Employers face heavy penalties for avoiding obligations through complex corporate structures

The Federal Court of Australia has made it clear employers may be severely penalised for attempting to avoid their obligations under the Fair Work Act 2009 (Cth) (Act) by manipulating corporate structures.

The Court, in Fair Work Ombudsman v Grouped Services Pty Ltd (No 2) [2017] FCA 557, imposed a penalty of $370,000 on a cleaning company, Grouped Services Pty Ltd (GS) and ordered it pay compensation of almost $225,000. Further fines of $3,300 and $74,300 (respectively) were imposed on two directors of GS who were found to have been involved in various contraventions committed by their company.

GS claimed to have engaged its workers through a labour-hire arrangement with another entity, National Contractors Pty Ltd (NC). However, the Fair Work Ombudsman (FWO) successfully argued that NC was a shell company used to implement sham labour-hire contracts, allowing GS to avoid its employer obligations.

The Court also held that NC was the last company in a line of several companies created by the directors as part of a ‘phoenixing’ scheme, due to the following factors:

  • NC generated little or no income, dividends, held no property and issued a share capital of $1;
  • NC had no systems implemented for employing staff;
  • 100% of NC’s income was transferred to GS;
  • GS dealt with all payroll matters and human resources issues;
  • NC had no visibility on the GS website and had no online presence of its own;
  • NC employees wore uniforms displaying the GS logo;
  • the same family members operated NC and GS;
  • GS owned and supplied all business assets to NC; and
  • GS presented itself as the employer of the cleaners supplied to clients.

Lessons for employers

Employers should be aware sham arrangements, including confected labour-hire schemes and complex corporate structures, will not prevent Courts or the FWO from holding parties to account for non-compliance with Act.

The FWO will impose particularly heavy penalties where directors and companies are found to have intentionally avoided obligations (and increased trial costs) through such sham arrangements.

If you want to ensure your business structures or practices are compliant, or need assistance responding to inquiries from the FWO, please contact our Employment, Safety and Migration team.

This article was written by Stella Gehrckens, Graduate Lawyer – Employment, Safety and Migration.