Darlaston v Risetop Construction Pty Ltd
[2011] FMCA 220
•5 April 2011
FEDERAL MAGISTRATES COURT OF AUSTRALIA
| DARLASTON v RISETOP CONSTRUCTION PTY LTD & ORS | [2011] FMCA 220 |
| INDUSTRIAL LAW – Civil penalty proceedings – where a contravention of the Workplace Relations Act 1996 (Cth) was admitted by each respondent – factors for consideration. |
| Workplace Relations Act 1996 (Cth), ss.728, 900, 904 |
| Australian Opthalmic Supplies Pty Ltd v McAlary-Smith (2008) 165 FCR 560; [2008] FCAFC 8 Construction, Forestry, Mining & Energy Union v Coal & Allied Operations Pty Ltd (No 2) (1999) 94 IR 231; [1999] FCA 1714 CPSU, The Community and Public Sector Union v Telstra Corporation Limited (2001) 108 IR 228; [2001] FCA 1364 Fair Work Ombudsman v Land Choice Pty Ltd & Anor [2009] FMCA 1255 Kelly v Fitzpatrick (2007) 166 IR 14; [2007] FCA 1080 Mason v Harrington Corporation Pty Ltd [2007] FMCA 7 Mornington Inn Pty Ltd v Jordan (2008) 168 FCR 383; [2008] FCAFC 70 Ponzio v B & P Caelli Constructions Pty Ltd and Others (2007) 158 FCR 543; [2007] FCAFC 65 Sharpe v Dogma Enterprises Pty Ltd [2007] FCA 1550 |
| Applicant: | PETER DARLASTON |
| First Respondent: | RISETOP CONSTRUCTION PTY LTD (ACN 099 767 512) |
| Second Respondent | MIKA RUMMUKAINEN |
| Third Respondent | RISTO RUMMUKAINEN |
| File Number: | SYG1889 of 2010 |
| Judgment of: | Barnes FM |
| Hearing date: | 7 February 2011 |
| Delivered at: | Sydney |
| Delivered on: | 5 April 2011 |
REPRESENTATION
| Counsel for the Applicant: | Mr R Reitano |
| Solicitors for the Applicant: | Australian Government Solicitor |
| Solicitors for the Respondents: | K P O’Donnell & Associates |
DECLARATIONS
The first respondent contravened s.900(1) of the Workplace Relations Act 1996 (Cth) in relation to the employment of Peter Kosonen, Timothy Kamppi, Mauno Ylisalo, Barry McAuliffe and Wayne Minnis in that it represented that the contracts of employment under which they performed work were contracts for services.
By operation of s.728(1) of the Workplace Relations Act the second respondent contravened s.900(1) of the Workplace Relations Act in that he was involved in the first respondent’s contravention in relation to the employment of Peter Kosonen, Timothy Kamppi, Mauno Ylisalo, Barry McAuliffe and Wayne Minnis.
By operation of s.728(1) of the Workplace Relations Act the third respondent contravened s.900(1) of the Workplace Relations Act in that he was involved in the first respondent’s contravention in relation to the employment of Peter Kosonen, Timothy Kamppi, Mauno Ylisalo, Barry McAuliffe and Wayne Minnis.
ORDERS
Pursuant to s.904(1) of the Workplace Relations Act a penalty of $10,000 be imposed on the first respondent in respect of the contravention of s.900(1) of the Act.
Pursuant to s.904(1) of the Workplace Relations Act a penalty of $2,000 be imposed on the second respondent in respect of the contravention of s.900(1) of the Act.
Pursuant to s.904(1) of the Workplace Relations Act a penalty of $2,000 be imposed on the third respondent in respect of the contravention of s.900(1) of the Act.
The penalties be paid to the Commonwealth of Australia.
| FEDERAL MAGISTRATES COURT OF AUSTRALIA AT SYDNEY |
SYG1889 of 2010
| PETER DARLASTON |
Applicant
And
| RISETOP CONSTRUCTION PTY LTD (ACN 099 767 512) |
First Respondent
| MIKA RUMMUKAINEN |
Second Respondent
| RISTO RUMMUKAINEN |
Third Respondent
REASONS FOR JUDGMENT
These proceedings
On 26 August 2010 the applicant commenced proceedings in this court under the Workplace Relations Act 1996 (Cth) (the WRA) seeking declarations that the first respondent contravened s.900(1) of the WRA and that by operation of s.728(1) of the WRA the second and third respondents contravened s.900(1) of the WRA and that penalties be imposed in respect of such contraventions. An amended application was filed on 15 October 2010.
In a Statement of Agreed Facts tendered in court, each of the respondents admitted a breach of s.900 of the WRA, which relates to misrepresenting an employment relationship as an independent contracting arrangement. The parties made submissions on penalties to be imposed. Pecuniary penalties are sought in relation to each of the respondents under s.904 of the Act which provides for a maximum penalty of 60 penalty units for an individual ($6,600) and 300 penalty units for a body corporate ($33,000).
The circumstances of the contraventions are set out in the Statement of Agreed Facts. There is nothing in the material before the court to suggest that it should not rely on that Statement. The respondents also relied on an affidavit of Mika Rummukainen (the second respondent) sworn 25 January 2011.
The WRA was in force at the time of the conduct in question. Section 900(1) of the WRA is as follows:
(1) A person contravenes this subsection if:
(a) the person is a party to a contract with an individual; and
(b) the person makes a representation to the individual that the contract is a contract for services under which the individual performs work, or is to perform work, for the person as an independent contractor; and
(c) the contract, as in force at the time of the representation, is a contract of employment under which the person is the employer of the individual, rather than a contract for services under which the individual performs work as an independent contractor.
There is a defence in s.900(2) that “if the person proves that, at the time the person made the representation concerned, the person did not know that, and was not reckless as to whether, the contract was a contract of employment rather than a contract for services”. The respondents have each admitted contraventions and do not seek to rely on this provision.
The first respondent, Risetop Construction Pty Ltd (Risetop), is a company which since March 2002 has conducted business in the Australian Capital Territory in the building and construction industry as a formwork company undertaking work associated with providing formwork at building and construction sites. Both the second respondent, Mika Rummukainen, and the third respondent, Risto Rummukainen, were at all material times directors or agents of Risetop acting within the scope of actual or apparent authority. The conduct that is admitted to constitute a contravention of s.900(1) of the WRA took place in June 2009.
As discussed below, the Statement of Agreed Facts addressed the employment situation of five named persons (Messrs Kosonen, Kampii, Ylisalo, McAuliffe and Minnis) who, it is agreed, were at all material times employees of Risetop.
It is convenient to set out what is agreed about the events of June 2009 in the Statement of Agreed Facts:
In June 2009 the Second and Third Respondents called a meeting of Risetop workers at the Risetop office in Belconnen, ACT. Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis attended this meeting. Also present at the meeting were the First Respondent’s accountant Ross Beames and insurance broker Dean Brown.
At this meeting Risto spoke to Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis and represented to each of them that that (sic) they were considered to be independent contractors and Risetop wanted to restructure its business so that they would be regarded ‘more openly as independent contractors’. Those present were told they would need to set up companies and that they could ‘claim a lot more business expenses from your tax by using a company’. Those present were provided with a document telling them how to form a company. Those present were told Risetop intended to stop paying superannuation and long service leave contributions. They were also told they would need to arrange their own workers compensation insurance for the future. In return Risetop would review their pay and give each of them a pay increase to meet those expenses. Only one person took up this suggestion to form a corporation although each of them received the pay increase.
Following the meeting a letter signed by Mika [Rummukainen] and dated 17 June 2009 was sent to each of Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis. The First Respondent by that letter represented to each of Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis that they were engaged by Risetop on a contract for services. The letters to each of the people concerned were relevantly in similar terms. The letter to Kosonen, for example, said:
‘In order to restructure everyone to be viewed more openly as sub-contractors we mentioned that you would receive a pay rise to help cover some of the costs involved. We are happy to say that your pay has gone from $35 per hour to $37 per hour to commence when we receive your Workers Compensation Certificate of Currency’.
The letter was over the hand of the Second Respondent.
Shortly afterwards Risetop increased the payments to cover superannuation and long service leave and Risetop ceased making separate superannuation and long service leave contributions in relation to each of the workers referred to…
In fact and in law and contrary to the representations made at the meeting and in the letter, the contracts in force as at 17 June 2009 between Risetop and each of Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis were contracts of employment under which Risetop was the employer of each of them. The letter was a misrepresentation to each of Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis.
The conduct of the Second and Third Respondents was within the scope of their actual or apparent authority.
Each of the respondents has admitted a breach of s.900(1) of the WRA, the first respondent directly and the second and third respondents by reason of their involvement in the contravention since s.728 of the WRA provides that a person “involved” in a contravention of a civil remedy provision is treated as having contravened that provision. A person is so involved:
…if, and only if, the person:
(a) has aided, abetted, counselled or procured the contravention; or
(b) has induced the contravention, whether by threats or promises or otherwise; or
(c) has been in any way, by act or omission, directly or indirectly, knowingly concerned in or a party to the contravention; or
(d) has conspired with others to effect the contravention.
The respondents have admitted that the contracts described above that were in force as at June 2009 were contracts of employment under which Risetop was the employer of each of the named employees. Such admission was properly made having regard to the agreement about the totality of the relationship between each of the workers and Risetop. The nature and extent of the conduct relevant to the breach is discussed further below.
Relevant principles
The principles applicable to the determination of penalties for breach of the civil penalty provisions of the WRA have been discussed in a number of cases. Mowbray FM conveniently summarised such principles in Mason v Harrington Corporation Pty Ltd [2007] FMCA 7 (and see Kelly v Fitzpatrick (2007) 166 IR 14; [2007] FCA 1080 per Tracey J and Construction, Forestry, Mining and Energy Union v Coal & Allied Operations Pty Ltd (No 2) (1999) 94 IR 231; [1999] FCA 1714 per Branson J).
I have borne in mind that any list of relevant matters is not exhaustive and does not fetter the court’s discretion as to the matters to be considered in setting a penalty (see Sharpe v Dogma Enterprises Pty Ltd [2007] FCA 1550 at [11]). The weight to be given to particular factors may vary from case to case. Each factor needs to be weighed in the “intuitive synthesis” involved in the sentencing process (see Australian Opthalmic Supplies Pty Ltd v McAlary-Smith (2008) 165 FCR 560; [2008] FCAFC 8 and Mornington Inn Pty Ltd v Jordan (2008) 168 FCR 383; [2008] FCAFC 70 at [60] – [63] and cases cited therein).
The parties did not differ significantly on what factors may be relevant to the determination of the appropriate penalties in this case, although they differed in relation to the weight to be given to particular factors in the circumstances of this case. I have considered each of the matters raised by the parties and all the circumstances of the case.
The nature and extent of the conduct relevant to the breach and the circumstances of the breach
It is convenient to consider these matters together. The employment situation of each of the five named employees is the subject of the Statement of Agreed Facts as are the circumstances of the conduct constituting the breach consisting of representations made in June 2009.
As set out above, Risetop, which was registered as a company on 1 March 2002, has since that time conducted business in the building and construction industry as a formwork company undertaking work associated with providing formwork at building and construction sites throughout the Australian Capital Territory. Each of the second and third respondents was at all material times a director of Risetop. Each of Messrs Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis was at all material times an employee of Risetop.
Mr Kosonen commenced work for Risetop in June 2002 in response to an advertisement indicating that Risetop was seeking to engage formworkers. At an interview he was told by Mr Risto Rummukainen that he was required to provide an Australian Business Number (ABN) (and that he could obtain one from the Australian Taxation Office) and that he would have to obtain a tax invoice book and submit invoices fortnightly to Risetop. Mr Kosonen obtained an ABN but “was not then or indeed at any time thereafter registered for the purpose of collecting goods and services taxation”. He commenced work for Risetop as a formworker.
Mr Kosonen is 63 years of age and an experienced formworker who needs little supervision. While performing work he was told by Mr McAuliffe, a Risetop project coordinator, where and when he was required to perform work. If he finished work before his normal finishing time he would call Mr McAuliffe or Mr Risto Rummukainen and would be told where he was to perform his next piece of work.
Mr Kosonen did not receive sick pay on days when he was unable to attend work because of illness or injury. He was unaware as to whether he was permitted to engage someone else to perform work in his place or not. He always considered himself a full-time employee. He worked approximately 40 hours a week on the basis of eight hours per day for five days each week and was paid a fixed hourly rate which increased twice between 2002 and July 2009. Risetop made superannuation contributions on his behalf. Mr Kosonen was registered for and accrued portable construction industry long service leave benefits while working for Risetop and Risetop took out workers’ compensation insurance in relation to him.
It is agreed that Mr Kosonen was directed by Risetop, through its managers or directors, as to where to work and what work was required to be undertaken. Risetop provided some tools and Mr Kosonen provided others. Mr Kosonen wore a uniform and protective clothing marked “Risetop” that was supplied by Risetop. He had his work checked by managers or directors of Risetop. He made himself available to work exclusively for Risetop and at its direction. He submitted invoices to Risetop on Risetop stationery that were requested by Risetop for the purpose of allowing Risetop to cost its jobs. Mr Kosonen “did not conduct a business on his own behalf”. He performed formwork duties when working for Risetop.
Mr Kamppi also started working for Risetop some time in 2002 after Mr Risto Rummukainen told him he was looking for workers and he would like Mr Kamppi to work for Risetop. They agreed on an hourly rate. Mr Rummukainen told Mr Kamppi that he would be paid every fortnight and would have to issue an invoice fortnightly and provide an ABN number to Risetop. Mr Kamppi was assigned jobs by Mr Rummukainen or Mr McAuliffe and was told where he was required to work from time to time. He generally worked from 7.00 am to 3.30 pm each day. On occasion he was asked by Mr McAuliffe to stay back to continue work. He was not paid overtime rates for extra work. He “was not at any time sick and unable to attend work but he did not consider he would be paid sick pay” if that occurred.
Like Mr Kosonen, Mr Kamppi worked approximately 40 hours a week and was paid an hourly rate for all work he performed for Risetop, which was increased over time. He received the benefit of superannuation contributions made on his behalf by Risetop and was registered for portable construction industry long service leave entitlements by Risetop. He accrued these entitlements during the time he worked for Risetop. Risetop also took out workers’ compensation insurance in respect of the work performed by Mr Kamppi.
Mr Kamppi submitted fortnightly invoices to Risetop. He was “directed by Risetop through its managers or directors as to where to work and what work was required”. Some of his tools were provided by Risetop as were a uniform and protective clothing which bore the word “Risetop”. He had his work checked by his managers or directors of Risetop. He “did not conduct a business on his behalf and was doing formwork duties at all times when working for Risetop”.
In early February 2009, Mr Ylisalo rang Mr McAuliffe (a Risetop supervisor) and said he was looking for work. He spoke to and then had a meeting with Mr Risto Rummukainen in March 2009. Mr Rummukainen offered Mr Ylisalo work with Risetop and told him he could start work the next day. He also asked Mr Ylisalo if he had an ABN. Mr Ylisalo said words to the effect of, “No not yet. I’ve been working on wages but I can get one.” He was given a form to fill out requiring details about union membership and an ABN number. There was a discussion of the rate of pay and the fact that Mr Ylisalo would be required to submit an invoice every two weeks to be paid. Mr Ylisalo obtained an ABN number and provided it to Risetop. He understood that “if he was sick he would not be paid and he was unaware whether he would be permitted to bring someone to help fill in for him to perform the work”.
Mr Ylisalo was also paid a fixed hourly rate working approximately 40 hours a week performing formwork duties. He submitted fortnightly invoices to Risetop. Risetop made superannuation contributions on his behalf and he was registered for portable construction industry long service leave entitlements and accrued such entitlements during the time he worked for Risetop. Risetop had workers’ compensation insurance in respect of Mr Ylisalo. Mr Ylisalo was directed by Risetop through its managers or directors as to where to work and what work was required to be undertaken. Some of his tools were provided, as were a uniform and protective clothing bearing the word “Risetop”. He had his work checked by his managers or by directors of Risetop. He received directions about work from a director and from Mr McAuliffe. Mr Ylisalo “did not conduct a business on his own behalf” and was “working for Risetop at all times when…doing formwork duties”. He “worked exclusively for Risetop”.
Mr McAuliffe commenced working for Risetop in February 2007 and was told that he would be required to submit invoices each fortnight. He was not registered for GST when he started working for Risetop, but since October 2009 has been registered for GST. He remits it to the Australian Taxation Office. He was paid an hourly rate and worked approximately 40 hours a week. Superannuation contributions were made on his behalf by Risetop. Risetop registered him for portable construction industry long service leave entitlements, which he accrued, and arranged and paid workers’ compensation insurance for him. Mr McAuliffe was directed by Risetop through its managers or directors as to where to work and what work was required to be undertaken. Some of his tools and his uniform and protective clothing bearing the word “Risetop” were provided by Risetop. He “did not conduct a business on his own behalf and was relevantly working for Risetop at all times when he was doing formwork duties”. He “worked solely for Risetop” and “did not operate a business on his own”. He was granted a Subclass 457 visa in October 2007. Risetop sponsored this application. He was promoted to a supervisory position on or about 1 September 2008 and after a three-week trial, his hourly rate of pay was increased and he was given use of a company car and mobile phone paid for by Risetop.
Towards the end of May 2009, Mr Mika Rummukainen told Mr McAuliffe that Risetop were going to try to implement some changes aimed at reducing costs, particularly in relation to workers’ compensation and that on the advice of an accountant this could be done if each of the “boys” formed their own “Pty Ltd companies”. Mr Mika Rummukainen also told Mr McAuliffe that Risetop would help the “boys” with the setup costs of forming companies and would increase their pay if they obtained workers’ compensation for themselves as “working directors”.
Mr Minnis started employment with Risetop prior to June 2009. He was paid an hourly rate. He worked approximately 40 hours a week for Risetop and worked solely for Risetop. He was directed by Risetop through its managers or directors as to where to work and what work to undertake.
Before July 2009, Mr Minnis was registered for GST which he collected and paid to the Australian Taxation Office. He also provided his ABN number to Risetop and was provided with tools and a vehicle for the work he was required to do. Risetop paid for vehicle registration and maintenance. Mr Minnis generally worked from 7.00 am to 3.30 pm each day, but occasionally was required to work back. He was not paid overtime rates for any additional hours. He was “usually able” to take days off, but was not paid for such days and “did not receive sick pay although he was paid for some time off when his father died”. When there was no formwork work to be done, Mr Risto Rummukainen directed Minnis to perform work in the yard, such as changing oil in the trucks. He would still be paid his ordinary hourly rate. In July 2009, Mr Minnis formed LCA Constructions Pty Ltd “solely for the purpose of performing work for Risetop”.
The agreed facts relating to the circumstances of the breach are set out above. It is relevant to consider those circumstances in light of the statutory provisions in issue which relate to sham arrangements as well as the provisions of the Building and Construction Industry (ACT) Award, 2002 (the Award).
Section 900 of the WRA is set out above. In this case the misrepresentation as to the relationships with each of the five workers as independent contracting arrangements occurred at the meeting in June 2009 and in the letter of 17 June 2009 in relation to the contracts in force between Risetop and each of the five employees as at 17 June 2009.
It is agreed that each of Kosonen, Kamppi, Ylisalo, McAuliffe and Minnis, being construction workers conducting work primarily in the ACT, were at the relevant time covered by the Award (which on 1 January 2010 was superseded by a modern Award, the Building and Construction General On-Site Award 2010). However the misrepresentations as to the nature of their contracts also conveyed that the workers would not enjoy the rights and entitlements provided for in an Award relating to employees (see cl.6.1 of the Award).
The respondents submitted that it was relevant to have regard to whether the first respondent, through its directors, was aware at the time it engaged these workers “as independent contractors” that they were employees. The evidence of Mr Mika Rummukainen in this respect is to the effect that up until May 2010 Risetop had always hired its construction workers “under ABN contracts”, as this was said to be “the norm of the industry”. It had however paid long service leave and superannuation for workers in accordance with the advice of the Construction, Forestry, Mining and Energy Union (the CFMEU). Mr Rummukainen’s evidence is that in early 2009 the CMFEU first advised that it regarded the “contractors” to be “employees”, as Risetop was paying their superannuation and long service leave and that the CMFEU began to complain about the way Risetop was paying the workers. While this should have alerted Risetop to the true situation it has not been established that Risetop in fact knew that the workers were employees at this time. At the least however it was alerted to that possibility and clearly contemplated a change to the contracts to put the position beyond doubt. Mr Rummukainen’s evidence is that it was “[i]n order to make a clear distinction that we employed contractors we stopped paying superannuation and long service leave and gave all contractors a pay rise to compensate them for the loss of superannuation and long service leave”.
In fact it appears that this meant that Risetop wished to change the arrangements to remove factors that would be indicative of a contract of employment. Mr Mika Rummukainen’s somewhat confusing evidence about the events of June 2009 is as follows:
In June 2009 Risetop held a meeting with all contractors and informed them that it seemed too difficult to continue to engage them as independent contractors as we found the CMFEU to be a constant source of stress. During the meeting we informed the contractors that we had been in discussions with our insurance broker and accountants and had come to the conclusion that the best way to continue with our business was if each contractor formed their own company and worked for us through that company. We also proposed the option of our workers being engaged as employees, but made it clear to our workers that we were finding it increasingly difficult to continue engaging them as independent contractors on some projects.
After this meeting one of our workers, Wayne Minnis, decided to form his own company and he still operates for us. All the other workers thought it would be too difficult or costly to set up a company and they did not like the reduced take home pay, and consequently did not change their engagement.
Mr Rummukainen’s evidence is that after an investigation by the Australian Building and Construction Commission (ABCC), Risetop Group ceased engaging independent contractors at his direction and that this led to a significant loss of the workforce as workers left and went to work for companies which were still prepared to engage them as independent contractors.
On the basis of this evidence the solicitor for the respondents submitted that the June 2009 conduct could be seen not as conduct attempting to avoid the legislation, but rather as conduct engaged in to avoid a contravention when the respondents became aware that the proposed arrangements would more openly treat the workers as contractors. However the contraventions in issue consist of the misrepresentation about the nature of the arrangements. The fact that it was proposed that there be different arrangements in the future (either through contracts with companies or workers being engaged as employees) does not alter the fact of misrepresentation.
It was also submitted for the first respondent that it was relevant that when it subsequently became apparent that the workers (other than Mr Minnis) were not inclined to form their own companies, they were then treated as Risetop employees. However Mr Rummukainen’s evidence is to the contrary. His statement that the workers (other than Mr Minnis) “did not change their employment” after the June 2009 meeting suggests that these workers continued to be treated as independent contractors until after the ABCC’s investigation.
The conduct in this case involved misrepresentation as to the nature of the contracts under which the five workers were engaged in June 2009 in circumstances where Risetop was proposing changes which the workers were told would mean they were regarded ‘more openly’ as independent contractors, notwithstanding that at that time the contracts in force were contracts of employment, not contracts for services. The respondents cannot be said to have been unaware that the workers may have been employees at the time of the misrepresentation given the CFMEU suggestion in early 2009 that the union regarded Risetop’s contractors as employees. On the other hand, the Agreed Statement of Facts and the evidence before the courts is not such as to establish that from 2002 on the respondents knew that the workers were employees. They did however have this possibility brought to their attention by early 2009 by the CFMEU. Despite this and the factors pointing to the arrangements being contracts of employment, they represented the past arrangements as being contracts with independent contractors to the workers in question.
The misrepresentation was communicated to five employees both at a meeting and in writing in relation to the nature of their existing contracts in circumstances where (in some cases) over several years the respondents had purported to treat each of the employees as contractors. The representations had the effect of concealing the fact that the workers were in fact employees.
No reliance is placed by the respondents on the defence in s.900(2) of the Act to the effect that a person does not contravene s.900(1):
“if the person proves that at the time the person made the representation concerned, the person did not know that, and was not reckless as to whether, the contract was a contract of employment rather than a contract for services.”
Such provision is not of any direct relevance in assessing the nature and extent of the conduct or the circumstances of the breach, although the deliberateness of the breach is discussed below.
The nature and extent of any loss or damage
There is no evidence of quantification of any loss or damage caused to the employees as a result of the breaches. Long service leave, superannuation contributions and workers’ compensation insurance were provided by Risetop. There is no suggestion of payment of less than Award rates. According to the respondents the employees were paid above the Award rates that would have been applicable. However until they were treated as employees after the ABCC investigation they did not receive benefits available to employees under the Award or legislation.
The purpose of s.900 of the Workplace Relations Act
The applicant raised several broader issues about the financial impact of sham arrangements, having regard to the purpose of s.900 of the WRA and the particular circumstances of this case. These issues were said to be important having regard to the system of regulation in existence under the WRA and now under the Fair Work Act 2009 (Cth).
In particular, the applicant contended that it was not necessary to point to an actual dollar amount of monetary loss as a relevant indicia of or factor in determining the seriousness of an offence in every case. I agree. As set out above, the oft-referred to lists of relevant matters do not fetter the court’s discretion and the weight to be given to particular factors.
It was submitted that the length of time a sham arrangement had been maintained may be more important than actual monetary loss and that there may be some things lost or foregone that could not necessarily be valued in actual money terms. While I note that the breach in question was the representation – not the treating of employees as independent contractors as such – the representation related to contractual arrangements which had been in force (in some instances) for a considerable period of time, and this is part of all the relevant circumstances.
As the applicant submitted, sham contracting permits employers to avoid legal obligations in relation to matters such as payroll tax (although there is no evidence of any avoidance of payroll tax in this case), workers’ compensation premiums, employee entitlements and superannuation contributions, and to avoid meeting obligations and rights to which employees may be entitled. While there is no direct evidence of such avoidance of obligations in this case, these matters are relevant having regard to the purpose of s.900 and also as discussed below the need for general deterrence.
It was also suggested that non-payment of workers’ compensation premiums left open the prospect of uninsured employees having to bear the risk of personal injury if they were injured at work and that this involved a social cost the community would ultimately bear. I note however that in this case Risetop had been meeting workers’ compensation obligations, although they proposed to stop this practice. Sham contracting may also discourage resort to protections that are found in instruments such as the Award applicable in this instance as well as to any National Employment Standards which apply to employees but not to independent contractors (now see Part 2.2 of the Fair Work Act 2009 (Cth) which however was not in force at the time in question).
As submitted, many of the protections in the Award cannot be measured directly in money in this case (such as leave entitlements not relied on by workers). Sham contracting may also avoid resort to entitlements such as redundancy pay. While this is so as a general statement of principle, I note that Risetop had paid superannuation contributions as well as workers’ compensation insurance for the workers and there is no evidence of any issue in relation to redundancy pay.
The indirect avoidance of entitlements by sham contracting cannot be measured in monetary terms. As pointed out, a contractor does not have recourse to paid sick leave. It can be inferred that such a person may be more likely to work when not well than an employee who has the protection of regulated standards of paid sick leave. Matters such as maximum weekly hours, requests for flexible working arrangements, parental leave and related entitlements, annual leave, personal carers’ leave and compassionate leave, community service leave, long service leave, public holidays and notice of termination and redundancy pay may be similarly “devalued” and even effectively negated by such sham contractual arrangements. The Award which would have applied to the workers as employees is in evidence before the court. It contains such protections. It may be that other rights that employees have or may have recourse to (such as protections for unfair dismissal) are negated and avoided by such arrangements, although there is no evidence of any particular issues in this respect in this case.
It was also said to be significant that there was potentially a loss to the income taxation system in that the “pay as you go” provisions applicable to employees would apply in only limited circumstances in respect of contractors. In this case the workers were told that if they set up companies they could claim more business expenses as deductions. There is, however, no evidence that the workers whose contracts are in issue in this case engaged in non-payment of income tax.
It is relevant that, as was conceded, the respondents engaged in what was in effect a course of conduct over the term of employment of each of the five persons named which resulted in these persons being treated for some purposes as independent contractors in ways which meant that they did not have or were discouraged from attempting to have recourse to benefits such as those discussed above, in particular paid sick leave and other leave available to employees under legislation or under the applicable Award.
On the other hand, this course of conduct meant that these employees were paid higher than the Award rates that would have been applicable to the employee classifications provided by the relevant Award. Risetop met superannuation, long service leave and workers’ compensation obligations (although it proposed to change that arrangement).
Insofar as it was submitted that the respondents “did not take advantage of any inferiority or vulnerability in treating the [workers] as independent contractors” and that there was no other claim against the respondents for unpaid wages or other award entitlements, there is no evidence of any such claim but, even if that is so, the conduct constituting the breach (the misrepresentation) is such as to undermine employee access to protections, entitlements and rights and enable an employer to avoid liability for such entitlements.
Furthermore, as counsel for the applicant pointed out and the respondent did not dispute, had the workers set up companies through which they operated, as suggested by the respondents, this would thereafter have taken any further representation of the relationships as independent contracting relations outside the ambit of s.900 of the WRA.
Similar previous conduct
The only conduct in evidence before the court in relation to the respondents’ practices is in relation to the five workers whose circumstances are the subject of the Statement of Agreed Facts, although the second respondent conceded in his affidavit that up until May 2010 Risetop had always hired its construction workers under what he described as “ABN contracts”, although it had also paid such persons long service leave and superannuation. There is no evidence of any proceedings in relation to any prior offences of the nature now admitted by the respondents.
Whether there was a pattern of conduct or an isolated incident of breach
In many instances a question arises as to whether breaches are properly distinct or arose out of one course of conduct. However in this case it is not in dispute that there was only one breach by each respondent. It is clear that the breach related to contracts entered into by Risetop with each of the five named employees. Section 900 of the WRA relates not to the existence of sham arrangements, but rather to a representation to a party to a contract that the contract is a contract for services under which the individual performs work as an independent contractor when in fact the contract is a contract of employment. The representation that is the essential element of a breach of s.900 was made in a meeting and in letters sent to each of the five persons.
Although there is no evidence of any previous conduct by the respondents consisting of oral or written representations of the sort covered by s.900 of the WRA, the contraventions occurred in a context in which persons who (it is agreed) were in fact and at law employees had been treated as contractors over a period of several years.
The size of the respondents’ business
The first respondent was said by the applicant to be a medium-sized firm operating in a relatively confined geographical area consisting of the Australian Capital Territory.
The respondents tendered special purpose financial statements of the first respondent as at 30 June 2009 and 30 June 2010 (not including the note explaining the specific purpose for which the special purpose financial statements had been prepared) as well as copies of income tax returns for Risetop for the financial years ending 30 June 2009 and 30 June 2010. On the basis of these documents it was contended that it was relevant that in the 2010 financial year Risetop operated at a loss of $581,470 and for taxation purposes had a retained profit in that financial year of $178,767 which took into account the profit from the 2009 financial year.
The applicant conceded that the financial evidence of the respondents was relevant to the determination of the appropriate penalty, bearing in mind that any penalty that was imposed should not be unduly oppressive. It was also submitted that this should not deter the court from the function it must perform in setting an appropriate penalty in all the circumstances, particularly having regard to the need for deterrence. I have borne the limited evidence in this respect in mind.
The respondents submitted that any substantial penalty would likely result in Risetop having to reduce the size of its business in order to maintain the viability of its business. There is no evidence to establish this claim, although the first respondent may have to reduce other expenditure to meet any penalty. There is no evidence to support the claim that the business of Risetop is the sole source of income of the second and third respondents. Indeed Mr Mika Rummukainen’s affidavit evidence attests to the existence of a group of companies.
Risetop was said to employ between 10 and 20 workers depending on casual staff turnover and was described in submissions for the respondents as a small business. The parties were at odds not only as to whether the Risetop business was a small or medium–sized business but also as to whether the ACT was a confined geographical region or whether there was competition from contractors outside the ACT. There is insufficient evidence before the court to assess the size of the first respondent on a relative basis or, indeed, the nature of the ACT construction business or market in which Risetop operates. It is clear, however, that Risetop is not a large contractor. It has been in business for a period of time and is said to be a member of the relevant industry association. The employees in question have worked for Risetop for varying periods of time, two of them quite long-term, and all the five persons concerned continue to work for the company.
The involvement of senior management
The two personal respondents were both directors of the first respondent and are the most senior managers in the business. Senior management was involved in and knew of the first respondent’s breaches. The oral representation was made by the third respondent while the written representation was made in a letter signed over the hand of the second respondent.
Cooperation, admissions and contrition
The applicant acknowledged that the respondents have cooperated with the applicant in its investigation and in these proceedings. Such cooperation has avoided the expense of contested proceedings and is of significance. The unchallenged affidavit evidence of the second respondent is that he is greatly embarrassed by being “prosecuted”, determined to ensure his company does not make such mistakes again and that he has always been concerned to look after Risetop workers properly by seeking the advice of industry professionals. The respondents also pointed to the fact that after Risetop became aware it was in breach of the legislation in relation to sham arrangements following the investigation by the ABCC, it began treating the workers as employees and from that time ceased engaging workers as contractors. It was submitted that this occurred in a context where the company’s insurance broker and accountants had been consulted and the company had previously concluded on that basis that the best way to continue the business was if each of the five persons formed his own company and worked for Risetop through that company.
The applicant submitted that the court would need to carefully assess the question of contrition and whether it was “true” contrition or an acceptance by the respondents of the inevitability of a finding of their contravention of the WRA.
Mr Mika Rummukainen was not cross-examined. I accept his evidence in relation to events after the ABCC investigation and as to his intentions for the future.
Although this is not a case in which it can be said that the respondents were unaware of the possibility that the representation about the nature of the workers’ contracts was a misrepresentation at that time, I accept that their cooperation and admissions are accompanied by an acceptance of wrongdoing and contrition, albeit it may also involve an acceptance of the inevitability of a finding of a contravention of the WRA. The admissions were made at a time that avoided the need for the applicant to file any affidavit evidence in these proceedings.
General and specific deterrence
As the applicant contended, the role of general deterrence in determining the appropriate penalty is of particular importance in this case.
The applicant referred to the fact that the Statement of Agreed Facts referred to the practice of sham arrangements being widespread in the building and construction industry throughout the ACT and the resulting effects of this practice. It was agreed between the parties that:
The practice of sham arrangements is widespread in the building and construction industry throughout the ACT. The practice involves large and small contractors; different trades and includes qualified tradesmen through to labourers.
The practice has resulted in employers failing to comply with their responsibilities to their employees by not meeting their obligations such as workers compensation, insurances, superannuation guarantee levy and income tax, as well as entitlements such as annual leave and sick leave.
It was submitted that penalties should be imposed at a meaningful level to deter other small to medium business operators from committing similar contraventions and also that the widespread nature of the practice throughout the Australian Capital Territory and its consequences was a relevant and significant matter in the circumstances.
The applicant pointed out that Mr Mika Rummukainen had conceded in his affidavit that until May 2010 Risetop had always hired its construction workers under ABN contracts “as this is the norm of the industry”. It was said to be proper to have regard to the fact that the practice in question was rife in the industry.
Reliance was placed on the observations of Lander J in Ponzio v B & P Caelli Constructions Pty Ltdand Others (2007) 158 FCR 543; [2007] FCAFC 65 at [93]. His Honour stated:
In regard to general deterrence, it is assumed that an appropriate penalty will act as a deterrent to others who might be likely to offend: Yardley v Betts (1979) 22 SASR 108. The penalty therefore should be of a kind that it would be likely to act as a deterrent in preventing similar contraventions by like minded persons or organisations. If the penalty does not demonstrate an appropriate assessment of the seriousness of the offending, the penalty will not operate to deter others from contravening the section. However, the penalty should not be such as to crush the person upon whom the penalty is imposed or used to make that person a scapegoat. In some cases, general deterrence will be the paramount factor in fixing the penalty: R v Thompson (1975) 11 SASR 217.
Further, as Finkelstein J stated in CPSU, The Community and Public Sector Union v Telstra Corporation Limited (2001) 108 IR 228; [2001] FCA 1364 at [9]:
…even if there be no need for specific deterrence, there will be occasions when general deterrence must take priority, and in that case a penalty should be imposed to mark the law’s disapproval of the conduct in question, and to act as a warning to others not to engage in similar conduct.
(Also see Fair Work Ombudsman v Land Choice Pty Ltd & Anor [2009] FMCA 1255 at [104] – [108]).
First, as the respondents submitted in relation to the need for specific deterrence, each of the five workers is now treated by Risetop as an employee and continues to be engaged by Risetop in circumstances where, at least for the future, there has been a preservation of their entitlements not only to long service leave and superannuation, but also to benefits such as annual leave and accrued sick leave. It was acknowledged that if any of these workers had taken periods of leave during the time they were engaged on the basis that they were contractors, they would not have received leave payments, albeit it was submitted that the payments they were receiving at that time were substantially more than the Award rates (being designed to incorporate an amount reflecting the absence of such entitlements). It was also acknowledged that this discouraged taking a period of leave in circumstances where an additional amount would not have been received. I accept that Risetop’s workers are now engaged as employees and that there is a limited need for specific deterrence.
However, as Finkelstein J recognised in CPSU v Telstra, “there will be occasions where general deterrence must take priority”. This is such a case. It is also relevant in this context to have regard to the purpose of s.900 to prevent sham contracting as discussed above. Any penalty should be imposed at a meaningful level so as to deter other small to medium businesses from committing similar contraventions in an environment where the practice is agreed to be widespread.
The parties have accepted that sham contracting is widespread throughout the ACT in the industry in which Risetop operates and that it has resulted in employers failing to comply with their obligations to their employees. I accept that the penalty should demonstrate an appropriate assessment of the seriousness of the conduct in question in such an environment. A message should be conveyed by the penalties that contracts which are in fact contracts of employment in the building and construction industry (or otherwise) should be correctly identified and not represented as contracts for services having regard to the implications of the sham contracting arrangements associated with such misrepresentations. The need for general deterrence by the imposition of a penalty at a meaningful level is of particular significance in this case.
At the same time, as the respondents submitted, the penalty should not be such as to crush the person upon whom the penalty is imposed. It was submitted that Risetop should not be made a scapegoat for the prevalence and effect of industry-wide sham contractor arrangements in the ACT, and that any penalty upon Risetop should be commensurate with its conduct. In that respect it was submitted that the defence in s.900(2) of the WRA was relevant and informed the nature of the offence, as where a person did not know or was not reckless about whether there was a contract of employment rather than a contract for services, a person would not contravene s.900(1) of the WRA. However, the respondents in this case have admitted their contraventions and logically cannot now be heard to say that they did not know and were not reckless within s.900(2) of the WRA in mitigation. Nonetheless, as a matter of general principle, it is appropriate to have regard to any evidence as to the deliberateness of conduct on the part of respondents. The evidence before the court does not go so far as to establish that either of the second or third respondents (or, hence, the first respondent) actually knew that the workers were employees and in those circumstances intentionally misrepresented the nature of the contract between Risetop and each of the five named persons, although it is clear that they were aware that the CFMEU was of that view and that this possibility was to be addressed by varying the basis on which Risetop contracted with the workers. The representation was at least reckless even if not intentional.
I have also borne in mind generally Mr Mika Rummukainen’s evidence about workers leaving Risetop to work for other companies as contractors.
Resolution
The maximum penalty provided for a contravention of s.900 of the WRA is $33,000 for a corporation and $6,600 for an individual. Such large penalties provide an indication that the legislature intended a contravention of s.900 to be treated seriously.
The applicant conceded that a consideration of all the relevant factors was such as to indicate that this was not a high range offence in terms of its seriousness. I agree. On the other hand the applicant submitted that the contravention should not be treated as a low range offence, whereas the respondents submitted that if a penalty was appropriate for the contravention it should be treated at the lower end of the scale.
It is clear that one can imagine much worse cases coming before the court with more obviously blatant activities directed at recourse to sham arrangements in order to exploit workers. At the same time, this was not a technical or trivial breach which would warrant only a nominal or low penalty. Of particular relevance is the purpose of s.900 in relation to sham arrangements and the factors that cannot easily be quantified in monetary terms but are a consequence of a person being represented to be and treated as a contractor when he or she is really an employee, in particular in relation to forgone leave and other entitlements. Moreover in this case the conduct of the employer, through its directors, involved taking steps to, as it were, further conceal the true nature of the relationship.
I do not accept that the conduct of the respondents at the meeting and in the subsequent letter was simply conduct which constituted an attempt not to contravene the legislation when Risetop had become aware that it was likely that the arrangement with the workers was such that it was appropriate to have them more openly treated as contractors. The contravention was a misrepresentation as to the nature of the contracts then in force. The proposals for the future were based on and consistent with such a misrepresentation.
Further, while it was submitted for the respondents that thereafter a conclusion was formed that it was not practical to proceed as proposed, (given that the workers were not inclined to agree), the company had adopted an approach of treating them as employees, in fact it appears from Mr Mika Rummukainen’s affidavit that it was in not until after the ABCC investigation that Risetop ceased engaging workers as independent contractors.
Another reason why the matter is not one in which a low-range penalty is appropriate is that the conduct of June 2009 was engaged in the face of advice from a key industry participant about the status of the employees. Further, when the representations were made, there was an attempt to have each of the individuals incorporate a company, the effect of which would (for various reasons not disputed by the respondents) take them outside the ambit of s.900. This made it a more egregious offence because such conduct would raise a substantial barrier in the way of the operation of s.900 and viewing the employees properly as employees.
I have had regard to all the evidence before me and the submissions for the parties. I bear in mind, in particular, the purpose of s.900 of the WRA, the consequences of misrepresentations of the nature covered by that section, the fact that the representation was, at the least, recklessly made, the context in which the contraventions occurred and the particular need for general deterrence. The respondents’ involvement in an industry in which sham arrangements are said to be widespread is relevant to the need for deterrence. It may explain but does not entirely excuse the respondents’ conduct. At the same time I have had regard to the evidence as to the respondents’ financial position. Of particular significance is their cooperation and contrition. The respondents admitted liability. The applicant was spared the expense of preparing for a trial on liability. The penalty hearing proceeded on the basis of an agreed statement of facts. While the respondents did not propose a particular discount on penalty to reflect these factors (cf Australian Opthalmic Supplies Pty Ltd v McAlary-Smith and Mornington Inn Pty Ltd v Jordan at [72] – [77]) it is a matter to be taken into account.
There is no relevant distinction between the second and third respondents in terms of their culpability and no reason to adopt a proportionate approach. In any event there is no relevant distinction in terms of proportionate culpability between the personal defendants and the corporate defendant. As directors of the first respondent, the second and third respondents were the moving minds of Risetop and both were directly involved in the conduct in question (see s.728 of the WRA).
Having regard to the need to mitigate the amount of the penalty by reference to the respondents’ cooperation and admission of liability, I consider that a penalty of $10,000 should be imposed on the first respondent and penalties of $2,000 on each of the second and third respondents.
I certify that the preceding eighty-six (86) paragraphs are a true copy of the reasons for judgment of Barnes FM
Associate:
Date: 5 April 2011
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