True employer status and recoveries under the Fair Entitlements Guarantee: lessons from Mosaic Brands

Corporate group structures can often obscure the practical realities of a group's operations, particularly where the "employer of record" is not the entity that is paying, directing and controlling the group's employees. This can raise difficult questions when the corporate group is insolvent, having regard to competing claims to circulating assets by the group's employees and its secured creditors.

An additional layer of complexity is introduced when the Commonwealth steps in, via the Department of Employment and Workplace Relations, to ensure employees of insolvent enterprises receive their fair entitlements under the Fair Entitlement Guarantee (FEG) scheme, and obtains a subrogated claim to the employees' entitlements in the insolvency.

The NSW Supreme Court has delivered a decision which gives significant guidance and support both to insolvency practitioners and the Department in its analysis of the true employer (In the matter of matter of Mosaic Brands Limited (admins apptd) (recs and mgrs apptd) [2025] NSWSC 959).

Key issue: Department’s stake in identifying the true employer

Receivers were appointed over Mosaic Brands Ltd and the other Mosaic group companies, a large fashion retail conglomerate, by a senior secured creditor, HUK 137 Limited (HUK). The group subsequently went into liquidation, leaving substantial employee entitlements unpaid. The Department, via the FEG scheme, paid out a significant portion of the employee entitlements, and thereby had a subrogated claim against the Mosaic group employing entity.

The Receivers, having realised $205 million in circulating assets held by Mosaic Brands, sought declarative relief from the Court as to which entity within the Mosaic Group was the true employer of the group's employees, to determine the priority in which the circulating asset realisations should be applied as between the Department (for its subrogated claim in respect of the paid employee entitlements) and the secured creditors.

Although employment contracts named Noni B Holdings Pty Ltd as the employer for most staff, the Court was asked to determine whether Mosaic Brands – the parent company – was in fact the true employer for the purposes of the Corporations Act 2001 (Cth), specifically sections 433, 556, and 561. This determination was critical for the Department, as it would decide whether employee entitlements (including those paid by the Department under the FEG scheme) would take priority over the claims of secured creditors, specifically HUK, in the distribution of circulating assets, where there was not sufficient circulating assets to fully pay out both.

Why Mosaic Brands was the true employer

The Court undertook a detailed review of the group’s structure and operations, focusing on the substance of the employment relationship rather than the formal contractual arrangements. The Department, as an interested party, supported the view that Mosaic Brands was the true employer, as this would ensure that the Department’s subrogated claims under the FEG scheme would have priority over secured creditors. It emphasised the employee protection purpose of the relevant legislation and the importance of ensuring that the Department’s FEG payments are recoverable in priority to secured creditors.

The Court held that Mosaic Brands was the true employer of the group’s employees, despite Noni B being the named employer in the employment contracts. Key findings included:

• Operational control and payment: Mosaic Brands, not Noni B, paid all employee wages, superannuation, workers' compensation premiums and related obligations directly from its own bank accounts. Noni B had no bank account, generated no revenue, and did not conduct any business other than acting as the nominal employer and lessee for certain leases.

• Management and decision-making: All major employment decisions, including remuneration and policy, were made by Mosaic Brands’ board and management. Employment contracts and policies, while naming Noni B, were issued on Mosaic Brands’ letterhead.

• No commercial purpose for Noni B as employer: The Court found no intelligible business objective for Noni B to act as employer, given its lack of assets and inability to meet employee obligations. The arrangement was not supported by any intercompany funding, management fee, recharge mechanism or labour hire agreement between Mosaic Brands and Noni B.

• Legal principles applied: The Court reaffirmed that the identity of the true employer is determined by the substance of the relationship, not merely the terms of the written contract. There is no inconsistency with orthodox contractual principles, as the Courts recognise the named employer may in fact be acting as agent for an undisclosed principal (the true employer).

As a result of the Court's finding that Mosaic Brands was the true employer of the group’s employees, employee entitlements – estimated at over $21 million – had to be paid in priority from the circulating assets of Mosaic Brands before any distribution to secured creditors, including HUK. Given the Department's subrogated claim to the employees’ rights, it will recover amounts paid out under the FEG scheme in priority to secured creditors.