were imposed on the MUA and Mr Tracey. Four of the affected employees were awarded $20,000 in compensation each. The fifth employee, who did not work during the strike, was awarded $40,000 (Fair Work Ombudsman v Maritime Union of Australia (No 2) [2015] FCA 814).

The MUA and Mr Tracey appealed the liability, penalty and compensation decisions.

Judicial consideration: Full Federal Court

In two separate judgments, the Full Federal Court affirmed Siopis J’s decision.

In their majority judgment, Tracey and Buchanan JJ concluded that the poster was designed to ‘damage’ the employees (at [24]) and that Siopis J’s conclusions as to the effects upon the employees were ‘unassailable’ (at [20]). Tracey and Buchanan JJ went on to conclude that a consideration of ‘employment’ for the purpose of ascertaining whether there had been prejudice in employment should not be confined to any narrow consideration of a formal relationship with an employer or to physical or tangible benefits of employment (at [16]). In this case, the effects upon the employees were bound up with their employment and it would be ‘artificial’ to say that the prejudice to the employees was not in their employment (at [21]). Tracey and Buchanan JJ placed emphasis on the importance of non-pecuniary aspects that affect a person’s experience in employment (at [22]). Finally, Tracey and Buchanan JJ approved the compensation awarded by Siopis J as appropriately compensating the employees (at [30]).

In a separate judgment, Bromberg J affirmed Siopis J’s decision, but applied somewhat different reasoning. He noted that the fact that distress and fear were experienced at work seemed to him to have been the basis for Siopis J’s conclusion that, in each case, the affected employees were prejudiced ‘in’ their employment. However, he stated that the proper question was not whether the effect was experienced at work, but whether the advantage derived from the employment was prejudicially altered in a real and substantive way (at [70]).

Bromberg J concluded that the words ‘in the person’s employment’ did not require that the terms and conditions of the person’s employment must be adversely affected (at [55]). There must be a nexus between the effect of the adverse action and an advantage derived from, and enjoyed in, employment which that effect has prejudicially altered (at [59]). Emotional distress and fear of harm is capable of constituting a prejudicial alteration to an advantage derived from an employment (at [73]). In this case, the fears of the non-striking employees were sourced in the fact that they had performed their duties in accordance with their employment (at [77]), and so they were affected in their employment for s 342(1)(7)(b) purposes. Bromberg J held that conceptually, emotional distress and fear of harm is capable of constituting a prejudicial alteration to an advantage derived from an employment – that is, a safe working environment. Accordingly, while Bromberg J adopted a different analytical framework to Siopis J, he concluded that the findings made by Siopis J, that the affected employees suffered emotional distress and fear, which had prejudicial effects in their employment, were not in error. Bromberg J, however, felt the compensation awarded was excessive (at [166]).

The Court ultimately dismissed the appeal.

It has long been the view of the FWO that a person’s employment is not confined to the narrow relationship with an employer, but rather comprises the broader working environment and its accompanying social interactions and emotional wellbeing. MUA v FWO and the first instance decision in this matter make it clear that workers are to be protected from detriment in their employment as a result of a decision not to take industrial action, regardless of the source of that detriment (be it an employer or a union). The FWO’s decision to test the provisions explored in this case has resulted in a new precedent supportive of this position and which provides a foundation for future litigation exploring this concept. The FWO will continue to pursue actions of this type where appropriate factual scenarios arise.

FWO v Quest

FWO v Quest involved a ‘triangular’ arrangement between Quest South Perth Holdings Pty Ltd (Quest), a third party labour hire provider, Contracting Solutions Pty Ltd (Contracting Solutions), and three individuals styled as ‘independent contractors’. Quest operated a business providing serviced apartments. Quest, using the services of Contracting Solutions, facilitated the ‘conversion’ of three Quest employees (two housekeepers and a receptionist) from employees to independent contractors. The employees were purportedly converted by resigning from their employment with Quest. They were then engaged by Contracting Solutions as independent contractors. Contracting Solutions hired out the services of the ‘independent contractors’ to Quest to undertake the same work they had been performing when they were directly employed by Quest.

Relevant provisions of the FW Act

Sections 357 and 358 are designed to prohibit the disguising of genuine employment relationships as independent contractor relationships. Mischaracterisation of employment as independent contracting has a number of negative effects. This includes, for example, the disadvantaging of misclassified workers who do not receive entitlements otherwise due to employees under the FW Act. There may be a range of other consequences under other laws, such as tax laws.

Section 357 of the FW Act provides that:

A person (the employer) that employs, or proposes to employ, an individual must not represent to the individual that the contract of employment under which the individual is, or would be, employed by the employer is a contract for services under which the individual performs, or would perform, work as an independent contractor.

The FWO’s case and the Quest’s response

It was the FWO’s view that the ‘independent contractors’ provided by Contracting Solutions to Quest were, in truth, at all times employees of Quest, working under an implied contract of employment with Quest. The FWO took this view because the workers were in relatively low-skilled occupations (housekeepers and a receptionist); the work performed by the workers did not change at all after their ‘conversion’ from employment to independent contracting; and both before and after ‘conversion’, the workers worked under the direction of Quest and had no control over their hours of work, method of work or remuneration. The evidence was that the employees felt pressured to resign and take up the new arrangements, or risk losing their employment altogether. The FWO accordingly contended that the arrangement was being misrepresented to the workers, in breach of s 357, and that the workers had been terminated by Quest and re-engaged by Quest to perform the same work as contractors, in breach of s 358.

Further, the FWO considered that the labour hire arrangement established by Quest with Contracting Solutions had been implemented with the express intention of assisting Quest to avoid its obligations as an employer. The FWO alleged that pursuant to s 550, each of Contracting Solutions, the Workplace Relations Manager for Contracting Solutions and the Manager of Quest were liable as accessories for the contraventions of ss 357 and 358 by Quest.

The respondents contended a genuine labour hire arrangement was in place. They argued that the employees voluntarily resigned from their employment to take up independent contracting arrangements because there were certain benefits of contracting that ‘attracted them to being independent contractors’ (at [20]).

Judicial consideration at first instance

At first instance, McKerracher J:

found no contravention in relation to the cleaners, on the basis that each entered into a contract of services with Contracting Solutions voluntarily and not as the result of threats or representations (at [235]–[245]); but

The FWO appealed in relation to the housekeepers.

Judicial consideration: Full Federal Court

On appeal there were two decisions, one of North and Bromberg JJ and one of Barker J.

Broadly, in these judgments it was held that:

the arrangements to convert the housekeepers into independent contractors did not form binding or effective contracts;

Nevertheless, the Full Court of the Federal Court held that Quest’s representations were not actionable under s 357(1) of the FW Act. Justices North and Bromberg in their joint reasons, and Barker J in his separate judgment, held that s 357(1) applies only if an employer’s representation mischaracterises the contract of employment between the employer and employee as a contract of services made directly between them (at [101]–[102] and [307]). Quest’s representations did not contravene s 357(1) of the FW Act because they mischaracterised the contracts of employment between Quest and the housekeepers as contracts for services made through a triangular contracting arrangement involving a third party, not directly between Quest and the housekeepers/receptionists.

The FWO had significant concerns that the decision of the Full Court of the Federal Court may have the effect of creating a ‘loophole’, whereby employers could avoid liability under s 357 by interposing a third party or a notional entity, to engage employees including by way of ‘converting’ existing employees of the principal entity. The FWO decided to appeal.

Judicial consideration: High Court of Australia

The FWO was successful in obtaining special leave to appeal to the High Court. The High Court went on to hand down a swift and unanimous decision on 2 December 2015, upholding the FWO’s appeal and varying the order of McKerracher J at first instance to include contraventions of s 357(1) in relation to the two housekeepers.

The High Court determined that the language of s 357 does not confine the application of the provision only to circumstances where the misrepresented contract of services is described as being with the employer. The purpose of s 357 is to protect an individual who is, in truth, an employee, from being misled by his or her employer about his or her employment status. It is the status of an employee which attracts the existence of workplace rights. The High Court held that to confine the prohibited representation to the employer–employee relationship would give a capricious operation to s 357 (at [16]).

In reaching its conclusion, the High Court also found the legislative history did not support the notion that s 357 should be confined in the manner adopted by the Full Court (at [18]). Rather, the High Court noted that ‘the misrepresentation attributed to Quest was squarely within the scope of the mischief to which the prohibition in s 357(1) was directed and is caught by the terms’ (at [22]).

The FWO views the outcome in this case as aligned with the true intent of the relevant protections under the FW Act. On its proper construction, s 357 of the FW Act does not distinguish between sham contracting arrangements made directly between an employer and employee and via a triangular contracting arrangement. Had the decision of the Full Federal Court remained, it would have significantly compromised the capacity of the Part 3-1 sham contracting provisions.