The Federal Court has found an employer who moved employees from one internal company to another to avoid employee entitlements guilty of sham contracting.
In Fair Work Ombudsman v Ramsey Food Processing Pty Ltd  FCA 1176, the court acknowledged that there may often be overlapping management and operating in intragroup arrangements, and that this is not illegal. However, in structuring companies, employers with intra-group arrangements must tread carefully in respect to the entity that will do the employing, ensuring there is a connection between the "employing" company and the company the employees do the majority of their work for, to avoid the arrangement being classified as a sham.
Ramsey Group is a meat packaging and exporting business that operates a South Grafton abattoir. In a previous Federal Court decision in 2006 (McIlwain v Ramsey Food Packaging Pty Ltd  FCA 828), the court ordered four employing companies within Ramsey Group to repay entitlements to 12 dismissed employees, with penalties totalling $84,000. These employing companies included Ramsey Food Packaging, Ramsey Food Packaging No. 2 and Ramsey Food Services.
After the decision, the four companies informed their employees that the Federal Court orders caused the companies to be insolvent and ended their employment. However, the employees were invited to approach a new company called Tempus Holdings Pty Ltd which represented that it might have positions available and be willing to “honour your entitlements”. Tempus was registered as a shelf company which had a benefit of an unqualified indemnity from Ramsey Food Processing, and provided labour to Ramsey Food Processing. It was part of the operational arrangement of Ramsey Group that separate companies were established to play the role of “employer” of staff at the abattoir.
It is worth noting that the ability of these insolvent companies to pay debts or meet obligations depended on the provision of funds by Ramsey Food Processing.
The employees worked for Tempus for about two years, until in 2008 Tempus ceased operating and terminated their employment. They were not rehired by any other Ramsey Group company and on termination they were collectively owed $33,683 in severance payments, $16,219 in accrued annual leave and $10,234 wages in lieu of notice. The employees sought these entitlements. The main issue in the case was whether Ramsey was the employer of the complainant employees or whether they were employed by Tempus.
In identifying the relevant legal principles, Buchanan J distinguished and analysed three different circumstances in which a business might obtain labour for its own purposes without direct employment:
Independent contracting – Buchanan J held that nothing in the case suggested that there was an independent contract for the complainant employees, and that they clearly worked as employees. However, it was noted that Tempus had no actual control over the work the employees performed, and that since Tempus was not the employer, the true employer required identification.
Labour hire – This is where a labour-hire company has a relationship with those whose labour it provides (either an employment or an independent contract), which provides labour to an unrelated company. It is assumed the labour-hire company is conducting a business of its own, and here Tempus does not fall under this category either.
Intra-group arrangements – Buchanan J noted that in these arrangements, there may be overlapping directorships and shareholdings, as well as shared management and operations, and noted that this is not illegal. However, in the case of a separate employing company which is completely reliant upon a company to which it purportedly supplies labour, with no assets and no management status of its own, and exists only as a corporate shell to protect another company (which does have assets) from liability to employees, courts might not hesitate before pronouncing the arrangement to be ineffective or even a sham.
Buchanan J considered two objectives of this arrangement – first, the apparent “termination” of the “employees” of the “employing companies”, thereby permitting the liquidation of the companies and the extinguishment of any liability owed to them. Second, the objective to ensure that Ramsey Food Processing would not become directly liable to employees for their entitlements whether already accrued or to be accrued. The arrangements, according to Buchanan J, were devoid of any legal content and represented an attempt to prevail by form over any substance.
Buchanan J observed that Tempus (and Ramsey Food Processing) did not give effect to the legal separation which they asserted in the evidence – that when Tempus became the employer, there was no evidence that anything changed or that new employment actually commenced for the employees concerned.
He referred to the principles for determining whether a person or entity is the employer of an individual. Tempus failed every one of these tests and Ramsey Food Processing satisfied all of them. Tempus bore none of the characteristics of an employer. It had no business of its own, nor did it earn any money.
With this, Buchanan J found that Tempus was not the employer of the employees concerned. In terms of the arrangement used by Tempus and Ramsey Food Processing, his Honour had no doubt that it was legally ineffective, as well as a sham. He considered the meaning of the work sham from the judgment of Lockhart J in Sharrment Pty Ltd v Official Trustee in Bankruptcy (1988) 18 FCR 449 at 454, where “sham” was described as “something intended to be mistaken for something else or not really what it purports to be. It is a spurious imitation, a counterfeit, a disguise or a false front.”
Buchanan J held that the attempted inter-positioning of Tempus between Ramsey Food Processing and the employees who performed work in the Ramsey Food Processing business was ineffective to produce the factual and legal consequence that Tempus was their employer (Fair Work Ombudsman v Ramsey Food Processing Pty Ltd  FCA 1176, ). The court found that in the relevant period the employer of the concerned employers was Ramsey Food Processing. Buchanan J concluded that the arrangements made for the inter-positioning of Tempus between Ramsey and the employees who performed work for Ramsey was legally irrelevant to the identification of their true employer.
The arrangement was not only legally irrelevant and ineffective, it was also considered to be a sham by the court due to its attempt to prevail by form over any substance.
Buchanan J directed the concerned employees be paid severance pay in accordance with the relevant award plus interest.
This article was written when Joe was a partner at Clayton Utz and does not necessarily reflect his views as Vice-President of the Fair Work Commission.
This article was first published in the Law Society Journal, December 2011