Creative Smiles Pty Ltd v Ekera Dental Pty Ltd (No 2)
[2023] VCC 745
•12 May 2023
| IN THE COUNTY COURT OF VICTORIA AT Melbourne commercial DIVISION | Revised Not Restricted Suitable for Publication |
Case No. CI-19-04997
| Creative Smiles Pty Ltd (ACN 116 150 353) JOHN GOODMAN | First Plaintiff Second Plaintiff |
| v | |
| Ekera Dental Pty Ltd (ACN 163 686 146) ANTHONY COULEPIS | First Defendant Second Defendant |
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JUDGE: | HIS HONOUR JUDGE COSGRAVE | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 27 and 28 February 2023 | |
DATE OF JUDGMENT: | 12 May 2023 | |
CASE MAY BE CITED AS: | Creative Smiles Pty Ltd & Anor v Ekera Dental Pty Ltd & Anor (No 2) | |
MEDIUM NEUTRAL CITATION: | [2023] VCC 745 | |
REASONS FOR JUDGMENT
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Subject: CIVIL PENALTY
Catchwords: Civil penalty provisions – penalty considerations – existence of employment relationship – severity of breach – deliberateness of breach – widespread breach – history of breaches – contrition – statutory purpose not advanced by imposition of a penalty – no penalty imposed
Legislation Cited: Fair Work Act 2009 (Cth); Trade Practices Act 1974 (Cth); Penalty Interest Rates Act 1984 (Vic)
Cases Cited:ABCC v Pattinson [2022] HCA 13; Australian Competition and Consumer Commission v TPG Internet Pty Ltd (2013) 250 CLR 640; Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385; Australian Rail, Tram and Bus Industry Union v Qube Logistics (Rail) Pty Ltd [2020] FCA 1520; Bartlett v Signostics Limited (in liquidation) [2019] FCCA 2989; Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482; Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Telstra Corporation Limited [2007] FCA 1607; Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner (2018) 264 FCR 155; Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 398 ALR 404; Fair Work Ombudsman v Ava Travel Pty Ltd & Ors [2018] FCCA 3627; Fair Work Ombudsman v NoBrace Centre Pty Ltd (in liquidation) & Ors (No 2) [2019] FCCA 2970; Fair Work Ombudsman v NoBrace Centre Pty Ltd [2018] FCCA 378; Kelly v Fitzpatrick [2007] 166 IR 14; Narich Pty Ltd v Commissioner of Pay-Roll Tax [1983] 2 NSWLR 597; PIA Mortgage Services Pty Ltd v King [2020] 292 IR 317; Singtel Optus Pty Ltd v Australian Competition and Consumer Commission (2012) 287 ALR 249; Trade Practices Commission v CSR Ltd (1991) ¶ATPR 41-076; Trade Practices Commission v Stihl Chain Saws (Aust) Pty Ltd (1978) ATPR ¶40-091; ZG Operations Australia Pty Ltd v Jamsek (2022) 398 ALR 603
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr M J Rivette | RM Commercial & Family Lawyers |
| For the Defendants | Mr A M J Meagher | Hassett & Co |
HIS HONOUR:
1 On 16 December 2022, I handed down my reasons for judgment in this matter (“the initial reasons”). At the conclusion of the judgment, I directed that the parties confer and attempt to frame orders giving effect to the initial reasons for judgment.
2 Having considered the initial reasons the parties have agreed upon several matters. First, they have agreed in relation to the employment claims that Ekera Dental Pty Ltd (“Ekera”) should pay Goodman the sum of $44,175.86 as unpaid wages together with interest to the date of judgment in the sum of $25,355.73, being a total of $69,531.59. Secondly, they have agreed that the claims against Coulepis should be dismissed. Thirdly, they have agreed that Ekera should pay Creative Smiles the sum of $136,687.84 within 30 days. Finally, they have agreed that Ekera should pay Creative Smiles interest on the sum of $136,687.84 from the date of issue of the writ at the rate prescribed under the Penalty Interest Rates Act 1984 (Vic), being $43,964.80.
3 In submissions filed before the penalty hearing there were a number of matters about which the parties could not agree. These included whether the court should impose a penalty upon Ekera in respect of its breaches of the Fair Work Act 2009 (Cth) (“FWA”), how much such a penalty ought be, and to whom any such penalty should be paid. Also disputed was whether Ekera was obliged to pay Goodman annual leave together with a holiday loading and payment for public holidays. Finally, the parties could not agree upon the amount of superannuation which Ekera should pay Goodman.
4 In a directions hearing earlier this year I advised the parties that my intention was to conduct the penalty hearing and address the various matters set out in paragraph 3 above before dealing with the costs of the litigation at the conclusion of the case. I directed that the parties frame the list of issues to be decided by the court at the second hearing to ensure that there was an efficient focus on the disputed issues.
5 The parties forwarded to the court a list of issues in the following terms:
(a) the quantum of:
(i)wages and interest;
(ii)annual leave loading and interest; and
(iii)superannuation and interest.
(b) whether pursuant to section 546 of the FWA an aggregate penalty is imposed upon Ekera, and if so, the quantum of the penalty.
6 At the penalty hearing, it became apparent that the parties were not that far apart on issue (a) regarding quantum. During the first day of hearing, counsel for Ekera took instructions over lunchtime and later advised the court that Ekera accepted the figures proposed by Goodman. Accordingly, the reasons below only address the question of whether any penalty ought be imposed and, if so, the quantum of such a penalty.
Legal Principles
7 It is well-settled that civil penalty provisions of the kind enacted in section 546 of the FWA have a statutory function of securing compliance with provisions of the statutory regime.[1] In Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (“the Agreed Penalties Case”)[2] French CJ, Kiefel, Bell, Nettle and Gordon JJ, when considering the purpose underlying civil penalties, stated:
“No less importantly, whereas criminal penalties import notions of retribution and rehabilitation, the purpose of a civil penalty, as French J explained in Trade Practices Commission v CSR Ltd, is primarily if not wholly protective in promoting the public interest in compliance:
… The principal, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.”[3]
[1]See Commonwealth of Australia v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 at [24]
[2](2015) 258 CLR 482
[3]Ibid at [55] citing Trade Practices Commission v CSR Ltd (1991) ATPR ¶41-076 at 52,152 (“CSR”)
8 Similarly, in Construction, Forestry, Maritime, Mining and Energy Union v Australian Building and Construction Commissioner,[4] the Full Court of the Federal Court cited the decision of French J in CSR[5] and the reasons of the plurality in the Agreed Penalties Case[6] as establishing that deterrence is the principal and indeed only object of the imposition of a civil penalty; retribution, denunciation and rehabilitation have no part to play.
[4](2018) 264 FCR 155
[5]Trade Practices Commission v CSR Ltd (1991) ATPR ¶41-076
[6](2015) 258 CLR 482
9 In explaining the deterrent purpose of civil penalty regimes such as those found in the FWA, the majority of the High Court in Australian Competition and Consumer Commission v TPG Internet Pty Ltd[7] approved the statement by the Full Court of the Federal Court in Singtel Optus Pty Ltd v Australian Competition and Consumer Commission[8] that a civil penalty:
“must be fixed with a view to ensuring that the penalty is not such as to be regarded by [the] offender or others as an acceptable cost of doing business.”[9]
[7](2013) 250 CLR 640 at [66]
[8](2012) 287 ALR 249
[9](2012) 287 ALR 249 at [62]
10 In the CSR[10] case, French J listed a number of factors relevant to an assessment under the Trade Practices Act 1974 (Cth) of a penalty of appropriate deterrent value:
[10](1991) ATPR ¶41-076
“The assessment of a penalty of appropriate deterrent value will have regard to a number of factors which have been canvassed in the cases. These include the following:
1.The nature and extent of the contravening conduct.
2.The amount of loss or damage caused.
3.The circumstances in which the conduct took place.
4.The size of the contravening company.
5.The degree of power it has, as evidenced by its market share and ease of entry into the market.
6.The deliberateness of the contravention and the period over which it extended.
7.Whether the contravention arose out of the conduct of senior management or at a lower level.
8.Whether the company has a corporate culture conducive to compliance with the Act, as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention.
9.Whether the company has shown a disposition to co-operate with the authorities responsible for the enforcement of the Act in relation to the contravention.”[11]
[11]Ibid at 52,152-3
11 In Kelly v Fitzpatrick,[12] Tracey J set out a list of factors which a court can properly take into account when addressing questions of penalty. The factors include:
[12] [2007] 166 IR 14 at [14]
(a) the nature and extent of the conduct which led to the breaches;
(b) the circumstances in which that conduct took place;
(c) the nature and extent of any losses or damage sustained as a result of the breaches;
(d) whether there had been similar previous conduct by the respondent;
(e) whether the breaches were properly distinct or arose out of the one course of conduct;
(f) the size of the business enterprise involved;
(g) whether or not the breaches were deliberate;
(h) whether senior management was involved in the breaches;
(i) whether the party committing the breach had exhibited contrition;
(j) whether the party committing the breach had taken corrective action;
(k) whether the party committing the breach had cooperated with the enforcement authorities;
(l) the need to ensure compliance with minimum standards by provision of an effective means for investigation and enforcement of employee entitlements; and
(m) the need for specific and general deterrence.
Plaintiffs’ submissions
12 The plaintiffs contended that based on the findings made in the initial reasons, Ekera contravened the following provisions of the FWA:
(a) Section 45, through the contravention of:
(i)clause 14.3 of the Award by failing to pay Goodman his wage entitlements;
(ii)clause 22.2 of the Award by failing to make superannuation contributions on behalf of Goodman.
Each contravention incurs a maximum penalty of 60 penalty units.
(b) Section 44, being a contravention of the National Employment Standards because:
(i)Ekera failed to pay Goodman for his absence on public holidays as prescribed by section 116 of the FWA;
(ii)Ekera failed to pay Goodman for accrued untaken annual leave in accordance with sections 87 and 90(2) of the FWA.
Each contravention incurs a maximum penalty of 60 penalty units.
13 The plaintiffs argued that the court should find that Ekera’s contraventions of the FWA were deliberate, serious, widespread and involved senior management. It was said that the contraventions were deliberate because, as I understood it, the Services Agreement was established in such a way that Ekera treated vendor dentists like Goodman as contractors even though, when performing non-clinical work, they were employees. The Ekera attitude to potential vendors was “if you want to come into the Ekera group, seek your own legal advice but this is the way we do it”.
14 The plaintiffs argued that the deliberateness of the contraventions stemmed from Ekera’s intention to structure its business of aggregating dental practices in such a way that, under the Services Agreement it used, it characterised vendor dentists as contractors. The position was said to have been made worse because, after Goodman first raised the possibility of being an employee in April 2019, over a year after he left the Creative Smiles business, Ekera did not actively engage with him on this issue.
15 The plaintiffs submitted that Ekera’s breach was serious because Ekera failed to pay Goodman any of his entitlements as an employee. This was not a situation where he received some, but not the whole, of his entitlements. Rather, Ekera paid Goodman nothing for the work he performed in his capacity as an employee.
16 In claiming that the contraventions were widespread, the plaintiffs relied upon Ekera’s use of the Services Agreement for the acquisition of about 36 practices where Ekera contracted with approximately 45 practice principals as vendors. The argument was that Ekera engaged in many contraventions of the FWA by using its standard form Services Agreement and not differentiating between clinical dental work performed as a contractor and non-clinical administrative work performed as an employee.
17 The plaintiffs’ point regarding the involvement of senior management was a reference to Coulepis and Jonathon Hassett (“Hassett”). Coulepis is the Executive Chairman of Ekera and has final responsibility for all decisions made by the company. Further, he was involved in the negotiations with Goodman which ultimately led to the acquisition of the Creative Smiles practice.
18 Hassett is on the Ekera Board and has been a director of Ekera since January 2014.[13] Hassett is a solicitor and his firm acts as the solicitor for Ekera. Hassett performed work on the Services Agreement template which Herbert Smith Freehills provided to Ekera for use in acquisitions in around late 2013 or early 2014. Hassett, or someone in his firm, made alterations to the template.
[13] Court book page 386
19 The plaintiffs contended that Ekera displayed no contrition in relation to its contraventions of the FWA. They said that after receiving my initial reasons, Ekera should have taken action to address the unlawful Services Agreement upon which its business relied. The plaintiffs acknowledged that Ekera could not make unilateral changes to the Services Agreement already entered into between Ekera and various vendor dentists. They said that Ekera had to pay vendors for the administrative work which they performed, or somehow delete from the agreement those clauses which imposed upon the ignorant an obligation to do certain things for Ekera.[14]
[14] Transcript page 58, lines 30-1
20 The plaintiffs drew attention to Ekera’s size as a relevant factor in determining the applicable penalty. The written submissions referred to 36 or 37 practices which, at the time of the trial, Ekera operated under the Services Agreement template provided by Herbert Smith Freehills. In his oral evidence in February 2023, Coulepis said that Ekera now operated 50 dental practices. He said that Ekera had an accounts department with Opolion as Chief Financial Officer, Tristan Cordery as Finance Manager, and a payroll manager. In the 2016-17 period, there were about six or seven accounts staff and approximately 500 employees within Ekera. This was said by the plaintiffs to be a significant company which needed to understand its obligations and be held accountable for its contraventions.
21 The plaintiffs also commented that Ekera:
· was owned and controlled by a group of financial institutions.
· consistently denied Goodman was an employee up to and during the trial, and mischaracterised the evidence about the relationship between Ekera and Goodman.
· continued to confuse or mistake the ability of a practice principal to earn money as a dentist under a Services Agreement with Ekera’s obligation to treat the practice principal as an employee when performing administrative work for Ekera.
22 In their written submissions, the plaintiffs contended that it was appropriate to fine Ekera $181,500, which represented 55% of the maximum which could be levied upon it. Orally, the plaintiffs contended that somewhere in the range of 35-55% of the maximum penalty was appropriate. Towards the end of its submissions,[15] the plaintiff argued that having regard to the evidence of Coulepis, the upper end of the scale better reflected the severity of the contravention.
[15] Transcript page 59
Ekera’s Submissions
23 Ekera’s primary submission was that no penalty should be awarded against it because it would not serve the statutory purpose of deterrence. Ekera and Coulepis believed at all relevant times that Goodman was a contractor and not an employee. This belief was based on a number of factors. First, Ekera obtained legal advice from Herbert Smith Freehills, a reputable national law firm, about the operation of its business of acquiring dental practices. Herbert Smith Freehills prepared the template used for the Services Agreement, which established the framework whereby a vendor dentist became an independent contractor under the Services Agreement. Except for the initial acquisition which Ekera made,[16] all subsequent practices were acquired using the Herbert Smith Freehills template.
[16]This acquisition was made before Ekera engaged Herbert Smith Freehills as its solicitors.
24 Secondly, from the time Ekera dealt with Herbert Smith Freehills around late 2013 or early 2014, Ekera also took advice from Liquid HR about the template. Ekera still seeks advice from Liquid HR as and when issues arise. The owners of Ekera are keen to ensure that the company meets its legal obligations and complies with relevant laws, including regulations and industrial awards.
25 Thirdly, clause 13 of the Services Agreement expressly stated that there was no employment relationship between Goodman and Ekera.
26 Fourthly, when negotiating the Acquisition Agreement and Services Agreement, Goodman never raised with Ekera the possibility that he was an employee or he would become an employee of Ekera once the acquisition was completed. Nor did Goodman, during the period after the acquisition until his termination in February 2018, make any suggestion or complain that Ekera was not paying him his proper entitlements as an employee.
27 Ekera argued that the situation was analogous to cases where the contravention was not deliberate but arose from an arguable, but erroneous, construction of an industrial agreement.
Analysis
28 In every penalty hearing, the circumstances in which the contravening conduct occurred are important. There are two matters of particular significance in the present case. First, in negotiating the sale of his practice to Ekera, Goodman made no mention of becoming an employee of Ekera if Ekera proceeded to purchase the Creative Smiles practice. The question of Goodman’s “employment” was never raised in the negotiations. Likewise, after the parties signed the Services Agreement and before its termination, Goodman did not claim to be an employee of Ekera. During the period from July 2016 to February 2018, Goodman never contended that Ekera was not paying him his entitlements as an employee. Given Goodman’s nature and his propensity to complain about any aspect of Ekera’s conduct which he perceived as adversely affecting his financial interests, I have no doubt that, if Goodman believed that he was not getting what he was due, he would have raised the matter with Ekera. In my opinion, it is most likely that Goodman did not raise the possibility of him being an employee of Ekera until April 2019 because, while he worked at Ekera, he never considered that he was one. This was consistent with Ekera’s understanding of the situation and the pre-contractual negotiations.[17]
[17]I acknowledge that given the recent High Court decisions of Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 398 ALR 404 and ZG Operations Australia Pty Ltd v Jamsek (2022) 398 ALR 603 conduct occurring after the entry into the written agreement is not relevant to the interpretation of the agreement, at least where the agreement is not a sham or varied.
29 I accept the evidence of Coulepis that he did not think of Goodman as an employee. As Ekera contended, there were sound reasons for this view. Ekera sought and obtained advice from Herbert Smith Freehills and Liquid HR around late 2013 or early 2014 in relation to the Ekera business. Prior to consulting Herbert Smith Freehills, Ekera had bought a single practice. In general terms, the form this purchase took was that the dentist provided services to Ekera. Herbert Smith Freehills advised a change in the model whereby the dentist vendor became a contractor, and Ekera provided services to the dental practice. Ekera also took advice from Liquid HR, which described itself as a national “expert HR consulting firm” to ensure that Ekera complied with its legal obligations.
30 Ekera is beneficially owned by a group of financial institutions. They invested in a special fund established by the investment banking firm, Archer Capital. Archer Capital controls the Ekera board of directors and has a strict policy of complying with its legal obligations. While the engagement of Herbert Smith Freehills appears to have been limited to its fundamental role in creating Ekera’s new business model, Ekera maintains an ongoing retainer with Liquid HR. There was no suggestion from either Herbert Smith Freehills or Liquid HR that a person in Goodman’s position could be an employee rather than a contractor.
31 This impression was reinforced by clause 13 of the Services Agreement which provides “[t]his Agreement does not create a relationship of employment, trust, agency or partnership between the parties.”
32 The second important aspect of the context is the unique position which Goodman held. Coulepis said that in every other practice Ekera owned, no practice principal did what Goodman did. The other dental practices all had a practice manager to attend to those tasks. Ekera’s experience was that, apart from Goodman, all other practice principals wanted to rid themselves of the non-clinical work.[18] This arrangement also suited Ekera, who preferred the dentists to concentrate their energy on the clinical work with patients.
[18] Transcript page 18
33 In saying this, I note that Ekera maintains some flexibility in its arrangements with dentists who sell their practices to Ekera. Ekera allows the principal to participate in areas where he or she has a special interest. For example, a vendor dentist might wish to maintain some oversight over staff, and interview new dental assistants who seek to join the practice. But generally, the vendors are content to focus on their clinical work and be relieved of the non-clinical administrative work.
34 The combined effect of these factors is that, from the commencement of negotiations until Ekera removed Goodman from his role, none of the parties believed that Ekera employed Goodman. In saying this, I accept that the court, in the case of a wholly written employment contract, is required to consider the totality of the relationship by examining the totality of the legal rights and obligations provided for in the contract.[19] This is determined objectively according to the established principles of contractual interpretation. Accordingly, the parties’ belief is not directly relevant. Indeed, while the parties to a contract are free to agree upon the rights and duties which constitute the relationship, that freedom does not enable them to attach a determinative label to the relationship where that label is inconsistent with the rights and duties in the agreement.[20] The characterisation of the legal relationship is a matter for the court, not the parties.[21] It was for this reason that clause 13 of the Services Agreement[22] was no more than one factor to take into account when examining the issue of whether Goodman was an employee of Ekera.
[19]Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 398 ALR 404 at [43]-[46] per Kiefel CJ, Keane and Edelman JJ, [173] per Gordon J
[20]Ibid at [58]
[21]Ibid at [64]-[66], [79], [126]-[127] and [184]
[22]See paragraph 31 above
35 While preparing this judgment, I was dismayed to realise that my discussion of clause 13 which had been in drafts of my initial reasons, was inadvertently omitted from that judgment. When examining the terms of the Services Agreement, I had included reference to clause 13 as reflecting the parties’ intention, at least in the normal scenario where the dentists at the vendor practice continued to work as contractor dentists for the new owner. Having considered the whole of the agreement I determined the better view was that Goodman was an employee when performing his usual administration and management work for Ekera. Influential terms in the Services Agreement included those addressing topics such as the obligation to work, the hours of work, the provision of holidays, delegation of work, the provision and maintenance of equipment, where the right to exercise direction and control lay, and restraints of trade.
36 It was apparent from the Services Agreement that:
· Goodman would not work full time as a dentist but he would continue to manage the dental practice (recital B and C).
· an employee was defined in clause 1.1 to mean a person employed by Ekera who was engaged in the provision of Support Services at the practice. Goodman was engaged in providing Support Services at the practice.
· Ekera directed Goodman to manage the roster generally and to provide non-clinical services for at least 44 weeks per annum (clause 3.3).
· Clauses 4.1 and 4.2 imposed specific obligations upon Goodman by which Ekera exercised a level of control over him. These were important provisions because Ekera could terminate the Services Agreement under clause 4.2(e) if Goodman refused or failed without reasonable excuse to conduct the practice as required. Further, clause 4.2(a) was written to protect the goodwill of the practice which Ekera now owned.
· Clause 6.3 also required Goodman to do everything reasonably required by Ekera to enable Ekera to take out and maintain keyman insurance over Goodman to protect Ekera’s goodwill in the practice and the value of its management rights.
· The restraints over Goodman in clause 18 were different from the restraints imposed on the contractor dentists working at Creative Smiles. The terms of the restraint on Goodman were broader and more extensive including as to duration and area.
· Unlike the contractor dentists, Goodman did not have the right to employ or engage another dentist to conduct or assist in conducting the practice at Creative Smiles.[23]
· Goodman was obliged to abide by the Ekera Code of Conduct which was in the Ekera employee handbook whereas the contractor dentists were to comply only with the code of conduct in the schedule to their agreements. This was limited to three obligations and was significantly less onerous than the obligations imposed on Goodman.
[23]See for example clause 11.
37 As noted, clause 13 of the Services Agreement was a factor to consider. However, there is well-established authority that if by reason of the terms of an agreement the true relationship between parties is, for example, that of master and servant under a contract of service, the parties cannot alter the truth of the relationship by attaching a different label to it.[24] Where the relationship is ambiguous, the parties can remove the ambiguity by the very agreement which they made.[25] As a matter of principle, the parties’ views about the nature of their relationship cannot really assist a court. A judge is required to characterise the relationship by reference to the rights and duties embodied in the agreement.[26]
[24]Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 at 389; Narich Pty Ltd v Commissioner of Pay-Roll Tax [1983] 2 NSWLR 597 at 601, 606; Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 398 ALR 404 at [64]-[65], [184]
[25]Australian Mutual Provident Society v Chaplin (1978) 18 ALR 385 at 389; Narich Pty Ltd v Commissioner of Pay-Roll Tax [1983] 2 NSWLR 597 at 601, 606
[26]Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd (2022) 398 ALR 404 at [66]
38 There is no doubt that Ekera, having consulted Herbert Smith Freehills, changed its business model so that vendor dentists who continued to work in their practices became contractors with Ekera. This was an intentional decision. However, that does not inevitably mean that they deliberately chose to subvert the FWA by ignoring the vendors’ potential status as employees in some of the work they performed at the practice.
39 Goodman argued that because:
(a) Ekera’s business model was a deliberate choice;
(b) Ekera paid Goodman none of his employee entitlements; and
(c) Ekera argued that he was not an employee
its contraventions of the FWA were “far more serious”,[27] than the contravention in Bartlett v Signostics Limited (in liquidation).[28]
[27] Plaintiffs’ outline of submissions dated 20 February 2023 at [9]
[28] [2019] FCCA 2989
40 In that case, Bartlett was an engineer, and the defendant company, since 2004, was engaged in research and development to design and produce a handheld device which had the ability to detect sounds from various bodily organs to assist with medical diagnosis. Bartlett was the chief operating officer of the company. In 2008, around the time of the global financial crisis, the company and Bartlett agreed to a reduction in his salary from $150,000 per annum to $120,000 per annum between November 2008 and March 2009, and to $100,000 between April 2009 and September 2009. In September 2009, the Board resolved to increase Bartlett’s wage to $150,000 and to also pay him the amount of salary which he had agreed to forego if either of two events occurred:
(a) the company was purchased by another entity or merged with another entity; or
(b) the company conducted a capital raising which attracted $10 million or more.
41 On 25 August 2011, the Board of the company decided to provide for Bartlett to receive two separate incentive payments upon the satisfaction of certain conditions. First, the company was to pay Bartlett $40,000 if it made a contract with a manufacturer for the production and distribution of the company’s product on terms acceptable to the Board. In addition, Bartlett was to receive another $20,000 if the company won regulatory approval in Australia and America for the distribution of its second general product.
42 Bartlett claimed that in December 2012, the company entered into a contract with Konica Minolta for the production and distribution of its product. On this basis, he said he was entitled to the manufacturer incentive payment of $40,000. Bartlett also claimed that in 2013, the company received permission from the Therapeutic Goods Administration to distribute its product in Australia and obtained clearance from the Federal Drug Administration in America to distribute its product there as well. Thus, Bartlett said that he should get the $20,000 incentive payment. The company did not pay Bartlett either of the incentives.
43 Bartlett alleges that in about November 2015, the company entered a merger or acquisition transaction or was involved in a deal which raised $10 million for an entity called Echonous – which in turn acquired all the shares in the defendant company, and the shareholders in the defendant received shares in Echonous in exchange for their shares in the defendant. Bartlett said that, as a result, he should have received the salary foregone of about $40,000.
44 Apart from these claims, Bartlett alleged that the defendant failed to pay him for his accrued annual leave of 431.5 hours which totalled a gross payment of $41,498.25. Instead, the defendant paid him only $7,870.34, which Bartlett alleged was in contravention of the national employment standards. Bartlett further claimed that the refusal to pay the correct amount occurred in circumstances which were aggravated by disagreements between him and officers of the company.
45 On 13 February 2017, Bartlett resigned from his employment and gave six months’ notice. His resignation took effect on 11 August 2017, and his employment with the defendant ceased at that time. Thereafter, there was a dispute between the parties about Bartlett’s annual leave entitlement. While Bartlett claimed over 400 hours, the company said that he had accrued only 81.85 hours of untaken annual leave.
46 The trial judge found that the company, in effect, forced Bartlett’s resignation by trying to make his position untenable. This was done to avoid its obligations to pay him his proper entitlements upon the cessation of his employment.
47 In discovery after the litigation commenced, the company produced a payslip from April 2009 which said that, at that time, Bartlett was owed only 13.2 hours of accrued leave. This was significantly less than the amount which Bartlett claimed. The court found that the document was a fabrication fraudulently created to improperly reduce Bartlett’s leave entitlement. On this basis, apart from ordering the company to make the incentive payments and foregone wages, the court also ordered the company to pay an extra $33,627.91 for untaken leave and a penalty of $110,000.
48 The Bartlett case[29] is plainly distinguishable from the present case. Bartlett was, and always had been, an employee of the defendant. This was never in question. The only issue in the context was the amount of accrued leave he was entitled to. The defendant was aware of its obligations but acted in a knowingly dishonest manner to deliberately reduce Bartlett’s entitlement. Ekera did not concoct documents or knowingly act in a fraudulent or dishonest manner in addressing Goodman’s claims as an employee. In my opinion, it is an extraordinary exaggeration to allege that Ekera’s conduct was a much more serious contravention of the FWA than the breach by Signostics.
[29][2019] FCCA 2989
49 Goodman drew attention to Ekera’s past conduct by being involved in litigation where a dental practice, before Ekera bought it, contravened the FWA. The previous management had underpaid an employee but Ekera owned the business at the time of the subsequent Fair Work investigation and the conduct of the penalty hearing.
50 In that case,[30] Dr Masters, who graduated as a dentist in 1992 and worked for two years as an employee, established his own practice. At first, he was responsible for the paperwork in administering the practice, but he progressively handed that responsibility to his wife. She began, but did not finish, a Diploma of Education and then pursued employment in the hospitality industry. After their marriage, Mrs Masters worked as the receptionist at her husband’s practice. After the birth of her first child in 2004, she continued to do some part-time work in order to learn the ropes of the business but, by 2007, her involvement was limited as she had three boys under the age of four.
[30]Fair Work Ombudsman v NoBrace Centre Pty Ltd [2018] FCCA 378
51 By 2002, the practice, which had begun without any patients, grew to 15 employees. It continued to expand and, by 2008, there were approximately 40 employees. Broadly speaking, Dr Masters was responsible for the clinical work and Mrs Masters, together with the bookkeeper, Ms Wong, was in charge of the employees and their issues.
52 In 2004, Dr Masters became interested in orthodontic work and decided on a new business plan which required the practice to advertise on television, radio and in the print media. He incorporated NoBrace Centre Pty Ltd (“NoBrace”) as a shelf company, and Mrs Masters became the sole director and secretary. She had no management experience before becoming a director of the company.
53 By 2008, the practice had expanded significantly and the administrative systems had slipped out of control.[31] Dr Masters left his wife and bookkeeper to cope as best they could. Ms Wong worked 20-90 hours per month on the accounts of NoBrace. She was responsible for the payroll records, employees’ pay and entitlements, and the PAYG tax.[32] Ms Wong set up systems to ensure staff recorded their time accurately and were paid accurately.
[31]Ibid at [111]
[32]Ibid at [116]
54 Ms Lee arrived in Australia in October 2008 on a working holiday visa. From December 2008 until March 2011, she had a student visa and obtained a Diploma of Dental Technology.[33] She began work at the practice in June 2010 and was paid $12 per hour. In September 2010, Dr Masters agreed to support Ms Lee’s application for a section 457 visa because she wanted to continue living in Australia. Mrs Masters consulted a lawyer about what was required to obtain the visa for Ms Lee. Inter alia, Ms Lee and NoBrace had to enter a written agreement whereby the company offered her a job at a salary of $50,000 per annum. Both parties knew that this was a sham at the time of entering the contract because Ms Lee’s salary was considerably less.
[33]Ibid at [128]
55 During her employment, NoBrace failed to pay Ms Lee the minimum weekly wages, overtime penalties, weekend loading, public holiday penalty rates and annual leave loading.
56 The Masters’ marriage collapsed around 2012, and Mrs Masters resigned as a director and secretary of the company in October that year. Her husband took over as director and secretary.
57 The Federal Circuit Court ordered that both Dr Masters and Mrs Masters pay the money owed to Ms Lee together with penalties, albeit he was ordered to pay more than she was.[34]
[34]See Fair Work Ombudsman v NoBrace Centre Pty Ltd (in liquidation) (ACN 121 556 447) & Ors (No 2) [2019] FCCA 2970
58 I consider that because, on any view, Ekera did not own and was not managing the business at the time of the FWA contraventions, the NoBrace case is not directly relevant to the present case. In my view, the details of the contravention in NoBrace do not reflect in any way upon Ekera or affect the question of penalty.
59 I have a similar attitude to the question of contrition. If a party is contrite, the party is regretful and remorseful for its wrongdoing. It wants to atone for the wrongdoing. Contrition usually entails an awareness of behaving wrongly. In the present context, it is difficult to be genuinely contrite if a party in the position of Ekera had no awareness at the relevant time that it contravened Commonwealth legislation. On the basis of legal and/or HR advice received, and its interactions with Goodman over a number of years, Ekera had reasonable grounds for considering that it had not acted unlawfully. At this stage, the only basis for saying that Goodman’s non-clinical work was performed in the capacity of an employee is my judgment handed down in December 2022. Ekera has accepted that ruling insofar as it has agreed to the payments sought by Goodman as his employee entitlements notwithstanding that Ekera initially had a different view on some points affecting quantum.
60 Ekera’s position was that there should be no penalty imposed for the contraventions of the FWA. Ekera relied upon some of the factual matters alluded to earlier, such as the legal advice received and clause 13 of the Services Agreement, together with various authorities including Australian Building and Construction Commissioner v Pattinson,[35] PIA Mortgage Services Pty Ltd v King,[36] Australian Rail, Tram and Bus Industry Union v Qube Logistics (Rail) Pty Ltd,[37] and Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia v Telstra Corporation Limited.[38]
[35] [2022] HCA 13
[36] [2020] 292 IR 317
[37] [2020] FCA 1520
[38] [2007] FCA 1607
61 In Pattinson,[39] a sub-contractor was engaged to install solar panels at a building site. Two of the sub-contractor’s employees attended at the site to perform the work. They had first to undergo an induction conducted by Pattinson. He was both an employee of the head contractor and an official of the union. Pattinson asked if the men belonged to the union and had “tickets” to work on the site. This alluded to the union’s “no ticket, no start” policy under which all workers were to be union members to work on sites where the Construction, Forestry, Maritime, Mining and Energy Union (“the CFMMEU”) had a presence. Such a policy was unlawful and the Australian Building and Construction Commissioner (“the ABCC”) brought civil penalty proceedings against Pattinson and the union.
[39][2022] HCA 13
62 The plurality recognised that civil penalties are imposed primarily, if not solely, for the purpose of deterrence. It said that section 546 of the FWA requires the court to ensure that the penalty imposed is proportionate – that is, it strikes a reasonable balance between deterrence and oppressive severity.[40] The overall circumstances are important. It said that a modest penalty, if any, might be appropriate if the contravention occurred due to inadvertence rather than the pursuit of a strategy of deliberate recalcitrance whereby the contravener chooses to pay a penalty rather than obey the law.[41] A modest penalty might also be appropriate where the circumstances in which a contravention occurred are unlikely to arise in the future.[42] The court’s task in determining a penalty is to act fairly and reasonably to protect the public interest by deterring future contraventions of the FWA.[43]
[40]Ibid at [41] and [46]
[41]Ibid at [46] and [50]
[42]Ibid at [47]
[43]Ibid at [48]
63 In the Qube[44] case, the union contended that the employer, Qube, had underpaid 31 current and former employees between April 2014 and March 2016. The Railways Enterprise Agreement applied to those employees from 17 June 2011. This agreement ceased to apply from 25 March 2016, when the Qube Enterprise Agreement came into effect. The negotiations for the latter enterprise agreement began in July 2013 and concluded three years later. The union argued that under the terms of the Railways Enterprise Agreement, in the absence of renegotiation, the last pay increase was to be the agreed annual increase for each anniversary date thereafter. Qube did not pay any increased wages on and after the various anniversary dates. Qube argued that the concept of “renegotiation” only required that the negotiations between the parties had commenced.
[44][2020] FCA 1520
64 The court determined that the union’s construction of the Railways Enterprise Agreement constituted the better view of the agreement. However, the court said that it was not an easy question to resolve and there was no evidence that Qube lacked a genuine and bona fide belief that its interpretation of the agreement was correct. As there was no question on the facts about requiring specific or general deterrence, the court imposed no penalty. The contravention was said to be “not deliberate but resulted from an arguable but erroneous misconstruction of an industrial agreement”.[45]
[45]Ibid at [50]
65 The Telstra case[46] concerned the Telstra Enterprise Agreement 2005-2008 between Telstra Corporation Limited and two unions, the Communications, Electrical, Electronic, Energy, Information, Postal, Plumbing and Allied Services Union of Australia (“the CEPU”) and the Community and Public Sector Union (“the CPSU”). The main issue was whether Telstra breached the 2005 Enterprise Agreement by failing to pay an employee, William McDonald, who was a member of the CEPU, his previous rate of salary after he was redeployed to, and later accepted a redundancy package from, a lower paying position. The answer to the issue turned on the construction of a clause in the 2005 Enterprise Agreement and, in particular, whether the enterprise agreement permitted the application of a clause in the Telstra Redundancy Agreement 2002 to McDonald.
[46][2007] FCA 1607
66 Justice Gordon concluded that Telstra had breached the 2005 Enterprise Agreement by failing to pay McDonald his previous rate of salary after he was redeployed to, and later accepted a redundancy package from, a lower paying position. This conclusion entailed findings that Telstra committed breaches of the 2005 Enterprise Agreement and the Telstra Redundancy Agreement. The CEPU sought consequential relief for these breaches, including penalties and declaratory relief.
67 Her Honour found that:
· the breaches arose from a disputed and disputable construction of the 2005 Enterprise Agreement and the Telstra Redundancy Agreement.
· neither breach was wilful or deliberate.
· the purpose of increasing the penalty for breaches of industrial instruments was to deter and discourage unlawful industrial conduct.
· where the unlawful conduct occurred through an arguable but erroneous construction of a term in an industrial agreement and the breach could not be characterised as demonstrating a flagrant or wilful disregard for the agreement, imposing a penalty would not serve to further the purpose of the legislation.
· in the circumstances, neither general nor specific deterrence was a significant factor in deciding whether to impose a penalty.
· the worker in question had been fully compensated for the loss suffered.
Her Honour decided that her discretion was best exercised by refusing to impose a penalty on Telstra.
68 In PIA Mortgage Services Pty Ltd v King,[47] the appellant company operated a mortgage broking business which formed part of, or was aligned with, a group known as the “Property Investors Alliance” (“the PIA group”). The second appellant, Justin Wang, was the sole director and shareholder of the company. The respondent, Leighton King, was the former CEO of the appellant.
[47] [2020] 292 IR 317
69 In the Federal Circuit Court, King alleged, and the trial judge agreed, that:
· the company had terminated King’s employment in contravention of section 340(1) of the FWA.
· Wang was an accessory to that contravention.
· by having failed to pay King at the point of termination, an equivalent amount to the value of untaken annual leave entitlements that he had accrued over the course of his employment, the appellant had contravened section 90(2) of the FWA.
70 The trial judge awarded King statutory compensation of $100,000 but dismissed the other damages claims for breach of contract and misleading and deceptive conduct.
71 King sought an award of pecuniary penalties against the appellants. The court did not order any penalty for the breach of section 340 of the FWA, but did impose a penalty of $43,200 for the contravention of section 90(2).
72 The appeal to the Full Court of the Federal Court argued that King’s dismissal did not contravene section 340(1) of the FWA, King did not suffer any loss from the alleged contravention (if there were one), and the penalty imposed was excessive.
73 King cross-appealed alleging that his compensation was inadequate, he ought to have received damages for the contractual breach, and there should have been a penalty for the contravention of section 340 of the FWA.
74 The appeal court held by majority that:
· the penalty for the contravention of section 90(2) of the FWA should be reduced from $43,200 to $8,100.
· the cross-appeal regarding section 340 of the FWA should be upheld and a penalty of $8,100 awarded against the appellant.
· the other grounds of appeal and cross-appeal should be dismissed.
75 The majority noted[48] that there were authorities which held that specific and general deterrence did not necessarily require the imposition of a pecuniary penalty where the contravention was not deliberate but resulted from an arguable but erroneous construction of an industrial agreement.
[48]Ibid at [55]
76 In the present case, I find that Ekera’s failure to pay Goodman employee entitlements was not deliberate in the sense that it was part of an industrial strategy whereby Ekera preferred to incur a penalty rather than obey the law. I find that in negotiations before the sale of the Creative Smiles business to Ekera, and throughout Goodman’s time working in the business between July 2016 and February 2018, neither Ekera nor Goodman thought of Goodman as an employee.
77 In my opinion, this factor explains why:
(a) Ekera failed to make payments to Goodman as if he were an employee for the administrative work he performed;
(b) Ekera contested Goodman’s allegation about being an employee which he raised only after he had left the Creative Smiles business.
78 I accept that Ekera, as a company, commits resources to ensuring that it pays staff in accordance with applicable laws and regulations and is keen not to infringe the law. It has an ongoing relationship with Liquid HR for this purpose. On the evidence, this was the first occasion upon which Ekera, as a business owner, had contravened the provisions of the FWA. There was no evidence of any history or pattern of contravening behaviour. Having regard to Ekera’s relationship with Liquid HR, its commitment to meeting its legal obligations and the absence of prior contraventions, I do not consider that there is a cultural problem at board or management level within Ekera whereby non-compliance with the law is encouraged.
79 Goodman implied that, because the Services Agreement was widely used, Ekera’s misconduct or contraventions of the FWA were also widespread and therefore, should attract a greater penalty. I reject that submission.
80 First, the evidence was clear that Goodman was unique in that while other vendor dentists continued principally to perform clinical work, he performed non-clinical administrative work to the virtual exclusion of clinical patient-focused work. No other dentist within the Ekera group operated the same way.
81 Secondly, there was no specific detailed evidence from which I could draw any safe conclusion about non-clinical work performed by other dentists in the Ekera group. The evidence on this topic was vague. It went no further than showing that Ekera was amenable to dentists continuing to engage in some management or administrative tasks where they were keen to do so.
82 However, I do not consider that Ekera would be obliged to treat as an employee any vendor dentist who performed some minor non-clinical work incidentally to his or her clinical work. This would create an unjustified level of complexity in the relationship. Moreover, it is unnecessary because the usual relationship between vendor dentists and Ekera is radically different from that which obtained between Goodman and Ekera. Goodman focused on non-clinical administrative tasks to the virtual exclusion of clinical work whereas all the other vendor dentists focused on clinical work and only some of them performed some non-clinical tasks.
83 In the circumstances of this case and having regard to the applicable legal principles and authorities, I do not consider that the statutory purpose of penalties under the FWA would be advanced by penalising Ekera in this way. Central to my opinion are two factors. First, the contraventions arose from inadvertence rather than a strategy of deliberate recalcitrance. For the reasons I have discussed Ekera had a sound basis for considering that Goodman was a contractor and not an employee. In Trade Practices Commission v Stihl Chain Saws (Aust) Pty Ltd[49] Smithers J said that a civil penalty “should constitute a real punishment proportionate to the deliberation with which the defendant contravened the provisions of the Act.”[50] Here, there was a complete absence of deliberation.
[49](1978) ATPR ¶40-091 at 17,896
[50]French J quoted this passage with approval in Trade Practices Commission v CSR Ltd (1991) ATPR ¶41-076
84 Secondly, the contraventions are highly unlikely to be repeated in the future. No other dentist in the Ekera group has embraced an administrative/management role to the virtual exclusion of clinical work as Goodman did. All the other dentists are still focusing on clinical work and have practice managers to assume responsibility for the running of the practice. I expect the experience of this case will dissuade Ekera from seeking to buy another practice where the vendor dentist seeks to perform almost exclusively non-clinical work. Alternatively, if Ekera did contemplate such an acquisition, it would know that this particular dentist should be treated as an employee rather than a contractor.
85 Apart from these matters, I have also taken into account other factors including:
· how Ekera operates its business and its attitude to compliance with its legal obligations;
· the absence of similar previous conduct by Ekera;
· Ekera reducing the scope of the conflict with Goodman by agreeing at trial to pay him the amount he sought by way of employee entitlements.
The facts of this case are such that a penalty is not required to deter future contraventions of a like kind by Ekera or other entities.
86 If I am wrong about this aspect of the case and ought to have imposed a penalty upon Ekera, I regard the penalty sought by Goodman as excessive. The question of whether a person is an employee or a contractor has often been unclear and complicated. The history of this area of law shows that it has been a highly contestable question. So much is evident from the discussion and the cases cited by the High Court in Construction, Forestry, Maritime, Mining and Energy Union v Personnel Contracting Pty Ltd[51] and ZG Operations Australia Pty Ltd v Jamsek.[52] The High Court has sought to revise and set out the guiding principles, at least where the relationship is governed solely by a written agreement which is not a sham or the subject of variation.
[51](2022) 398 ALR 404
[52](2022) 398 ALR 603
87 Goodman drew attention to the case of Fair Work Ombudsman v Ava Travel Pty Ltd & Ors[53] where the court imposed a penalty of approximately $164,000 on the company even though it fully cooperated in the Fair Work investigation and took corrective action in a timely way. That case concerned tourist coach drivers one of whom was a full-time employee and the other a casual employee. Each was paid a flat-rate of $20.59 per hour. If the drivers had been paid pursuant to the Passenger Vehicle Transportation Award 2010, as they should have been, each would have been entitled to other loadings, penalty rates, minimum engagement pay and waiting time pay. In September 2014, the company sent the employees a text message advising that they would be moving soon to independent contractor status rather than remain as employees. Their work duties did not change. The only practical difference was that instead of submitting time sheets or job records, they submitted invoices for payment.
[53][2018] FCCA 3627
88 Ultimately, the company admitted about 27 contraventions of the FWA including underpayments of $43,477, sham contracting arrangements and record keeping and payslip contraventions.
89 The Ava[54] case is plainly distinguishable from the present case. Ekera did not seek to wrongfully exploit low skilled persons with limited English and underpay them amounts which were significant relative to their modest incomes. Further, there was no equivalent to the employee, Mr Hong, who during his five years at the company was given no personal or annual leave. He took no holidays and worked all the time except when he was sick – and he was not paid sick leave.
[54][2018] FCCA 3627
90 Due to the above matters and given the submissions which each party advanced about Goodman’s status as a worker, I consider that Ekera did not act maliciously or unreasonably in adopting the view that Goodman was a contractor. My only, albeit slight, reservation about Ekera’s conduct was its failure to appreciate that Goodman might have created an issue because his situation was different from that of other vendor dentists.[55]
[55]At the time Ekera bought Creative Smiles it had purchased about 13 other practices.
91 In circumstances where:
· the contraventions were not wilful and specifically intended;
· Ekera had reasonable grounds for considering Goodman was a contractor;
· Ekera is not likely to contravene the FWA again in the same way;
· Ekera has no history of prior contraventions of the FWA; and
· Ekera has agreed to repay Goodman the amounts owing to him as an employee together with interest; and
· the genesis of the contraventions was the same in each case – Ekera did not believe or appreciate that Goodman was an employee
I regard $12,500 as a sufficient penalty. Though Goodman submitted that a penalty of $181,500, being about 55% of the maximum payable was appropriate, I consider that figure grossly disproportionate and inconsistent with the legislative purpose of the penalty as most recently set out in Pattinson.[56]
[56][2022] HCA 13
Conclusion
92 For the reasons set out, I find that Ekera should not suffer any penalty under the FWA.
93 I direct the parties to confer about the form of final order and costs in an effort to agree upon orders giving effect to this judgment. If they cannot agree, then by 4.00pm on 22 May 2023, each party is to file with my chambers and serve a written submission and any supporting affidavit material setting out the orders sought and the reasons therefor. The submissions are not to exceed 10 A4 pages, a minimum 12 point typeface, and 40mm margins on either side of the page. By 4.00pm on 26 May 2023, each party may file a reply submission limited to no more than three A4 pages. Unless the parties specifically request an oral hearing or I consider it appropriate after reading the submissions, I propose to decide the question of costs on the papers.
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