Kersten and Secretary, Department of Employment (Social services second review)

[2016] AATA 1052

Kersten and Secretary, Department of Employment (Social services second review) [2016] AATA 1052 (21 December 2016)

Division	GENERAL DIVISION
File Number(s)	2015/2769
Re	Frank Kersten
APPLICANT
And	Secretary, Department of Employment
RESPONDENT

DECISION

Tribunal	Deputy President S E Frost
Date	21 December 2016
Place	Sydney

The decision under review is affirmed.

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Deputy President S E Frost

CATCHWORDS

EMPLOYMENT – Fair Entitlements Guarantee – claim for advance under Fair Entitlements Guarantee Act 2012 – employee or independent contractor – particular employer – decision affirmed

LEGISLATION

Fair Entitlements Guarantee Act 2012 (Cth) ss 3, 6, 10, 15, 38, 39, 40(1)

A New Tax System (Goods and Services Tax) Act 1999 (Cth) s 29-70(1)(c)(v)

CASES

ACE Insurance Ltd v Trifunovski [2011] FCA 1204; 200 FCR 532

Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21
Marshall v Whittaker’s Building Supply Co [1963] HCA 26; 109 CLR 210

Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; 160 CLR 16

REASONS FOR DECISION

Deputy President S E Frost

21 December 2016

INTRODUCTION

1. In the late 1980s and early 1990s Frank Kersten ran a number of pet stores in Queensland. 

2. In 1992 he sold the stores to the Pets Paradise organisation.[1]  At the same time he spoke to Gary Diamond, the major shareholder of the Pets Paradise organisation, and agreed to work for the organisation.  He continued to do so for the next 20 years.

   [1] As will become clear later in these reasons, there is some difficulty in identifying specific companies within what might be broadly described as the Pets Paradise organisation. When a specific company can be identified it will be referred to by its formal name. When the identity of the company is unclear it will be referred to as the ‘Pets Paradise organisation’.

3. In around 2011 the Pets Paradise organisation encountered some financial difficulties which eventually led to the appointment of receivers and managers, and ultimately some, but not all, companies within the Pets Paradise organisation went into liquidation.  Mr Kersten claims he is owed salary and other employee entitlements which have not been paid to him.

4. He applied to the Department of Employment for an ‘advance’ under the Fair Entitlements Guarantee Act 2012 (FEG Act).  A delegate of the Secretary refused his claim for an advance and that refusal was affirmed on internal review.

5. Mr Kersten has now applied to the Tribunal for review of that decision.  I am not satisfied that Mr Kersten is entitled to the relief he seeks and I must therefore affirm the decision under review.

   THE LEGISLATIVE BACKGROUND

6. The FEG Act provides in s 3 for a statutory scheme to advance unpaid employment entitlements to former employees where the employer is insolvent or bankrupt, and the employee cannot otherwise recover payments.

7. Section 6 provides that an employee may receive payment for a number of employment entitlements, including annual leave, long service leave, redundancy pay, payment in lieu of notice, and unpaid wages.

8. Section 10 sets out the conditions for eligibility for an advance. Relevantly, a person’s employment must have ended as a result of the insolvency of their employer; the person must be owed one or more debts in respect of their employment entitlements; the person must have taken reasonable steps, before the insolvency event, to be paid those debts; the person must be an Australian citizen, permanent resident or holder of a special category visa at the time the employment ended; and an effective claim must be made to the Secretary for payment of an advance.

9. On receipt of an effective claim, the Secretary is required to decide if the person is eligible for an advance, and the amount of the advance: s 15.

10. Where, as here, the Secretary has made a decision on a claimant’s eligibility for a FEG advance, and that decision has been affirmed, varied or substituted under the internal review process established under ss 38 and 39 of the FEG Act, the person may apply to the Tribunal under s 40(1)(a) for review of the decision.

    THE ISSUES

11. The dispute turns on two components of the eligibility provisions in s 10(1) of the FEG Act – paragraphs (a) and (f).

12. The effect of paragraph (a) is that, for a person to be eligible for a FEG advance, the Secretary (or, on review, the Tribunal) must be satisfied that ‘the person’s employment by a particular employer has ended’.  The Secretary says there are two problems in Mr Kersten’s case.  The first is that Mr Kersten was not an ‘employee’, but was instead an independent contractor, and so there was no ‘employment’ that was ‘ended’.  The second problem is that if, contrary to that view, Mr Kersten was indeed an employee, it is not clear who his ‘particular employer’ was.  On either view, Mr Kersten’s claim must fail.

13. Paragraph (f) requires the Tribunal to be satisfied that the person took reasonable steps, before the insolvency event, to be paid the debts claimed.  The Secretary says Mr Kersten did not take reasonable steps, so that even if he satisfies the Tribunal as to paragraph (a), the decision under review should be affirmed.

    FACTUAL BACKGROUND

14. In October 1987 Mr Kersten purchased the Master Franchise Territorial Rights for Pets Paradise Queensland and Northern New South Wales. At the time he already owned and operated a chain of 11 pet stores in Queensland.  The precise identity of the previous owner of those rights was not exposed to me, although I find it was either Gary Diamond, or an entity or entities controlled by him. 

15. Five years later, in November 1992, Mr Kersten sold the territorial rights to Pets Paradise Pty Ltd, a company that Mr Diamond had founded some years before and which had about 40 stores, mainly in Victoria and New South Wales.

16. Mr Diamond was quite well acquainted with Mr Kersten, having known him since before the 1987 transaction.  He recognised Mr Kersten’s business skills and experience and thought they would be a good fit for the Pets Paradise organisation, which Mr Diamond was looking to expand through the use of a franchising model.  In particular, Mr Kersten had developed a good deal of expertise in retail leasing, and he had experience liaising and negotiating with major shopping centre owners.  Mr Kersten and Mr Diamond spoke about Mr Kersten working for the Pets Paradise organisation (and as far as Mr Kersten was concerned, he thought he would be working specifically for Pets Paradise Pty Ltd).  Eventually they agreed (‘as part of the deal’, as Mr Kersten put it) that Mr Kersten would work for the organisation.

    The arrangement between Mr Kersten and Mr Diamond

17. Mr Kersten says that on 1 December 1992, he started working as ‘an employee of Pets Paradise Pty Ltd’.  Mr Diamond similarly says that Mr Kersten ‘became an employee of Pets Paradise Pty Ltd’ and that Mr Diamond, or his corporate entities, took over Mr Kersten’s Queensland stores. 

18. Mr Kersten initially said there was no written agreement dealing with his working arrangements.  Later he said Mr Diamond had reminded him there had been a written agreement but neither he nor Mr Diamond could locate it.  The arrangement, as described by both men, was that Mr Kersten would be paid ‘an initial base salary of $60,000, plus commission on franchise sales’.  The base salary increased from time to time; by 1997 it had risen to $75,000. 

19. Mr Kersten’s initial title, according to the business card that he was given in 1992, was ‘Franchise Sales & Marketing Manager’ for ‘Pets Paradise’ – apparently for the brand, rather than specifically for the company.  Later business cards describe him as ‘National Leasing & Sales Manager’ for ‘Pets Paradise’, ‘National Leasing Manager’ and ‘Shopfitting Coordinator’ for ‘Pets Paradise’, ‘Group Property Manager’ for ‘Billy Baxter’s’ and ‘National Leasing Manager’ for ‘Paradise Retail Holdings Pty Ltd’.  Despite all these descriptions, Mr Kersten says he always regarded himself as working for Pets Paradise and he always told people he was working for Pets Paradise.  Even now, he says, people refer to him as ‘the guy from Pets Paradise’.

20. Mr Diamond indicated in his affidavit, at [5], that he expected Mr Kersten to work for Pets Paradise and for no-one else, adding that he would have been ‘extremely unhappy’ if Mr Kersten had worked for others.  Under cross-examination he put the position more strongly, saying he would have sacked Mr Kersten if he had worked for anyone other than Pets Paradise. 

21. Mr Diamond described Mr Kersten as ‘an extremely valuable member of the team’.  He said Mr Kersten was ‘intimately familiar with the business plans of Pets Paradise’. Mr Diamond added that he would not have shared sensitive information like that with an external consultant.

22. There is no real dispute about the work Mr Kersten performed.  I find the following description, as extracted from Exhibit A1, to be accurate:

    [2]       … I would work from [Mr Diamond’s] Queensland office at Shortland Street Springwood where he also had a full time secretary but the job would involve frequent travel to Pets Paradise head office in Hallam Victoria and around the country.  As the Pets Paradise chain grew I would spend a great deal of time on the road looking at potential store sites, assessing potential franchisees and negotiating with landlords.  It was a demanding job but enjoyable. … All my secretarial assistance was performed by colleagues in the Melbourne Office of PP and all my office equipment and stationery supplies were either supplied or reimbursed by PP.

    [3]       In the discussions [in 1992] Gary explained that he needed a property manager who could deal with shopping centre owners to negotiate terms for new stores that we would open for franchisees and who could recruit more franchisees[.]  Gary said he was confident that through my previous activities I had the expertise in dealing with shopping centre groups and would be able to recruit franchisees. …

    …

    [5]       My relationship with Gary was close.  Gary and I would talk very frequently about the development of the business.  Gary would often call me in the evenings or at weekends or on holiday whether at home or when I was on the road, which was very frequent as I travelled extensively in the course of my job.  We would often meet in Melbourne, Sydney or Adelaide quite often attending meetings together.  Gary even gave me a special phone (that we called the bat phone) he was the only one who knew the number so I would know it was him calling.

    [6]       … [Mr Diamond] was always my boss and I was directed by his instructions, my time was controlled by Gary and I reported to him virtually on a daily basis, if I was absent due to sickness I advised Gary, if I wanted to change my plans or travel I needed Gary’s approval.  I was part of the senior management team and attended regular management and planning meetings at our head office in Melbourne. …

    The expansion of Mr Diamond’s business empire

23. Over the years the business expanded, and Mr Diamond also branched out into other enterprises that operated in areas not connected with pets and pet accessories, such as the Billy Baxter’s chain of cafes and Outback Jack’s Bar and Grills.  In the Pets Paradise family a number of different corporate entities were created, including Pets Paradise (NSW) Pty Ltd, Pets Paradise (QLD) Pty Ltd, Petsmart Pty Ltd, Global Pet Products Pty Ltd, Pets Paradise (Franchising) Pty Ltd and a further range of apparently State-based franchising companies such as Pets Paradise Franchising (WA) Pty Ltd and correspondingly named companies in most of the other States (T19-470).

24. At the top of the corporate group was a company known as Paradise Retail Holdings Pty Ltd, or PRH, which Mr Diamond explained was the head company of the consolidated group.  It apparently did nothing and employed no-one, incurred no expenses and paid no bills.  It was created solely for the purpose of lodging the tax returns for the consolidated group.

25. As the overall business grew, Mr Kersten would provide services ‘across the group’, as Mr Diamond put it.  So would some of the other people who worked for Mr Diamond.  Mr Diamond said his workers were employed by different companies.  It was not the case that there was one employing company within the group; instead the arrangements seem to have been quite haphazard, with different staff members employed by different companies but in fact not confining the provision of their services to the particular entity that paid their salary.

    The method of payment

26. The way Mr Kersten was paid was unusual.  He kept a record of the jobs he had worked on and he would provide, on a quarterly basis, a summary of the work he had done, described (not entirely accurately) as ‘time sheets’.  For some work types he would be paid for the time spent on particular activities, apparently by reference to an hourly rate.  For other work types he would be paid a specified amount for achieving a particular outcome – such as, for example, securing the sale of a store.  By 1997 the amount he was paid for the sale of a store was $7,500.

27. Mr Kersten’s remuneration therefore varied from one quarter to the next.  If in a given quarter he had secured multiple store sales (for which he was paid handsomely) then his remuneration for that quarter would be quite substantial.  In another quarter he may have secured no store sales but been particularly successful in negotiating new leases or variations of leases.  His remuneration for a quarter would vary according to the work he had performed and the specific outcomes he had achieved.

28. In 2003 Mr Kersten was told he would have to start separating his ‘time sheets’ to identify which particular company in the group he had done the work for.  Nevertheless, despite this change in procedure, he was told ‘You will still be employed by Pets Paradise Pty Ltd’.[2]

    [2] Annexure E to Exhibit A4.

29. At the end of the year Mr Kersten would provide a summary of what he had done – which was really just an amalgamation of the information previously provided on a quarterly basis.  If the total amount he had been paid was less than his ‘base salary’ then he would provide an ‘account’, or in later years a ‘tax invoice’, to claim the shortfall.  (I will describe the ‘accounts’ and ‘tax invoices’ in more detail later in these reasons.)  On the other hand, if he had already been paid more than his ‘base salary’ then he was not entitled to any adjustment at the end of the year. 

30. Another unusual feature of the arrangement was that the payee for Mr Kersten’s services was not Mr Kersten personally; instead it was his private company, R&F Franchising Pty Ltd (R&F).  Nevertheless, the work was performed by Mr Kersten.  This arrangement had been suggested to Mr Kersten by his accountant following Mr Kersten’s sale of his pet stores to the Pets Paradise organisation. 

31. Mr Kersten and Mr Diamond both gave evidence about the discussions they had had in 1992 about this arrangement involving R&F.  Neither of them saw anything particularly unusual in the arrangement.  This was despite the fact that, with the knowledge of both of them, and in respect of an arrangement they both claimed was an employer/employee relationship, no tax was deducted by the Pets Paradise organisation, no superannuation contribution was made on Mr Kersten’s behalf, and Mr Kersten’s name did not appear in any list of employees for any of Mr Diamond’s companies – whether Pets Paradise Pty Ltd itself, or any of the other companies Mr Diamond controlled (see below).  Mr Kersten explained simply that it was done that way on his accountant’s advice; Mr Diamond said he thought it was all ‘above board’ and he was hardly in a position to doubt the advice of an accountant who, he assumed, knew what he was talking about.

    The issuing of the accounts and ‘tax invoices’

32. The accounts that were issued at year end, if necessary, were issued by R&F, not by Mr Kersten personally.  Moreover, at some stage after GST was introduced in 2000, R&F started providing documents which were styled ‘tax invoices’ to Pets Paradise (or one of the entities in the group) claiming the outstanding amount plus GST.

33. There are only a few of the accounts in evidence.  One is at Annexure D to Mr Diamond’s affidavit (Exhibit A4).  It is dated 11 August 1997 and is made out to ‘Pets Paradise’.  It is described as ‘96/97 end of financial year summary and account’.  It sets out some detail of the payments that were made throughout the year, and the categories of activity they relate to, and then summarises the position as follows:

    TOTAL:  $61,338.55

    AGREED WAGES:    $75,000.00

    SHORT:  $13,661.45

34. A document in similar form for the 1997/98 year, but with different amounts, is at Annexure D2 to Mr Diamond’s affidavit. 

35. Several of the R&F ‘tax invoices’ are annexed to Mr Kersten’s 19 November 2015 affidavit, Exhibit A2 (although, inexplicably, they show the supplier as R F Franchising Pty Ltd). 

36. It seems that up to and including the 2010 calendar year R&F would issue separate ‘tax invoices’[3] to different companies in the group, to reflect the work Mr Kersten had been doing and which of the companies had benefited from his efforts.  So, for example, R&F issued ‘tax invoices’ in calendar years 2009 and 2010 (Annexures B1-B13 and C1) to multiple separate entities – Pets Paradise Franchising Pty Ltd, Pets Paradise (NSW) Pty Ltd, Petsmart, Billy Baxters Franchising Pty Ltd, Pet Goods Direct Pty Ltd and Outback Jacks.  From 2011, the ‘tax invoices’ (Annexures C2-C5 and D1-D3) were issued to ‘PRH Pty Ltd’ – which appears to be intended as a reference to Paradise Retail Holdings Pty Ltd (see [24] above) – and each line item[4] nominates, by a letter code, which company in the group was the beneficiary of Mr Kersten’s efforts.  Mr Kersten and Mr Diamond both explained this was a mechanism for allocating expenses to the different entities in the corporate group.  It was also consistent with the instruction that Mr Kersten was given in 2003, to separate his ‘time sheets’ by company (see [28] above).

    [3] I describe the pre-2011 documents as ‘tax invoices’ although, strictly speaking, they do not comply with the ‘tax invoice’ requirements of the GST law since (quite apart from getting the name of the supplier wrong) they do not include the date of issue of the document: A New Tax System (Goods and Services Tax) Act 1999, s 29-70(1)(c)(v).

    [4] Excluding expenses.

37. When the Pets Paradise organisation started experiencing cash flow problems in 2011 Mr Kersten offered to reduce his pay to $2,000 per week to ease the pressure.  Mr Diamond accepted Mr Kersten’s offer and started paying him that amount.

    WAS MR KERSTEN AN EMPLOYEE OR AN INDEPENDENT CONTRACTOR?

38. The distinction between an employee and an independent contractor is ‘rooted fundamentally in the difference between a person who serves his employer in his, the employer’s, business, and a person who carries on a trade or business of his own’: ACE Insurance Ltd v Trifunovski [2011] FCA 1204; 200 FCR 532 (Perram J) at [29], citing Hollis v Vabu Pty Ltd [2001] HCA 44; 207 CLR 21 at 39 [40] (Gleeson CJ, Gaudron, Gummow, Kirby and Hayne JJ) and Marshall v Whittaker’s Building Supply Co [1963] HCA 26; 109 CLR 210 at 217 (Windeyer J).

39. To determine on which side of the line a relationship falls one needs to have regard to the totality of the relationship, which may require consideration of factors such as the terms of the contract; the intention of the parties; whether tax is deducted; whether sub-contracting is permitted; whether uniforms are worn; whether tools are supplied; whether holidays are permitted; the extent of control of, or the right to control, the putative employee; whether wages are paid or instead whether there exists a commission structure; what is disclosed in the tax returns; whether one party ‘represents’ the other; for whose benefit does the goodwill in the business inure; how ‘business-like’ is the alleged business of the putative employee.  In any given case, there may be additional factors that are relevant: Trifunovski at [29]; Stevens v Brodribb Sawmilling Co Pty Ltd [1986] HCA 1; 160 CLR 16 at 24 (Mason J) and at 36-37 (Wilson and Dawson JJ).

1. In the current case, most factors of relevance point away from a conclusion that Mr Kersten was an independent contractor.  Although he had, on the face of it, a business of his own (R&F), it is difficult to see how the work that he performed benefited that business rather than the business of some or all of the Diamond entities.  Indeed, there is nothing in the evidence to suggest that the activities of R&F in the period 1992 to 2012 extended beyond whatever work Mr Kersten undertook for the Diamond entities.

2. Specific indicators of an employment relationship are Mr Diamond’s control of Mr Kersten’s work activities; the need for Mr Kersten to get Mr Diamond’s approval for work and travel plans; Mr Diamond’s sharing of commercially sensitive information with Mr Kersten; the fact that Mr Kersten was held out as a representative of the Pets Paradise organisation; the fact that Mr Kersten was effectively prohibited from working for organisations other than those within the Diamond camp; and the fact that Mr Kersten’s remuneration was referred to as ‘wages’ (although this last factor carries relatively minor weight).

3. One factor that tends away from a conclusion that the relationship was one of employment is the way things were arranged for tax purposes.  I found it surprising that two men with decades of experience in the workplace did not understand that an employer is under an obligation to withhold income tax instalments from an employee’s pay.  But their ignorance of the obligation was as clear as it was surprising.  Nevertheless, as Perram J said in Trifunovski at [90]:

   I do not grasp as a matter of analysis, however, why it is that the tax treatment of the payments advances matters beyond disclosing the parties’ understanding of the relationship.

4. Here, the tax treatment discloses the men’s understanding (incorrect, as it happens) that apparent engagement of a corporate entity, R&F, and failure to withhold tax instalments were not inconsistent with Mr Kersten’s asserted status as an employee.  There was never any reasoned analysis on the part of either Mr Diamond or Mr Kersten as to whether, in an asserted employment relationship, the employer could choose to ignore tax withholding obligations – or even an analysis of what those obligations may have been.  Their analysis did not proceed beyond blind acceptance by both of them that paperwork could be created that gave the impression that services were provided by R&F and that payments could be made that were consistent with that paperwork.  In fact, Mr Diamond’s approach seems to have been simply to shrug his shoulders at the suggestion that payments be made to R&F, with Mr Kersten left free to look after his own tax.

5. Those payment arrangements meant that the payroll records of the Pets Paradise organisation did not contain any reference to Mr Kersten as an employee.  That is not a factor that in itself weighs against a finding of an employment relationship; it is simply another element of the overall payment arrangement.

6. Ultimately I consider that the view held by both Mr Diamond and Mr Kersten that the latter was an employee is the correct one.  That is because the strength of the factors in favour of that conclusion outweighs the strength of those that point the other way.

   WHO WAS THE EMPLOYER?

7. That conclusion takes Mr Kersten part of the way towards meeting the requirements of paragraph (a) of s 10(1) of the FEG Act. The rest of the journey requires him to satisfy me that he had a ‘particular employer’, with whom his employment relationship has ended. For practical purposes, and in light of s 10(1)(c)(ii), I need to be satisfied that the ‘particular employer’ of Mr Kersten, at any time during the period 30 January to 30 July 2012 (that is, the period of 6 months prior to the appointment of receivers and managers), was Pets Paradise Pty Ltd or one of the other Diamond entities to which an insolvency event has happened.

8. Mr Kersten himself maintains that his employer in the beginning was Pets Paradise Pty Ltd and so it remained.  Mr Diamond is of the same view.  Unfortunately for Mr Kersten, I am not satisfied that is the case.

9. The position is complicated by the fact that Mr Diamond’s empire expanded so significantly over the years.  As I have already indicated at [25] of these reasons, staff members were employed by different companies in the group, with no apparent logical method underpinning the process.  Staff – including Mr Kersten – performed work not only for their employing entity but also, as required, for other companies in the group.  That in itself would have been of little consequence if it were possible to identify a specific employment company (combined, perhaps, with an arrangement for cross-charging expenses from that company to others in the group).  But that is not how things were done.

10. It is true that Mr Kersten was told in October 2003 that despite the requested change in the way he should complete his time sheets, he would ‘still be employed by Pets Paradise Pty Ltd’.[5]  But that is almost nine years before any relevant insolvency event, and the broad picture did not remain unchanged in the interim. 

    [5] Annexure E to Exhibit A4.

11. By 2011, R&F was issuing its ‘tax invoices’ to Paradise Retail Holdings Pty Ltd (although referring to it as ‘PRH Pty Ltd’).  I do not infer that this practice was introduced at Mr Kersten’s suggestion; it is much more likely that someone from the Pets Paradise organisation requested it, but no-one has explained why.  Mr Diamond said that PRH incurred no expenses, paid no bills, and was not registered for GST.  He also said, in answer to the question why Mr Kersten would issue invoices to PRH, that it was a mistake for him to have done so.  Mr Diamond said that if an invoice was issued to PRH it would have been sent back for reissue.  But there is no evidence that that ever occurred, and there is no evidence that Mr Kersten was ever told that the tax invoices should be issued to Pets Paradise Pty Ltd instead.

12. Of course, the fact that the R&F invoices were issued to PRH does not mean that PRH was necessarily Mr Kersten’s employer.  But nor does it help to satisfy me that his employer was Pets Paradise Pty Ltd or some other identified company.  Indeed, the documents at T9-67 and T26-504 indicate that Pets Paradise Pty Ltd had no employees at all around the time of the insolvency event.  Most of the identified employees of the group were employed by either Global Pet Products Pty Ltd, Billy Baxter’s, Pet Goods Direct or Pets R Fun.

13. The difficulty is that the empire that Mr Diamond oversaw had become so unwieldy that it was unclear precisely which of the entities within that empire was employing Mr Kersten.  That might have been less significant if all the companies in the group had gone into administration at around the same time.  However, not all of them did, and I simply cannot be satisfied on the evidence before me that Mr Kersten was actually employed by one of the failed companies rather than by one of the others. 

14. It follows that I am unable to identify Mr Kersten’s ‘particular employer’ for the purposes of s 10(1)(a) of the FEG Act and, as a result, Mr Kersten has not established his eligibility for an ‘advance’ under that Act.

15. It is unnecessary for me to deal with the issue arising under s 10(1)(f) of the FEG Act.

    CONCLUSION

16. The decision under review is affirmed.

I certify that the preceding 55 (fifty -five) paragraphs are a true copy of the reasons for the decision herein of Deputy President S E Frost

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Associate

Dated 21 December 2016

Date(s) of hearing	25 and 26 August 2016
Solicitors for the Applicant	N Thomson, Gartree Thomson Lawyers
Solicitors for the Respondent	J Bird, Clayton Utz