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Large penalties for “workplace cowboy” who underpaid employees

The Federal Magistrates’ Court has held that workers who were purportedly engaged as independent contractors were in fact casual employees with entitlements to overtime and casual loading. Their employer was penalised for failure to pay these entitlements and for other breaches of legislation.

Implications for employers

Employers should be aware that labelling a worker as an “independent contractor” is not determinative of the nature of the relationship. A court may find, based on the substance of the relationship between the worker and the hirer, that the worker is actually an employee and entitled to the protections of employment laws.

Background

T-Jays Wholesalers Pty Ltd (T-Jays) ran a fruit and vegetable processing business. Fresho Foods Pty Ltd (Fresho Foods) purchased the business in July 2006 and offered to take on 12 of the T-Jays workers as independent contractors.

The nature of the business did not change under Fresho Foods and all the workers continued to perform similar tasks, including peeling, chopping and preparing fruit and vegetables. They were supervised, told when to work, paid an hourly rate and provided with machinery and aprons.

Fresho Foods did not pay the workers overtime or casual loadings, because it was treating them as contractors rather than employees.

The Workplace Ombudsman argued the workers were in fact employees, and applied to the Federal Magistrates’ Court for orders to compel the employer to rectify the underpayments and also to have the Court impose penalties on Fresho Foods for its conduct.

Decision

The first issue for the Court was whether the workers were independent contractors or employees. To decide this issue, the Court applied tests from two High Court decisions.

First, the Court noted that in Stevens v Brodribb Sawmilling Company Pty Ltd (1986) 160 CLR 16, the right to exercise control over a worker was held to be an important, but not conclusive, consideration in determining whether an employment relationship exists. Numerous other indicia of an employment relationship were identified, including the mode of remuneration, the provision and maintenance of equipment, the right to have a particular person do the work, and the right to dictate hours and place of work.

Second, the Court noted that similar matters were considered in Hollis v Vabu Pty Ltd (2001) 207 CLR 21, where it was held that factors pointing to an employment, rather than contracting, relationship included that the work did not require special skills, the manner of work was controlled and the workers were identified as serving their employer’s business, rather than carrying on a business of their own.

The Court noted that Fresho Foods made it clear to the workers that they would be engaged as independent contractors, and required them to supply an ABN. However, the fact that the workers and Fresho Foods called their relationship an independent contractor relationship was not conclusive of the issue. On the facts, the Court found the workers were employees. The workers were told what work to do and how to record their hours, were rotated through various tasks that did not require special skills, produced products for the Fresho Foods business and were paid per hour rather than per product. The Court also noted that the workers did not provide invoices to Fresho Foods and there were few opportunities for delegation. All of these factors pointed towards a relationship of employment between Fresho Foods and its workers.

The next issue was to identify the minimum rates of pay and other entitlements to which the workers, as employees, were entitled. This question was complicated by two issues:

  • the impact of the WorkChoices amendments on the relevant award, and
  • the transmission of the business from T-Jays to Fresho Foods.

When the business had been run by T-Jays, the employees were covered by the Jam, Preserve Fruit and Vegetable Processing Award (Qld). When the WorkChoices amendments to the Workplace Relations Act 1996 (Cth) (WR Act) commenced in March 2006, this award was replaced by a Notional Agreement Preserving a State Award (NAPSA) and, in relation to rates of pay, by an Australian Pay and Classification Scale (APCS).

The Court found that when the business was purchased by Fresho Foods in July 2006, the NAPSA and APCS that were then binding on T-Jays “transmitted” to, and became binding on, Fresho Foods in relation to the employees that transferred from T-Jays as a result of the transmission of business rules in the WR Act.

Therefore, the Court held that the employees were entitled, in relation to their employment by Fresho Foods, to overtime as prescribed in the NAPSA and to the minimum rates of pay and casual loadings prescribed in the APCS.

Penalty

The Court identified six distinct breaches by Fresho Foods relating to non-payment of casual loadings and overtime and notification requirements in relation to the transmission of the business. Five of these breaches involved multiple employees and the underpayments persisted over a period of 14 months. The Court noted that the workers were vulnerable in that they were “employed as unskilled, menial workers who had little choice but to accept the terms of remuneration that they were offered”. The director of Fresho Foods was described as treating the workers “with contempt”, “entirely unrepentant”, and “aggressive towards, and dismissive of” the Workplace Ombudsman’s inspectors.

Fresho Foods submitted in relation to penalty that a significant penalties order would mean the Fresho Foods business would need to close down. The Court treated this submission as an “attempt to hold the Court to ransom”.

Fresho Foods was ordered to rectify underpayments of $13,510.27 to the employees and pay penalties totalling $80,200 “to deter other would be workplace cowboys”.

Martin v Fresho Foods Pty Ltd [2009] FMCA 15; Martin v Fresho Foods Pty Ltd (No 2) [2009] FMCA 191

Who does this affect?
All Australian employers

What do you need to do?
Ensure you are updated on recent developments

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