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Focus: Employment Law

6 December 2016

In this issue: we look at the Fair Work Ombudsman's decision to prosecute a sham contracting offence even after the employer had rectified the underpayments; the enforceability of post-employment restraint of trade clauses; what a new ABCC will look like after its journey through the Senate; and the importance of negotiating an enterprise agreement only with employees who have commenced work.

Ombudsman and court send warning to employers engaged in sham contracting

In brief: The Federal Circuit Court has imposed a hefty penalty on an employer and its director who engaged in sham contracting, even after the underpayment had been rectified. Senior Associate Chloe Wilton and Lawyer David Hunt report.

 
 

How does it affect you?

  • Employers should carefully consider whether workers engaged as independent contractors (including through a labour hire arrangement) are actually employees.

Background

In 2013, Thomas Beckitt was engaged as an independent contractor by PMA Unit Trust Pty Ltd (PMA) to provide services to a related entity, Australian Sales & Promotions Pty Ltd (ASAP). Following a complaint by Mr Beckitt, the Fair Work Ombudsman (Ombudsman) investigated and formed an opinion that Mr Beckitt was engaged as an employee, not as an independent contractor. This was largely due to the high degree of control that ASAP exercised over the work he performed and the fact that he was not operating his own business. The Ombudsman also considered that ASAP, not PMA, was Mr Beckitt's employer. This was because PMA did not operate any business of its own and while PMA paid Mr Beckitt, all other relevant contact was with ASAP.

ASAP admitted that its failure to provide Mr Beckitt with his minimum employment entitlements resulted in him being underpaid almost $8000 and voluntarily rectified the underpayment. Despite this, the Ombudsman commenced proceedings seeking penalties against ASAP and its sole director.

The decision

ASAP admitted that it had contravened the Fair Work Act 2009 (Cth) in various respects, including by:

  • misrepresenting to Mr Beckitt that he was engaged as an independent contractor when he was actually an employee;
  • underpaying him; and
  • failing to keep proper records.

ASAP's sole director admitted to being an accessory to the contraventions.

The court concluded that the purported labour hire arrangement between ASAP and PMA was contrived to allow ASAP to control Mr Beckitt's work while paying him as an independent contractor. Further, the absence of an arm's-length relationship between PMA and ASAP meant that the arrangement could not be characterised as a labour hire arrangement.

The court observed that while ASAP cooperated with the Ombudsman's investigation, admitted the contraventions and voluntarily rectified the underpayment, there was no evidence that it would not repeat the conduct. In imposing a penalty of $100,000 on ASAP and $24,000 on its director, the court also noted that it was important to make it clear that this type of conduct would be penalised.

Court refuses to enforce post-employment restraint

In brief: Post-employment restraints will be enforced only when they go no further than protecting the employer's legitimate business interests. Associate Victoria Eastwood reports on a recent example of a restraint not being enforced.

 
 

How does it affect you?

  • Post-employment restraint clauses will only be enforced if they are limited to protecting the employer's legitimate business interests (eg their customer connections and confidential information).
  • Legislation in New South Wales allows the courts there to enforce restraints to the extent that they provide that protection, even if they are drafted more broadly.
  • In the other states, employers rely on 'cascading' restraint areas and restraint periods to try to achieve a similar result.

Background

Nicole Peck was employed as the Chief Financial Officer of Just Group Limited (JGL). Ms Peck resigned after only four months to work for the Cotton On Group as the General Manager, Finance and Treasury.

Ms Peck's contract included a post-employment restraint clause. It obliged her to not:

  • carry on any activity which was the 'same as, or similar to, any part of the speciality brand and fashion business' of JGL; and
  • carry on any activity for any of the 50 entities listed in a schedule (including Cotton On).

Those restrictions applied for a series of cascading geographic areas and periods. At its maximum, the restrictions applied in Australia and New Zealand for 24 months, and at their minimum they applied in Victoria for 12 months.

The decision

The court refused to enforce any of the restraint clause, deciding that it was both too broad and too long to protect the Just Group's legitimate business interests.

The court decided that the restriction on Ms Peck doing anything the 'same as, or similar to, any part of the speciality brand and fashion business' of JGL was unreasonable, since it would prevent Ms Peck from working in roles where JGL's confidential information is irrelevant.

The court also refused to enforce the second restriction, which specified the 50 entities that Ms Peck was restricted from working for. The court said that JGL needed to prove that each of those companies actually competed with it. Since JGL led evidence in relation to four of those entities only, it failed to prove that the restraint was reasonable.

Ms Peck was still in her six month probation period when she resigned, during which time she or JGL could terminate the employment on one month's notice. The court said that there was a disparity between, on the one hand, JGL's ability to terminate Ms Peck on one month's notice, and, on the other, being able to impose a 12 month restraint. The court acknowledged that Ms Peck's restraint had been the subject of negotiation and contained an express acknowledgment that it was reasonable. However, this did not automatically mean that the clause would be enforceable. Since even the minimum restraint was too long, the court decided that it could not be enforced against Ms Peck.

Re-establishment of the Australian Building and Construction Commission

In brief: The Federal Government has succeeded in passing legislation to reintroduce the Australian Building and Construction Commission, but only after making significant concessions to the Senate crossbench. Managing Associate Andrew Stirling reports.

 
 

How does it affect you?

  • The Australian Building and Construction Commission (the ABCC) will be re-established from 1 January 2017.
  • The ABCC's role will be to investigate and enforce the building industry's compliance with the legislation's unlawful action provisions, the building code and other workplace laws.

Key features of the legislation

What does the legislation apply to? The legislation regulates those involved in building work, including employers, employees, contractors and unions. Building work includes various construction processes and extends to preparatory work and the supply of goods to building sites. It does not include mining processes or work on single-dwelling houses.

What is the building code? The Government has issued a code of practice that building industry participants must comply with. The code of practice:

  • sets minimum standards of conduct in the building industry (eg a prohibition on side deals with trade unions); 
  • requires that enterprise agreements not include particular content (eg clauses that would prescribe the terms and conditions on which subcontractors might be engaged); and
  • deals with work health and safety matters.

In concessions to the Senate, the building code must also require:

  • tenderers for Federal projects to provide certain information about their expected procurement practices (eg the extent to which building materials will be sourced from within Australia); and
  • participants in the building industry to genuinely advertise job vacancies in Australia before employing temporary visa holders (eg 457 visa).

What happens if a building participant does not comply with the building code? Building industry participants who do not comply with the building code may be excluded from tendering for Federal projects. A late concession to the Senate was that until 28 November 2018, Federal projects could still be awarded to builders whose enterprise agreements did not comply with the building code, provided the agreements were made before the code was issued.

What other conduct does the legislation prohibit? The legislation also prohibits unlawful industrial action and unlawful pickets. Unlawful industrial action will include action that is protected industrial action under the Fair Work Act but that is engaged in concert with anyone who is not a legitimate participant in that action (eg bargaining representatives and their members who will be covered by the proposed enterprise agreement). The courts may order that such conduct cease and that participants pay large penalties (three times higher than under the Fair Work Act).

No genuine agreement – employees not yet covered by enterprise agreement

In brief: The Full Court of the Federal Court has overturned the Fair Work Commission's approval of an enterprise agreement made with employees who had not commenced work covered by the agreement. Managing Associate Andrew Stirling and Partner Simon Dewberry report.

 
 

How does it affect you?

  • Enterprise agreements other than greenfields agreements cannot be made with employees who are not yet performing work that would be covered by the agreement.
  • An enterprise agreement that merely puts employees in a position equivalent to that of the relevant modern award will not satisfy the Better Off Overall Test (BOOT).
  • Employers should ensure that a Notice of Employee Representational Rights (NERR) strictly conforms to the form required by the Fair Work Act.

Background

In 2015, ALDI Foods Pty Ltd (ALDI) sought to expand its operations by opening new retail stores in South Australia. In May 2015, 17 existing ALDI employees who were working in New South Wales, Victoria and Queensland accepted offers of employment under which they continued working in their respective states, but would commence employment in the new stores once those had been constructed.

ALDI negotiated an enterprise agreement with these employees to cover work in the new stores, even though the employees continued to be employed in their respective states. The employees voted to approve the agreement. The Fair Work Commission (the Commission) approved the agreement in an uncontested hearing.

The Shop, Distributive & Allied Employees Association (SDA) was not a bargaining representative and so was not party to the initial hearing. It was given leave to appeal the Commission's approval, but this appeal was dismissed by the Full Bench of the Commission. The SDA then applied to the Federal Court to overturn these decisions on three grounds:

  • the agreement was not genuinely agreed to, because the employees had not yet commenced employment in the new stores;
  • the Commission misapplied the BOOT; and
  • the NERR sent to the employees was not in the required form.
The decision

The Full Court of Federal Court overturned the Commission's approval of the enterprise agreement.

The court concluded that although the employees would eventually fill positions in the new stores, employment in these positions had not actually commenced when the vote to approve the agreement took place. As a result, they were not employees who were 'covered by' the agreement and so could not vote to approve it. As a result, the Commission should not have approved the agreement.

The court also concluded that the Commission misapplied the BOOT. In deciding the enterprise agreement passed the BOOT, the Commission had relied on a clause that gave employees the right to request that ALDI compare their pay for a certain period with what they would have been paid under the modern award. ALDI had to pay the employee any shortfall. The court said that, at best, this clause only placed employees in a position equivalent to, and not better than, the modern award.

Finally, the court commented that the NERR sent to the employees was not in the required form. This was despite the fact that the only difference between the NERR sent by ALDI and the required form was the use of the word 'leader' instead of 'employer' in one sentence. The court did not overturn the approval of the agreement for this reason, because the SDA had not made this argument before the Commission.

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