Who's the (actual) boss? The true legal employer in an insolvent corporate group
By Orla McCoy and Tom Gardner
Ascertaining which of a number of entities in a corporate group is the true employer of employees who provide intragroup services, is often complex. In an insolvency situation, where recovery outcomes for employees can fluctuate significantly depending on the answer to the question, the appropriate analysis becomes much more acute. In particular, the group's financial and administrative arrangements should be consistent with the relationship contended for.
Chapter image Who's the (actual) boss?

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) [2020] 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.

“ There must be a rational explanation for the alleged employment arrangements which must be satisfactorily related to an 'intelligible business objective'. ”

The employer is not necessarily the entity nominated in the company's records or named on the contract of employment

The liquidators sought directions from the Court: namely, were the employees employed by BNM or Holdings? Their primary submission and position was that Holdings was the employer (while acknowledging some factors went against that proposition). The Commonwealth contended BNM was the true employer.

The liquidators placed weight on Holdings being an employer of record on contracts, payslips, tax documents and the payroll system and relied on evidence as to the internal reporting and management structure in support of their contentions. The Court viewed the substance and reality of the employment relationship differently, upholding the Commonwealth's submissions that BNM was the employer.

Justice Black noted that the facts of the liquidators' application closely resembled those in Gothard and adopted substantially the same reasoning. The key considerations were that:

  • There must be a rational explanation for the alleged employment arrangements which must be satisfactorily related to an "intelligible business objective". The Court accepted that there could be an "intelligible business objective" in having a single employer entity for the BNM group of companies if there had been a payment structure or an accounting structure which meant that Holdings was in a position to meet its obligations to employees on an ongoing basis. However, no intelligible business objective, or proper purpose, could be found in circumstances where the employer entity had no income or assets and was incapable of meeting its obligations to employees from incorporation and at all relevant times. Any such objective would have been improper as, by definition, the employer entity would have been insolvent at all times (and, inferentially, established for an improper purpose). Without direct evidence of the principals' intention in establishing the structure, the Court was not prepared to assume an improper (or insolvent) purpose.
  • BNM incurred the costs of paying employees who provided services to it and to entities across the group. BNM on-charged its other subsidiaries in respect of those costs. Even if Holdings was indebted to BNM for BNM's payments to employees (which was not established by evidence), the Court would give little weight to an indebtedness that appeared only as a year-end accounting entry and was owed by a company that had neither the assets nor the revenue to meet the liability.
  • The liquidators submitted that the employees in question were subject to the direction and control of Holdings, which they said indicated that Holdings was the employer. However, the Court considered that argument circular, since the question of whether the persons purportedly exercising control were employees of Holdings, itself depended upon the answer to the "true employer" question. The Court also agreed with the Commonwealth that the exercise of direction and control is a neutral factor where the issue arises within a wholly owned corporate group.

Ascertaining the true employer

The "true employer" question and the principles in this case are, of course, not limited to insolvency; it can also arise in other contexts, such as in determining which company owes workplace obligations or whether a company is liable for the conduct of an (alleged) employee. But for insolvency practitioners and creditors, the judgment in Branded Media Holdings is a helpful exposition of the law in this area, and shows how the test can be applied in a practical fashion.

For employee creditors of insolvent companies, it is comforting to know that employer obligations cannot just be allocated to a straw company if the allocation does not reflect the substance and reality of the employment relationship. In the current environment where abuses of labour hire arrangements dominate media headlines, the decision that one should not simply assume an "intelligible business objective" from the notional structure of the group is an important logical and policy-based conclusion.

Importantly, Branded Media Holdings shows that if one entity in a corporate group is intended to be an employer of employees who provide intragroup services, the group's financial and administrative arrangements should be consistent with that relationship. Where there is some ambiguity about which entity in a corporate group is the employer, the question of which company controls or directs an employee is a less meaningful indication of which is the employer. Rather, the group's internal financial and administrative arrangements assume even greater importance. In those circumstances, Courts will not be inclined to find that the employer was intended to be a company without the assets or revenue to meet its obligations (not least because it implies that the employer entity was intended to be permanently insolvent).

Finally, the decision also emphasises that an "intelligible business purpose" for nominating one entity in a corporate group as the employer will not be assumed where the employer entity has no assets or revenue from which to meet employee entitlements and does not charge for its services.