FEDERAL COURT OF AUSTRALIA

Australian Building & Construction Commissioner v Inner Strength Steel Fixing Pty Ltd [2012] FCA 499

THE COURT ORDERS THAT:

1.    A pecuniary penalty of $6,600.00 be imposed on the first respondent (Inner Strength) for a contravention of s 900 of the Workplace Relations Act 1996 (Cth) (WR Act), by reason of the second respondent (Sacha), acting for and on behalf of Inner Strength, representing to Phillip Iemma, after he was converted from an employee to an independent contractor in or about June 2007, that he would thereafter be engaged by Inner Strength under a contract for services under which he would perform work for Inner Strength as an independent contractor, in circumstances were as a matter of fact and law, at all material times, he was employed by Inner Strength under a contract of employment (Iemma Representations).

2.    A pecuniary penalty of $6,600.00 be imposed on Inner Strength for a contravention of s 900 of the WR Act by reason of Sacha, acting for and on behalf of Inner Strength, representing to Jesse Munyard for the duration of Munyard’s employment with Inner Strength, that he was employed by Inner Strength under a contract for services under which he performed work as an independent contractor, in circumstances where as a matter of fact and law, at all material times, he was employed by Inner Strength under a contract of employment (Munyard Representations).

3.    A pecuniary penalty of $6,600.00 be imposed on Inner Strength for a contravention of s 357 of the Fair Work Act 2009 (Cth) (FW Act) by reason of Sacha, acting for and on behalf Inner Strength, representing to Tony Page, for the duration of Page’s employment with Inner Strength, that he was employed by Inner Strength under a contract for services under which he performed work as an independent contractor, in circumstances where as a matter of fact and law, at all material times, he was employed by Inner Strength under a contract of employment (Page Representations).

4.    A pecuniary penalty of $6,600.00 be imposed on Inner Strength for a contravention of s 357 of the FW Act by reason of Sacha, acting for and on behalf Inner Strength, representing to Daniel Paschkewitz, for the duration of Paschkewitz’s employment with Inner Strength, that he was employed by Inner Strength under a contract for services under which he performed work as an independent contractor, in circumstances where as a matter of fact and law, at all material times, he was employed by Inner Strength under a contract of employment (Paschkewitz Representations).

5.    A pecuniary penalty of $6,600.00 be imposed on Inner Strength for a contravention of s 357 of the FW Act by reason of Sacha, acting for and on behalf Inner Strength, representing to Barry Teeling, for the duration of Teeling’s employment with Inner Strength, that he was employed by Inner Strength under a contract for services under which he performed work as an independent contractor, in circumstances where as a matter of fact and law, at all material times, he was employed by Inner Strength under a contract of employment (Teeling Representations).

6.    A pecuniary penalty of $8,250.00 be imposed on Inner Strength for a contravention of s 902(1) of the WR Act by reason of Sacha, acting for and on behalf of Inner Strength, in or about June 2007, causing the dismissal of Iemma as an employee of Inner Strength in order to engage him as an independent contractor to perform the same, or substantially the same work under a contract for services (Unlawful Dismissal).

7.    The following pecuniary penalties be imposed on Sacha for the following contraventions:

(a)    $1,050.00 for a contravention of s 900 of the WR Act by reason of the Iemma Representations;

(b)    $1,050.00 for a contravention of s 900 of the WR Act by reason of the Munyard Representations;

(c)    $1,050.00 for a contravention of s 357 of the FW Act by reason of the Page Representations;

(d)    $1,050.00 for a contravention of s 357 of the FW Act by reason of the Paschkewitz Representations;

(e)    $1,050.00 for a contravention of s 357 of the FW Act by reason of the Teeling Representations;

(f)    $1,500.00 for a contravention of s 902 of the WR Act by reason of the Unlawful Dismissal.

8.    Fifty per cent of the pecuniary penalties referred to in paras 1 to 7 above shall be paid to the Commonwealth within one month of this order being made, and the remaining fifty per cent shall be paid to the Commonwealth within three months thereafter.

9.    There be no order as to costs.

NOTE: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

REASONS FOR JUDGMENT

A.    Background

1    The respondents have admitted, on the basis of the facts set out in the Statement of Agreed Facts and Admissions filed on 20 February 2012 (SOAFA), that:

(a)    The first respondent, Inner Strength Steel Fixing Pty Ltd (Inner Strength), committed:

(i)    two contraventions of s 900 of the Workplace Relations Act 1996 (Cth) (WR Act);

(ii)    one contravention of s 902 of the WR Act;

(iii)    three contraventions of s 357 of the Fair Work Act 2009 (Cth) (FW Act); and

(b)    By operation of s 728 of the WR Act and s 550 of the FW Act, the second respondent, Vishuddha Shane Sacha (Sacha), also committed the six contraventions admitted by Inner Strength.

2    The applicant, the Australian Building and Construction Commissioner (ABCC), seeks orders imposing pecuniary penalties on the respondents for each of the admitted contraventions. The parties have consented to this matter being dealt with by me on the papers having regard to the SOAFA and any submissions filed by the parties. Neither Inner Strength nor Sacha availed themselves of the liberty granted to file written submissions.

3    The parties agree that the following penalties are appropriate and within the permissible range for the admitted contraventions:

(a)    $41,250.00 in the case of Inner Strength; and

(b)    $6,750.00 in the case of Sacha.

4    The parties have also agreed that the penalties ought to be paid to the Commonwealth in accordance with s 546(3)(a) of the FW Act and s 841(a) of the WR Act.

Maximum penalties under the legislation

5    Section 4 of the WR Act and s 12 of the FW Act provides that a “penalty unit” has the same meaning as in the Crimes Act 1914 (Cth) (Crimes Act). Section 4AA of the Crimes Act defines a “penalty unit” to be $110.00.

6    Pursuant to s 904(2) of the WR Act and s 546(2) of the FW Act, the maximum penalty available for contraventions of the relevant provisions in this proceeding are:

(a)    $33,000.00 for a body corporate; and

(b)    $6,600.00 for an individual.

7    The maximum penalties that the Court can impose on each of the respondents for the totality of the admitted contraventions is as follows:

(a)    in the case of Inner Strength, a body corporate, $198,000.00; and

(b)    in the case of Sacha, an individual, $39,600.00.

8    The total penalties which the parties have agreed ought to be paid by Inner Strength represent 20.83% of the maximum available. The total penalties which the parties have agreed ought to be paid by Sacha represent 17.05% of the maximum available.

9    The general legal principles are well-established. They were, conveniently, collected in Fair Work Ombudsman v Offshore Marine Services Pty Ltd [2012] FCA 498. There is no need to repeat them here. However, the overriding principle when fixing a penalty is to ensure that it is proportionate to the gravity of the contravening conduct: Attorney-General v Tichy (1982) 30 SASR 84 at 92-93.

Agreement between the parties on penalty

10    The principles applicable where the parties are agreed on penalties were considered in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 at 298-299 (Burchett and Kiefel JJ, with whom Carr J agreed) and were summarised by the Full Court in Minister for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd [2004] FCAFC 72 at [51] as follows:

(i)    It is the responsibility of the court to determine the appropriate penalty ….

(ii)    Determining the quantum of a penalty is not an exact science. Within a permissible range, the courts have acknowledged that a particular figure cannot necessarily be said to be more appropriate than another.

(iii)    There is a public interest in promoting settlement of litigation, particularly where it is likely to be lengthy ….

(iv)    The view of the regulator, as a specialist body, is a relevant but not determinative consideration on the question of penalty ….

(v)    In determining whether the proposed penalty is appropriate, the Court examines all of the circumstances of the case. Where the parties have put forward an agreed statement of facts, the Court may act on that statement if it is appropriate to do so.

(vi)    Where the parties have jointly proposed a penalty, it will not be useful to investigate whether the Court would have arrived at that precise figure in the absence of agreement. The question is whether that figure is, in the Court’s view, appropriate in the circumstances of the case. In answering that question, the Court will not reject the agreed figure simply because it would have been disposed to select some other figure. It will be appropriate if it is within the permissible range.

11    In Minister for Industry, Tourism & Resources, the Full Court further observed at [54]:

… the sixth proposition drawn from the reasoning in NW Frozen Foods does not mean ... that the Court must commence its reasoning with the proposed penalty and limit itself to considering whether that penalty is within the permissible range. A Court may wish to take that approach. However, it is open to a Court, consistently with the reasoning in NW Frozen Foods, first to address the appropriate range of penalties independently of the parties’ proposed figure and then, having made that judgement, determine whether the prepared penalty falls within the range.

12    The principles enunciated in Minister for Industry, Tourism & Resources have been applied in an industrial context: Leighton Contractors Pty Ltd v Construction, Forestry, Mining and Energy Union (2006) 164 IR 375 at [53]–[56]; and Australian Building and Construction Commissioner v Construction, Forestry, Mining and Energy Union [2012] FCA 189 at [20]-[21]; White v Construction, Forestry, Mining and Energy Union [2011] FCA 192 at [5].

sham contracting

13    The purpose of ss 900 and 902 of the WR Act and s 357 of the FW Act is to prohibit a practice commonly referred to as “sham contracting”. The practice occurs where an employer disguises an employment relationship as an independent contracting relationship.

14    The legislature has prohibited the practice of sham contracting because it undermines the protections afforded to employees by Australian industrial relations laws and instruments. Sham contracting arrangements enable employers to avoid legal obligations such as payment of payroll tax, workers compensation premiums, employee entitlements and superannuation contributions.

15    The penalty regime established for sham contracting arrangements that contravene ss 900 and 902 of the WR Act and s 357 of the FW Act is indicative of the seriousness with which the legislature views this type of conduct.

Relevant considerations in the assessment of penalty

16    A non-exhaustive list of factors that are potentially relevant in the imposition of a penalty was summarised by Mowbray FM in Mason v Harrington Corporation Pty Ltd [2007] FMCA 7 at [26]-[59] and adopted by Tracey J in Kelly v Fitzpatrick (2007) 166 IR 14 at [14] as follows:

•    The nature and extent of the conduct which led to the breaches.

•    The circumstances in which the relevant conduct took place.

•    The nature and extent of any loss or damage sustained as a result of the breaches.

•    Whether there had been similar previous conduct by the respondent.

•    Whether the breaches were properly distinct or arose out of the one course of conduct.

•    The size of the business enterprise involved.

•    Whether or not the breaches were deliberate.

•    Whether senior management was involved in the breaches.

•    Whether the party committing the breach had exhibited contrition.

•    Whether the party committing the breach had taken corrective action.

•    Whether the party committing the breach had co-operated with the enforcement authorities.

•    The need to ensure compliance with minimum standards by provision of an effective means for investigation and enforcement of employee entitlements; and

•    The need for specific and general deterrence.

17    While these considerations are neither exhaustive nor applicable in all cases involving the imposition of penalties, they do provide a useful guide for the Court as to the appropriate matters which may, or may not, be considered relevant in the assessment of pecuniary penalties under the WR Act and FW Act.

Nature and extent of the conduct and circumstances in which it occurred

18    The nature and extent of the contravening conduct and the circumstances in which it occurred are set out in the SOAFA. In essence, Sacha, in his capacity as the sole director of Inner Strength, engaged in unlawful conduct over a period of about two years, which involved:

(a)    in 2008, converting the employment of an existing worker, Phillip Iemma (Iemma), from an employee to an independent contractor in circumstances where that worker remained, as a matter of fact and law, an employee of Inner Strength; and

(b)    between June 2009 and July 2010, Sacha engaged Jesse Munyard, Tony Page, Daniel Paschkewitz and Barry Teeling (the Workers) as independent contractors in circumstances where, as a matter of fact and law, the Workers were employees of Inner Strength.

Nature and extent of loss or damage

19    Iemma and the Workers were each unlawfully engaged as independent contractors and as a result, deprived of their entitlements as employees from the time of their engagement as independent contractors until at least early 2011. The monetary loss for the Workers has not been quantified. Furthermore, such quantification is not an easy task. For example, a contractor who does not have recourse to paid sick leave is more likely to work when sick than an employee who has an entitlement to sick leave. Similarly, a contractor may have borne the loss for a personal injury caused at work because the employer failed to pay workers compensation premiums.

Whether the contraventions were distinct or arose out of the one course of conduct

20    The contraventions involve a course of conduct, over a period of at least two years, rather than a single, one-off incident. Nonetheless, the parties accept that they constitute discrete contraventions of the WR Act and FW Act.

Involvement of senior management

21    Sacha was the sole director of, and employed by Inner Strength in a managerial capacity. He was directly involved and personally responsible for determining that Iemma and the Workers should be engaged as independent contractors rather than employees. Further, he established business systems for the purpose of engaging the five workers under sham contracting arrangements. This demonstrates the deliberate nature of Sacha's unlawful conduct.

Size of Inner Strength's business

22    Inner Strength is a medium sized business that provides steel fixing services.

23    Inner Strength has agreed to the proposed penalties and has not led any evidence of impecuniosity.

Whether or not the breaches were deliberate

24    It is conceded by the respondents that the unlawful conduct was engaged in deliberately in order to financially benefit Inner Strength.

25    The unlawful conduct was of direct financial benefit to Inner Strength. Inner Strength avoided payment of payroll tax, workers’ compensation premiums, employee leave entitlements and superannuation contributions as a result of the unlawful conduct, thereby reducing the operating costs of the company.

Contrition, corrective action and co-operation with enforcement authorities

26    The respondents have admitted liability and co-operated with the ABCC in relation to the appropriate level of penalties to be paid.

27    The respondents have taken some corrective action by agreeing for Inner Strength to pay to Iemma the annual leave entitlements not paid to him as a result of the unlawful conduct. It has been agreed that Iemma will be paid the total amount of $26,807.50 with payments of $1,000.00 per fortnight.

28    The respondents, since the commencement of this proceeding, have also obtained legal and accounting advice at Inner Strength’s expense directed to:

(a)    appreciating the legal distinction between an employee and an independent contractor; and

(b)    reducing the risk of either of them committing similar contraventions in the future.

Prior relevant conduct

29    Neither Inner Strength nor Sacha has previously been found to have committed a contravention of any applicable industrial legislation.

General and specific deterrence

30    The establishment of unlawful sham contract arrangements is objectively serious. Sham contracting, by its nature, provides a company with an unfair advantage over its competitors in that the company’s operating expenses are unlawfully reduced, making it more competitive against its rivals and providing increased company revenue. Accordingly, penalties must reflect the objective seriousness of this type of conduct to act as a deterrent to others who might be likely to engage in contraventions: Ponzio v B&P Caelli Constructions Pty Ltd (2007) 158 FCR 543 at [93].

31    Specific deterrence is also relevant. The penalties must be sufficient to deter the respondents from engaging in further unlawful conduct of this type.

Other relevant consideration – totality principle

32    The Court must also take into account the totality principle in determining the appropriate level of penalty. This principle is designed to ensure that the aggregate penalties imposed are not such as to be oppressive or crushing: Kelly at [30].

Conclusion

33    I am satisfied, in the overall, that the penalties proposed by the parties are within the permissible range. I will make orders accordingly in terms of Annexure “A” to the SOAFA.

Associate:

Dated:    17 May 2012