The "true employer" question is one which frequently arises in insolvencies of corporate groups, and it also arises in solvent workplace dispute scenarios. Answering it, however, is often hampered by inconsistent or incomplete records and very divergent returns for employees, depending on the outcome of the question.
For some time, the leading decision in Australia has been Gothard (recs and mgrs of AFG Pty Ltd) (in liq) v Davey (2010) 80 ACSR 56, an authority which furnished practitioners with clear guiding principles for identifying an employer of a person or group of persons from two or more possibilities. The difficulty lies, as a judge has recently pointed out, in applying those principles to the particular facts.
That judge, Justice Black of the NSW Supreme Court (Corporations List), has gone some way to shedding greater light on how to apply the Gothard principles. This development of the law is welcome and to be embraced by insolvency practitioners and those advising them on insolvent corporate groups. Since the facts in Branded Media Holdings Pty Limited (in liq)  NSWSC 557 are prevalent in many insolvent corporate groups, the decision will assist employees and insolvency practitioners in similar circumstances.
How to determine which entity is the employer: the Gothard decision
The legal test to determine which of two companies within a corporate group is the true employer is well established: it is an objective search for substance and reality. In Gothard, Justice Edmonds held that, in determining which entity is the true employer, it is relevant to take into account which entity:
- had practical and legal control and direction of the employees;
- made decisions about hiring;
- made decisions about disciplinary issues;
- made decisions about the level of remuneration;
- actually paid remuneration;
- communicated with employees; and
- made decisions about the termination of employment.
The Brand New Media group of companies
Gothard concerned a dispute about whether the "head company" or the "payroll company" in a corporate group was the true employer. The payroll company was treated as the employer on paper, but the head company actually paid remuneration and directed the employees in their work. Justice Edmonds found that, as a matter of substance and reality, the head company was the true employer.
The facts of Branded Media Holdings were similar. Branded Media Holdings Pty Ltd (Holdings) is (despite its name) a wholly owned subsidiary of Brand New Media Pty Ltd (BNM). It was purportedly incorporated to employ persons to provide services to BNM and to BNM's other subsidiaries. Almost all of the employees entered employment contracts which identified Holdings (rather than BNM) as the employer. The group treated Holdings as an "employer of record", and Holdings issued payslips and PAYG payment summaries. The group's payroll system also identified Holdings as the employer.
The employees provided services to BNM and its subsidiaries, but not to Holdings. The employees' wages or salaries were paid by BNM, and their non-cash employee entitlements were recorded as a liability of Holdings. There were no written agreements between Holdings and BNM or any other group entity, documenting the provision of employees to the group. Holdings did not profit from the purported arrangement, or conduct any other business by which it generated income.
As it had no bank account, in addition to paying their wages or salaries, BNM remitted PAYG income and payroll tax in respect of the employees, paid workers' compensation insurance premiums, and made corresponding provisions in its accounts. Notably, however, BNM did not record any liability to Holdings for services purportedly provided to BNM by Holdings (in the form of provision of employees to BNM and its other subsidiaries). Where the employees provided services to BNM's other subsidiaries, the costs of those services were charged by BNM (and not Holdings) to the relevant subsidiary.
Voluntary administrators were appointed to BNM and Holdings; they terminated the employees' employment with the employer of record, Holdings). BNM and Holdings entered liquidation and advances in respect of the employee entitlements (of over $1 million) were made by the Commonwealth Government under its Fair Entitlements Guarantee Scheme, under which the Commonwealth becomes subrogated to the claims of eligible employees. As a result, the Commonwealth became a priority creditor in the liquidation of the employer. Since Holdings had no business, income or (recorded) assets, creditors of Holdings stood to receive a much lower dividend than creditors of BNM.