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In June 2013, an Australian court confirmed the fears of those in the hire industry with imperfect documentation and procedures [1].

Those in the vehicle-equipment hire and finance industries, and construction and resources industries, should be aware that the Personal Property Securities Act 2009 (PPSA) created a legal concept new to Australia called a “PPS Lease”. As the name suggests, the “PPS Lease” concept applies to leases, however, it also often includes a licence, bailment, hire-purchase, consignment and/or retention of title arrangement; in fact, it covers most occasions when an asset is in the possession of a non-owner.

If the non-owner has possession of the asset for 12+ months (or 90+ days for serial numbered assets, e.g. vehicles), or is entitled to possession for an indefinite period (e.g. under a long or a renewing hire arrangement), and the true ownership of the asset is not registered properly as a security interest then receivers, liquidators, bankruptcy trustees and some secured creditors (e.g. financiers with broad-based security – fixed and floating charges in the pre-PPSA terminology) can ignore the true ownership, and seize and sell the assets.

The Dispute
Queensland Excavation Services (QES) leased excavators and loaders to Maiden Civil (Maiden), which got into financial difficulty during the lease. This resulted in Maiden granting security over all of its assets to Fast Financial Solutions (Fast). Fast perfected its security interest by registration under the PPSA, whereas QES had not registered its interests plant.

Fast appointed receivers to Maiden. Meanwhile, QES terminated its leases to Maiden and asserted primary rights as owners. Fast’s receivers also asserted primary rights to the equipment as the sole perfected security interest holder. There were no written leases between QES and Maiden and QES periodically invoiced Maiden for the use of the equipment.

The Outcome
The receivers were entitled to possession of the excavators and loaders. QES and Fast each had security interests attaching to the equipment. The dispute was a PPSA priority dispute, not an ownership dispute. Since the QES lease was not perfected by PPS registration and the Fast lease was, the solution from the Court was relatively simple – despite some transitional issues, the Fast perfected security interest had priority over the QES unperfected interest.

Was this expected?

In short, “yes”, this was a predictable outcome. The QES leases were entered into before 31 January 2013, making them transitional security leases. Most transitional leases were perfected without registration until 31 January 2014, however in this case they were not as they were capable of registration (and had not been registered) under applicable N.T. legislation.

Hire companies and their financiers need to be particularly wary. We recommend against reliance on “wet” hire distinctions, and all PPSA users should be aware of the strict time limits required to preserve a security interest. In many cases, it will be necessary to register a hire company’s ownership interest in an asset before possession passes to the hirer.

[1] In the matter of Maiden Civil (P&E) Pty Ltd; Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852.

For further information about the PPSA, or other security issues, please contact:

Ben Warren – Director
M: 0402 003 364
E: bwarren@ellemwarren.com.au

Richard Ellem – Director
M: 0403 464 875
E: rellem@ellemwarren.com.au

Regardless of the size, type or function of a company, pursuant to the Corporations Act 2001, directors of a company are required to ensure that it complies with obligations and meets minimum standards for good governance.
 
At Ellem Warren Lawyers, having regularly appeared in court for and against directors of companies in liquidation, we understand that corporate governance and compliance can require constant dedication and development.  We know from experience what ASIC and liquidators are targeting.
 
We provide our corporate clients not only with high quality and detailed advice on all regulatory issues, but with a practical approach to compliance, capable of integration into the everyday processes.
 
No matter the economic climate, companies and their officers should reflect on their corporate compliance protocol, structuring for asset protection, and understand the key duties of company directors.
 
We are able to provide the information and systems to maximize protection to organisations (and the people with the responsibility of running them) while minimizing the complexity and ‘red tape’.

Recent high-profile prosecutions, cases and news reports highlight the need for all companies and directors, publicly listed or private, to ensure that compliance and governance requirements are being consistently met.
 
Ellem Warren Lawyers’ team have represented public and private companies to ensure they meet compliance and good governance standards.
 
Our experience is complemented by our highly skilled Dispute Resolution and Litigation team who have been involved in a number of successful litigations and representations in this area.
 
Examples include the following:

• Advising publicly listed companies on corporate governance issues, directors’ duties and other corporate matters, including:
  • Requirements for additional capital raising and PDS preparation;
  • Australian financial services licence (AFSL) application and compliance;
  • Compliance with the Corporations Act, the Trade Practices Act and the ASX Listing Rules.
• Start-up compliance advice and assistance, including structure advice to limit liability for:
  • wholly owned foreign entities;
  • high risk ventures.
• Advice on directors’ duties for companies in financial difficulty, turn-around and insolvency;
• Advising regarding risk management plans, risk assessment checklists, and training;
• Providing recommendations for integration of corporate governance, management, operational and audit programs / systems in the context of risk management;
• Structuring for asset protection.
• Representation in ASIC or liquidator litigation.

 
We are able to provide workshops and updates to our clients to ensure that relevant staff and directors are up to date with the latest developments. In doing so, we are able provide our clients with the tools and knowledge to increase compliance strategies to assist them with what they do best – their business.

Senior managers and directors are exposed to personal liability under the civil penalty provisions of the Fair Work Act 2009.  Some recent cases provide useful examples of blatant contraventions, resulting in penalties imposed on managers and directors personally, as well as contraventions arising from workforce structuring mistakes.
 
In this publication we highlight some workforce structuring mistakes, demonstrate how civil penalties have been imposed in practice, and explain how pitfalls can be avoided.
 
Workforce Structuring

• Are your “casual” staff really casuals?  Williams v Macmahon Mining Services¹.
• Are independent contractors really employees?  Fair Work O. v Centennial Financial² .

Casual

There is no “one size fits all” definition – it is a question of degree – but when a corporate group as large and as well-resourced as Macmahon is getting the “casual” employee issue so wrong, perhaps everyone should revisit the basic principles.
 
In the Macmahon case, the employee was engaged for approx. 12 months at the Argyle Diamond mine site, with a regular 2 weeks on and 1 week off roster fixed a full year in advance.  There was an employment agreement, which indicated that the engagement was “casual”.
 
It also indicated that Mr Williams’ pay rate of $40.00/hour was “all inclusive and takes into account all … allowances … and includes payment for all hours necessary to undertake your rostered duties, and as a casual employee, a loading in lieu of paid leave entitlements. The rate includes compensation for any necessary shift, public holiday and weekend work”.  The engagement could be terminated on one hour’s notice.
 
There was no paid leave and this is why the matter came before the Court, because following termination of the engagement, Mr Williams (and the Union behind him) claimed accrued leave.  He won.
 
Although the parties’ intention (recorded in a written agreement) is relevant, it is not conclusive.  A court will look at all of the facts to decide how the engagement relationship should be classified.  The relevant issues, in no particular order, are as follows:

• The engagement has been regular and systematic for a sequence of periods of at least 12 months³ ;
• The availability of work is the subject of significant fluctuation from one day, or one week, or one month, to the next so as to make the work, and hours of work, irregular and uncertain;
• The employer elects to offer employment on a particular day or days and when offered, the employee can elect (or not) to work;
• There is no certainty about the period over which employment will be offered.

Contractor -v- Employee

Again, there is no “one size fits all” definition clearly identifying a relationship as contractor or employee.  Again, the intention of the parties (and a written agreement recording it) is relevant but not conclusive.
 
The law maintains this “vagueness” to prevent lawful exploitation.  Employers often prefer to classify the relationship as one of client and contractor and in some cases the result is clearly unjust for the worker.  In other cases, the contractor is happy to reap the ‘cash-in-hand’ benefits of contractor work but will unjustly seek to claim employee status upon termination or for other purposes.
 
There are many relevant considerations including, again in no particular order, the following:

• Control – who controls the timing and method of work, the environment and work standard?
• Financial – are remuneration, benefits and tax consistent with employment (e.g. daily, weekly or piecemeal rates), leave, and PAYG?
• Equipment – who provides and maintains it?
• Risk – who bears the cost of remedying poor performance and who bears risk (i.e. insurance)?
• Delegation – can the worker delegate or assign some or all of the work to others, and do they?

Getting it right can be a careful balancing exercise.  If you are dealing with a situation that has features in common with both forms of engagement, get advice.

Civil Penalties

Many of the provisions in the Fair Work Act 2009 are either a “civil remedy provision” or provide for a “safety net contractual entitlement”, meaning that if someone fails to comply with the provision they become exposed to a financial penalty claim.
 
These claims can be (and are) made in addition to the claim for unpaid entitlements and can be (and are) made by a range of different people – a relevant union, an employee, the Fair Work Ombudsman, etc. – depending on the contravention.
 
The Centennial Financial Services case is useful because it provides a good analysis of the law differentiating between a contractor and an employee, it looks at “sham” contracting and also because both the HR manager and director of the employer company were personally fined for involvement in contraventions.
 
It involved a fairly obvious attempt to take an existing employed sales team and convert them to commission-only contractors.
 
James v Planpac International Pty Ltd & Ors (No2) [2010] FMCA 845 is interesting as well because it is an uncommon example of an employee, who already had orders for the payment of all his entitlements as a result of a District Court claim, getting the benefit of penalty orders as well, including personal penalty orders against the directors of his former employer.
 
The defendant employers submitted that any penalty should be paid into consolidated revenue, rather than to the former employee, but the Court disagreed, saying: “… in my view, it is appropriate that the penalties [totalling $34,000] should be paid to the complainant who has carried the burden of bringing the proceedings”.
 
Avoiding Pitfalls

Remember the following key points:

• Awards – It remains complicated, but since the implementation of the “modern awards” under the Fair Work Act 2009, it is easier to identify the appropriate award for a role.  Look at this issue when employing anyone.  The Ombudsman should be able to assist: www.fairwork.gov.au.
• Written agreement – If there is any doubt about the true nature of the relationship, a well-drafted written agreement will be influential in deciding the outcome, so commit the arrangement to writing and get it signed by the worker.
• Call it what it is – As an employer seeking to classify the engagement relationship as casual, part time, full time or independent contractor, think carefully about your requirements to avoid “dressing up” one relationship as if it were another.  If it waddles, quacks and has feathers, it is probably a duck, regardless of what you call it.
• Review – Often engagements begin as casual or independent contractor but morph over time into something else.  Ideally, this can occur because a temporary worker or consultant performs well and becomes indispensible.  Over time, the role becomes permanent.  Do regular reviews.

Competent legal advice – Of course, there is no substitute for competent advice from a lawyer experienced in the area.  Good “front-end” advice is much less expensive than scrambling to respond to an audit by the Fair Work Ombudsman or a complaint from an employee

This firm acts for a lot of clients in industries where the difference between an employee and contractor can be difficult to assess, including:

• Building and Construction;
• Mining and Resources;
• Transport and Logistics.

Risks and Penalties

This issue – employee or contractor – particularly for the industries above, is frequently targeted by the ATO, Unions, the Fair Work Ombudsman and other agencies with regulatory powers, and there can be severe consequences for getting it wrong, including exposure to large back-pay obligations and personal liability for directors and human resources managers.

For example:

• In May 2012, a steel fixing company, Inner Strength Steel Fixing Pty Ltd received penalties of $41,250.00 for contraventions of the Fair Work Act 2009 (and the preceding legislation) relating to engaging workers as contractors in circumstances where they should have been treated as employees.  In addition, the director was personally penalized $6,750.00, and the business was further liable to its workers for accumulated under-payments and leave and other entitlements;
• In April 2011, the ATO won a landmark case against a business, On Call Interpreters that put interpreters into short-term placements.  The court refined the previous test defining “employee” to include an examination about entrepreneurship and the role of a worker within a business that builds good will.  And, a little surprisingly, found against the business in circumstances where, some years earlier, the business had truthfully and accurately completed an ATO questionnaire and received written ATO feedback accepting that the interpreters were contractors.  The contrary finding that the interpreters were employees had back-pay and superannuation implications costing many tens of thousands of dollars.
• In April 2011, the director and a manager of a financial services company, Centennial Financial Services Pty Ltd each personally received penalties of several thousand dollars for their involvement in “sham” contracting, where sales personnel were terminated from employment and re-engaged as ABN holding contractors.  These personal penalties were in addition to penalties against the corporate employer, and orders were made requiring payment of penalties direct to the employees affected;
• In December 2011, this firm successfully represented a participant in the taxi industry in a claim by a cab rank supervisor (following termination of his services) that he was an employee entitled to unfair dismissal remedies.  There was no written contract between the parties, and the claimant predominantly provided his labour, but he rendered invoices.  The history of the relationship was significant to the finding by FWA that he was not an employee.

Myths Busted

Business owners frequently assume that a worker with an ABN, rendering invoices for hours worked, must be a contractor.  This is frequently wrong.

There is a commonly held assumption that a written contract with a worker, acknowledging and agreeing that he or she is a contractor (and not an employee), removes doubt about the status of the relationship.  It can help, but a contract alone will not be enough.

Another commonly held assumption is that a worker who is a contractor for one purpose, e.g. Commonwealth taxation obligations, must be a contractor for all purposes.  Again, this is frequently wrong.  Regrettably, there are different tests to determine the issue in different statutory contexts, for example:

• Fair Work Act 2009 – This is the predominant employment legislation in Australia and relies on the ‘common law’ test.  There is commentary on the common law test below, which is based on court decisions, which means (note:) the test can change whenever there is a new case dealing with the issue;
• PAYG and Superannuation (ATO) – This legislation expands the ‘common law’ test in limited ways, e.g. by including persons who work “under a contract that is wholly or principally for the labour of the person”.  However, the ATO has a useful ‘decision tool’ freely available to assist: www.ato.gov.au;
• WH&S and Workers’ Compensation legislation – These laws each have different defined meanings for “worker”, which create obligations to, for example, pay WorkCover premiums or ensure safe systems of work, for a much broader category of persons.  Statutory responsibilities for safety are so broad that it is nearly always better to assume you are responsible.  The WorkCover Queensland website contains some specific guidelines: www.workcoverqld.com.au;
• State payroll tax – This perhaps ‘casts the widest net’, not so much by changing the definition of ‘employee’ but instead, by including a payroll tax obligation in circumstances where there is a “relevant contract” (defined to include contracts for services where labour is the most significant component of supply), even where there is an “interposed entity” (e.g. company) providing the services.  Again, for more payroll specific guidance: www.osr.qld.gov.au.

Common Law Test

The ‘common law’ test to determine whether or not a person is an “employee” is deliberately vague and flexible, and can change over time, to catch situations that would otherwise result in (perceived) injustices.

The test achieves this flexibility by having a broad range of ‘indicia’ that must be examined in the circumstances of each case, and the court will look at the “totality of the relationship”.  We set out below a checklist of the indicia that most frequently determine the outcome.  The list is not exhaustive and, although we have listed the indicia roughly in the order that tend to weigh most heavily, :

We recommend business owners and senior managers not tolerate circumstances that leave in doubt the status of worker engagement.  It is better to have certainty than to leave the engagement status in doubt and find yourself exposed to large back-pay liabilities and statutory penalties.

There are steps that can be taken to provide more certainty and this firm regularly advises how best to manage the situation.  We also represent clients in audits or disputes where the issue is in contention.