FEDERAL COURT OF AUSTRALIA

Fair Work Ombudsman v Contracting Solutions Australia Pty Ltd

[2013] FCA 7

THE COURT DECLARES:

1.    THAT THE SECOND RESPONDENT:

contravened s 900 of the Workplace Relations Act 1996 (Cth) (the Act) by representing to Ms Samantha Davis from on or about 24 November 2007 to on or about 7 April 2008, that the contract to which she was a party with the Second Respondent was a contract for services under which Ms Davis performed, or was to perform, work for the Second Respondent as an independent contractor; in circumstances where, as a matter of fact and law, the contract was a contract of employment under which the Second Respondent was the employer of Ms Davis, rather than a contract for services under which Ms Davis performed work as an independent contractor.

2.    THAT THE THIRD, FOURTH AND FIFTH RESPONDENTS:

(a)    by reason of s 728 of the Act, each contravened s 900 of the Act by representing to Ms Nikki Langmead from on or about 1 March 2007 to 27 November 2007, that the contract to which she was a party with the First Respondent was a contract for services under which Ms Langmead performed, or was to perform, work for the First Respondent as an independent contractor; in circumstances where, as a matter of fact and law, the contract was a contract of employment under which the First Respondent was the employer of Ms Langmead, rather than a contract for services under which Ms Langmead performed work as an independent contractor.

(b)    were each involved in the Second Respondent’s contravention of s 900 of the Act, and thereby, by reason of s 728 of the Act, each contravened s 900 of the Act by representing to Ms Samantha Davis from on or about 24 November 2007 to on or about 7 April 2008, that the contract to which she was a party with the Second Respondent was a contract for services under which Ms Davis performed, or was to perform, work for the Second Respondent as an independent contractor; in circumstances where, as a matter of fact and law, the contract was a contract of employment under which the Second Respondent was the employer of Ms Davis, rather than a contract for services under which Ms Davis performed work as an independent contractor.

THE COURT ORDERS THAT:

1.    Pursuant to s 904(1) of the Act, the Second Respondent pay a penalty of $14,850 in respect of the declared contravention of s 900 of the Act.

2.    Pursuant to s 904(1) of the Act, the Third Respondent pay an aggregate penalty of $13,200 in respect of the declared contraventions of s 900 of the Act.

3.    Pursuant to s 904(1) of the Act, the Fourth Respondent pay an aggregate penalty of $5,940 in respect of the declared contraventions of s 900 of the Act.

4.    Pursuant to s 904(1) of the Act, the Fifth Respondent pay an aggregate penalty of $2,640 in respect of the declared contraventions of s 900 of the Act.

5.    Pursuant to s 841(a) of the Act, the second and fourth respondents pay the penalties referred to in orders 1 and 3 above to the Consolidated Revenue Fund of the Commonwealth within three months of the date of this order.

6.    Pursuant to s 841(a) of the Act, the third and fifth respondents pay the penalties referred to in orders 2 and 4 above to the Consolidated Revenue Fund of the Commonwealth within six months of the date of this order.

7.    The proceeding otherwise be dismissed.

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

REASONS FOR JUDGMENT

Introduction

1    This proceeding was started on 15 October 2010. It is an application by the Fair Work Ombudsman (Ombudsman) for the imposition of penalties, and other relief, against the respondents pursuant to ss 719 and 904 of the Workplace Relations Act 1996 (Cth) (WR Act) and s 23 of the Federal Court of Australia Act 1976 (Cth) (Federal Court Act), in respect of contraventions by the respondents of the WR Act relating to the application of a labour contracting model to school-aged teenagers performing retail food assistant duties at a food outlet.

The parties

2    The office of the applicant, the Ombudsman, is established by s 696 of the Fair Work Act 2009 (Cth) (FW Act) and the Ombudsman is a Fair Work Inspector pursuant to s 701 of the FW Act, and in that capacity able to prosecute this proceeding.

3    The first respondent, Contracting Solutions Australia Pty Ltd (in liquidation) (ACN 099 340 566) (Contracting Solutions), was a company incorporated in South Australia and a constitutional corporation within the meaning of s 4(1) of the WR Act. It ceased to trade on or about 17 November 2007, and was placed into liquidation on or about 27 April 2011, which was after this proceeding started. I will address the effect of that liquidation upon the orders sought later in these reasons. The Ombudsman did not seek leave to proceed against Contracting Solutions pursuant to s 471B of the Corporations Act 2001 (Cth). The effect of s 471B means that the Ombudsman cannot seek any relief against Contracting Solutions. However, that does not mean that the Ombudsman cannot rely upon Contracting Solutions’ contraventions in proving accessorial liability against Mr Michael Wright: Matheson Engineers Pty Limited and Another v El Raghy and Others (1992) 37 FCR 6 at 9; Richardson & Wrench (Holdings) Pty Ltd and Another v Ligon No 174 Pty Ltd and Others (1994) 123 ALR 681 per Burchett J at 683; Australian Competition and Consumer Commission v Black on White Pty Ltd and Others (2001) 110 FCR 1 at [41]-[53].

4    The second respondent, Labour Contract Solutions Pty Ltd (ACN 123 533 111) (LCS) is a company incorporated in South Australia and a constitutional corporation within the meaning of s 4(1) of the WR Act.

5    The third respondent, Blue Steel Corporation Pty Ltd (ACN 099 725 372) (Blue Steel), is a company incorporated in South Australia and a constitutional corporation within the meaning of s 4(1) of the WR Act.

6    The fourth respondent, Mr Michael Wright, is and was at all material times the sole director of Contracting Solutions and a director of LCS.

7    The fifth respondent, Mr Daryl Lenkic, is and was at all material times the sole director and secretary of Blue Steel.

The relief sought

8    The Ombudsman sought and obtained leave to amend the statement of claim by including a reference to a third employee, Dean Cocks. However, on 20 October 2011, the Ombudsman filed an amended application seeking the following declarations:

(a)    In the period 27 March 2006 until around November 2007, the first, third, fourth and fifth respondents contravened the terms of the former state award applicable at the relevant times in respect of Master Dean Cocks and Miss Nikki Langmead;

(b)    In the period 1 March 2007 until around November 2007, the first, third, fourth and fifth respondents contravened s 900 of the WR Act in respect of Miss Langmead;

(c)    In November 2007, the second, third, fourth, and fifth respondents contravened s 901 of the WR Act in relation to the offer of work to Miss Samantha Davis;

(d)    In the period November 2007 to April 2008, the second, third, fourth and fifth respondents contravened s 900 of the WR Act in relation to Miss Davis;

(e)    In December 2007, the second, third, fourth and fifth respondents contravened s 901 of the WR Act in relation to the offer of work to Master Luke McKibben;

(f)    In the period December 2007 to April 2008, the second, third, fourth and fifth respondents contravened s 900 of the WR Act in relation to Master McKibben.

9    Also in that amended application, the Ombudsman claimed:

(a)    The imposition of penalties under s 719 of the WR Act in respect of each declared contravention of the terms of the former state awards applicable at the relevant times in respect of Master Cocks and Miss Langmead;

(b)    An order under s 719(6) of the WR Act and s 23 of the Federal Court Act that the first respondent, or alternatively the third respondent, pay Master Cocks and Miss Langmead compensation for underpaid wages and interest on that sum pursuant to ss 722 and 723 of the WR Act;

(c)    The imposition of penalties pursuant to s 904 in respect of declared contraventions of ss 900 and 901 of the WR Act in respect of Miss Langmead, Miss Davis, and Master McKibben; and

(d)    To remedy the effects of this conduct, orders pursuant to s 904(2A) of the WR Act that the first, third, fourth, and fifth respondents pay compensation to Miss Langmead, and the second, third, fourth, and fifth respondents pay compensation to Miss Davis and Master McKibben.

10    The Ombudsman did not prosecute the proceeding in respect to Masters Cocks and McKibben.

The relevant legislation

11    The Ombudsman’s claims are that the respondents contravened s 900(1) of the WR Act, which is contained in Part 22 of the WR Act entitled “Sham arrangements”. Part 22 was inserted into the WR Act by Schedule 1 of the Workplace Relations Legislation Amendment (Independent Contractors) Act 2006 (Cth) and commenced operation on 1 March 2007.

12    Although the WR Act was repealed on 1 July 2009, it continues to apply to conduct that occurred before that date, and the Ombudsman is entitled to bring proceedings under the WR Act in relation to such conduct: Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 (Cth) Schedule 2 part 3 s 11(1), Schedule 18 part 3 s 13(1).

13    Section 900(1) of the WR Act provides:

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.

14    Section 900(2) of the WR Act provides a defence:

A person does not contravene subsection (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.

15    As will be later seen, the respondents do not contend they are entitled to the benefit of s 900(2).

16    Section 900(3) provides that s 900(1) is a civil remedy provision. A civil remedy provision is defined in s 727, which provides:

(1)    This Division sets out rules that apply for the purposes of these provisions:

(a)    section 719; and

(b)    another provision of this Act that is declared (whether by that provision or by another provision of this Act) to be a civil remedy provision (whether or not for the purposes of a particular segment of this Act); and

(c)    another provision of this Act that provides a remedy for a contravention of a provision referred to in paragraph (b).

(2)    Those provisions are called the civil remedy provisions.

17    Section 728 addresses a contravention of a civil remedy provision. It provides:

(1)    A person who is involved in a contravention of a civil remedy provision is treated as having contravened that provision.

(2)    For this purpose, a person is involved in a contravention of a civil remedy provision 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 party to the contravention; or

(d)    has conspired with others to effect the contravention.

18    Although Part 22 is entitled “Sham arrangements”, s 900 does not address common law notions of a sham where the parties have a common intention that the document or act is a disguise for some other transaction and does not in fact create the legal rights and obligations which the document appears to create.

19    In Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471, the Court said at [46]:

“Sham” is an expression which has a well-understood legal meaning. It refers to steps which take the form of a legally effective transaction but which the parties intend should not have the apparent, or any, legal consequences.

(Footnotes omitted)

20    A contravention of s 900(1) will be established if a respondent is a party to a contract with a person and the respondent makes the representation referred to in s 900(1)(b) and, in fact, the contract is a contract of employment rather than a contract for services.

The agreed facts

21    An agreed statement of facts as between the Ombudsman, LCS and Mr Wright was filed 26 September 2012. Contracting Solutions was not, of course, a party to the agreed statement of facts. An amended agreed statement of facts as between the Ombudsman, Blue Steel and Mr Lenkic was filed 2 October 2012. A summary of the agreed facts is as follows.

22    From around 2002 until 7 April 2008, Blue Steel conducted a retail fast food business selling pretzels, drinks and other items. Pursuant to a franchise agreement, the business traded at different times under the name “Wetzels Pretzels” and under the name “The Pretzel Bakehouse”, at a shop within the Tea Tree Plaza Shopping Centre at 976 North East Road, Modbury, in South Australia (the shop). Blue Steel employed staff in the shop who performed duties including making pretzels, serving customers, and cleaning.

Contracting Solutions and LCS

23    From 2001 to 2002, Mr Wright was employed by Australia Contracting Solutions Pty Ltd (ACS) as its operations manager. ACS supplied contract labour and contractors to commerce and industry under a form of labour contracting known as the “Odco contracting model” (Odco model). ACS was licensed by a company that owned the rights to the intellectual property of the Odco model processes and forms used to implement and apply the Odco model.

24    In February 2002, Mr Wright decided to establish his own Odco contracting company, Contracting Solutions.

25    On 21 March 2002, Contracting Solutions entered into an Odco Licence Agreement with the then licensor, Labour Force Australia Pty Ltd (LFA), and Contracting Solutions conducted business as an Odco contracting company, supplying contract labour and personnel to commerce and industry in South Australia until November 2007.

26    On or around 26 November 2007, LCS entered into an Odco Licence Agreement with the then licensor, Odco Contract Systems Australia Pty Ltd. The agreement was in substantially the same terms as the 2002 Odco Licence Agreement between Contracting Solutions and LFA. After November 2007, LCS conducted business as an Odco contracting company in a similar fashion to the way that Contracting Solutions had done.

27    Mr Wright and his Odco contracting companies (Contracting Solutions and later LCS) knew, by virtue of the initial training materials and subsequent updates and conferences, several relevant matters. First, that the Odco system was designed not to exploit workers, but was designed to operate so that the contractor would be paid above award rates, and designed for contractors who were business people with a business attitude to work who did not want to be constrained by the award wages system. Secondly, the Odco system of labour contracting was not fool-proof and the legality of each implementation of the Odco system of contracting, and whether the arrangement in any situation led to the worker being deemed a contractor or employee, had to be assessed on its circumstances. Thirdly, Contracting Solutions and subsequently LCS were required under their licences to adhere strictly to the Odco system. Fourthly, the licensors required all licensees to adhere strictly to the principle that contractors supplied should receive remuneration equal to or more than the total benefits received by an employee working in similar circumstances. Fifthly, the licensors required all licensees not to use the Odco system as a cheap labour system.

28    In September 2003, Mr Wright attended a LFA Licensing Conference in which there were materials and presentations addressing the risks involved in the contracting model.

29    The 2004 version of the LFA Operations Manual was published to Contracting Solutions and, accordingly, Contracting Solutions and Mr Wright were made aware of further several relevant matters. First, the licensor required the licensee to consider the relevant industrial award for employees, and issues of overtime, penalties, allowances, loadings, and superannuation, to arrive at a minimum rate, and that preferably the contractor should be paid above that rate. Secondly, the licensee’s checklist for interviewing a prospective contractor provided for the contractor to be informed that the rates paid would include components to accommodate comparable award rates and compensation for holiday pay, annual leave, sick leave, and superannuation, and the contractor rates would always be above comparable minimum award rates and conditions. Thirdly, in a decision of the Full Bench of the South Australian Workers Compensation Tribunal, Country Metropolitan Agency Contracting Services Pty Ltd v Slater and WorkCover/CGU Workers Compensation Insurance (SA) Pty Ltd [2003] SAWCT 57, the Tribunal had dismissed an appeal against a decision of the Tribunal, which found that the first respondent in that matter, purportedly an Odco system contractor, was in fact an employee for reasons including that the employee was performing low skill work and was only paid slightly more than the minimum wage.

30    The later versions of the LFA Operations Manual again addressed those matters and provided further guidance on how to calculate remuneration for a contractor.

31    On 24 September 2004, a memorandum was sent from the licensor to all licensees to remind them that advertising for contractors always had to be done by the agency; the first contact always had to be with the agency; and the agency’s client should never offer work directly to the contractor.

32    Contracting Solutions’ and LCS’s documentation and systems were audited every year or so by the Odco licensor. In 2005, after an audit, the licensor wrote to Mr Wright for Contracting Solutions stating that any minors should be accompanied by a parent or guardian at their interview with Contracting Solutions and parents or guardians needed to co-sign any agreement to contract. Mr Wright understood from at least this point in time that the licensor was aware that Contracting Solutions was applying the Odco model to minors.

The labour hiring agreements

33    When Blue Steel started its business in 2002, Sunday trading was not conducted in Tea Tree Plaza. It started in October 2003. The shop had not been operating successfully, and Mr Lenkic was concerned about the effect of Sunday trading, including the impact of penalty rates payable to his employees.

34    In or about mid November 2003, Mr Lenkic spoke about the impact of Sunday trading to the Master Franchisor for Wetzels Pretzels, who suggested Mr Lenkic speak to Mr Wright about using the services of Contracting Solutions.

35    On or about 24 November 2003, Mr Lenkic met Mr Wright who provided Mr Lenkic with information about agency contracting and the Odco system, which Mr Lenkic read and viewed. Mr Lenkic was aware that the Odco system was designed to operate on the basis that the contractor would be paid above the award rates; designed for contractors who were business people with a business attitude to work; and designed for contractors who did not want to be constrained by the award wages system. Mr Lenkic consulted with the Master Franchisor who agreed that contracting would be beneficial.

36    In early December 2003, Mr Lenkic met with Mr Wright and told him that Blue Steel wished to engage Contracting Solutions.

37    Mr Wright calculated the rates for contractors under the Odco system that would apply to Blue Steel and provided a schedule of those rates in a document dated as at 5 January 2004 (Contracting Solutions’ schedule of rates).

38    As at 5 January 2004, the “Delicatessens, Canteens and Unlicensed Cafes Award (South Australia)” (State Award) regulated the terms and conditions of employees doing the same or comparable work to the work that retail food assistants would be doing at the shop. Contrary to the licensor’s instructions, Contracting Solutions’ schedule of rates provided for set rates of pay at the shop below the minimum award rates and conditions for employees in South Australia doing the same or comparable work under the State Award.

39    On 11 January 2004, in a meeting between Mr Wright and Mr Lenkic, a hire agreement was entered into by Contracting Solutions and Blue Steel, whereby Contracting Solutions would supply retail food assistants to Blue Steel as required by Blue Steel; Contracting Solutions would assume responsibility for all administration of the statutory requirements for the personnel supplied; Blue Steel would pay Contracting Solutions for the supply of personnel based on an agreed schedule of hourly rates; and the rates charged by Contracting Solutions in respect of each retail food assistant comprised the rate that Contracting Solutions paid the retail food assistant, plus a client charge, plus Goods and Services Tax (GST).

40    From 27 March 2006, the State Award commenced operation as a “notional agreement preserving state awards” (NAPSA). Contracting Solutions’ schedule of rates set rates of pay for retail food assistants at the shop below the minimum award rates and conditions for employees in South Australia doing the same or comparable work under the NAPSA.

41    Some time in late 2007, the Workplace Ombudsman (as the Ombudsman was then known) conducted an industry audit of the fast food industry, in which Blue Steel was required to participate. Mr Lenkic met with an inspector from the Workplace Ombudsman who informed him that there was an issue with the rates being paid and the correct award that covered the employees was the State Award.

42    On 19 November 2007, Mr Wright prepared a new quotation for Blue Steel in a document dated the same day (LCS’ schedule of rates), setting out the contractor rates to be charged by LCS.

43    LCS’ schedule of rates set rates of pay for retail food assistants at the shop at a flattened pay structure, with the rate on Monday to Friday between 8:00am and 6:00pm being above the minimum award rates and conditions for employees in South Australia doing the same or comparable work under the NAPSA. However, the rates for all other periods of time were below the minimum award rates and conditions.

44    On or around 26 November 2007, Blue Steel entered into a contract with LCS which was similar to the previous agreement between Blue Steel and Contracting Solutions whereby LCS would supply retail food assistants to Blue Steel as required by Blue Steel; LCS would assume responsibility for all administration of the statutory requirements for the personnel supplied; Blue Steel would pay LCS for the supply of the personnel at hourly rates as agreed in the schedule of rates; and the rates charged by LCS in respect of each retail food assistant comprised the rate that LCS paid the retail food assistant, plus a client charge, plus GST.

The relevant employees

45    Blue Steel advertised at the shop, stating that it wanted casual staff to work at certain times. Miss Langmead was a 15 year old school girl, seeking casual work outside school hours. Miss Langmead responded to the advertisement.

46    At Mr Lenkic’s request, Miss Langmead went to the shop after school and completed an unpaid trial for a couple of hours, during which Mr Lenkic showed her how to perform various tasks. Not all persons who completed a trial were offered positions, whilst others who may have been offered work did not want to pursue the work after the trial. The trial sessions were held to enable both the shop and the persons applying for positions to make a genuine assessment of the suitability of the proposed employee for the position.

47    After the trial, Mr Lenkic phoned Miss Langmead and told her that she had the job. He told her that Blue Steel engaged staff through Contracting Solutions and that she should meet Mr Wright at Café Primo at Tea Tree Plaza to “go over the paperwork”. He inquired as to what times she and a parent of hers would be available.

48    On 31 March 2005, Miss Langmead and her mother met with Mr Wright at Café Primo. Mr Wright informed them of the working arrangements and gave Miss Langmead a document entitled “The Contractors Guide The Agency Contracting System” (Contractors Guide) and an “Agreement to Contract”.

49    The respondents accept that Contracting Solutions through Mr Wright represented to Miss Langmead that the contract being offered to her was a contract for services under which she would perform retail food assistant work at the shop for Contracting Solutions as an independent contractor. However, that representation did not give rise to a contravention of the WR Act at the time that it was made, because s 900(1) was not then enacted in its current form.

50    At the meeting at Café Primo, Miss Langmead accepted the offer. Miss Langmead, and Mr Wright on behalf of Contracting Solutions, signed the Agreement to Contract, which stated:

I am self-employed and, as such, I am not bound to accept any work through the agency.

It is agreed that I must carry out all work … and the agency is hereby guaranteed against faulty work. All work must be made good.

I agree to cover the work (where necessary) for Public Liability, Accident Insurance, Long Service, and Holiday Pay, and have no claims on the agency in respect of the above.

I hereby agree to supply my own equipment, including safety equipment …

51    The Contractors Guide stated:

The agency works to maintain the independence and self-employed status of bona fide contractors who do not wish to be bound by the constraints of the wages system ...

As an independent contractor, you are primarily responsible for your own safety on side …

… contractors are excluded from workers compensation cover …

As part of your contract with us it is essential that you have Public Liability Insurance … It is to protect you, the contractor, against the costs of legal proceedings …

You could be held personally liable for injury caused through your negligent actions.

[Persons who can use the agency contracting system include] any worker who … needs more flexibility and control over their working lives [and] [i]ndependent, responsible workers who want to be in control of their own lives, who want to decide when they will work, and who are not answerable to a “boss”.

52    The Odco system was not suitable for use with minors. Miss Langmead was not a bona fide self-employed independent contractor running her own business. What Contracting Solutions had in substance offered Miss Langmead was an arrangement as follows:

(a)    Contracting Solutions would arrange for Miss Langmead to perform retail food assistant work at the shop;

(b)    That work would be on a casual basis with no annual leave or sick leave;

(c)    Miss Langmead agreed to make herself available outside of school hours to work such hours to be arranged between her and Blue Steel;

(d)    When working at the shop, Miss Langmead would be obliged to perform her work in a proper manner, in accordance with the instructions of Blue Steel;

(e)    Contracting Solutions would pay Miss Langmead for such work at hourly rates, starting at a base weekday rate of $7.50 and a weekend rate of $9.00 (for a person under 18 years of age) derived from the Contracting Solutions’ schedule of rates.

53    The arrangement meant that Contracting Solutions had offered Miss Langmead casual employment at the shop, not an Odco independent contractor relationship.

54    From early April 2005 until around 17 November 2007, Miss Langmead made herself available out of school hours to work, and worked the hours agreed between her and Blue Steel, which was normally 10 hours per week. She performed basic retail assistant work under supervision of Mr Lenkic or his store manager Ms Jennifer Harrison. Contracting Solutions did not arrange work for Miss Langmead, other than retail food assistant work at the shop. Miss Langmead performed her work at the shop properly and in accordance with Blue Steel’s instructions. Contracting Solutions paid her each fortnight for the hours worked at the rates to which I have just referred.

55    Miss Langmead was employed by Contracting Solutions for the period during which she worked at the shop from 31 March 2005 until Contracting Solutions ceased to trade on or about 17 November 2007. During that period, Contracting Solutions continued to represent to Miss Langmead that her contract with Contracting Solutions was a contract for services under which she performed, or was to perform, retail food assistant work for Contracting Solutions at the shop as an independent contractor. Part 22 of the WR Act contains the provisions that are contravened by a representation of this kind. They are referred to earlier in these reasons and, as I have said, came into force on 1 March 2007.

56    Miss Davis was also a 15 year old school girl seeking casual work outside school hours, who responded to an advertisement at the shop that sought casual staff.

57    Miss Davis was asked by Ms Harrison to come to the shop and complete an unpaid trial, during which she was shown how to do the various tasks around the shop. At the end of the trial, Ms Harrison informed Miss Davis that she had the job and she should meet Mr Wright at Café Primo at Tea Tree Plaza, with a parent, to sign some forms.

58    On 24 November 2007, Miss Davis and her father met Mr Wright at Café Primo. Mr Wright informed them of the working arrangements and gave Miss Davis a document entitled “Information Guide for Odco Contractors” and an Agreement to Contract.

59    LCS through Mr Wright thereby represented to Miss Davis that the contract being offered to her was a contract for services under which she would perform the retail food assistant work at the shop for LCS as an independent contractor. This representation was made at a time when Part 22 of the WR Act had, as I have said, commenced operation.

60    At the meeting at Café Primo, Miss Davis accepted the offer. Miss Davis signed the Agreement to Contract that day, and Mr Wright on behalf of LCS signed it on 10 December 2007.

61    The Agreement to Contract that was provided to Miss Davis was in relevantly the same terms as the one Miss Langmead had signed, to which I have referred.

62    The Information Guide for Odco Contractors provided to Miss Davis was in relevantly the same terms as the Contractors Guide provided to Miss Langmead, to which I have referred.

63    The Odco system was not suitable for use with minors, and Miss Davis, like Miss Langmead, was not a self-employed independent contractor running her own business. What LCS had really offered Miss Davis was an arrangement of the same kind that Contracting Solutions had offered Miss Langmead, with the exception being as to pay rates; LCS would pay Miss Davis for work at hourly rates starting at a base weekday rate of $9.66 and a weekend rate of $13.78 (for a person under 17 years of age) derived from LCS’ schedule of rates.

64    By reason of this arrangement, LCS had offered Miss Davis casual employment at the shop, not an Odco independent contractor relationship.

65    From late November 2007 to on or about 7 April 2008, Miss Davis worked the hours at the shop agreed between her and Blue Steel. She performed basic retail assistant work under supervision by Mr Lenkic or his store manager Ms Jennifer Harrison. LCS did not arrange work for Miss Davis, other than retail food assistant work at the shop. Miss Davis performed her work at the shop properly and in accordance with Blue Steel’s instructions. LCS paid her each fortnight for the hours she worked at the rates to which I have just referred.

66    Miss Davis was employed by LCS for the period during which she worked at the shop from November 2007 to on or about 7 April 2008. During that period, LCS represented to Miss Davis that her contract with LCS was a contract for services under which she performed, or was to perform, retail food assistant work for LCS at the shop as an independent contractor.

Conduct of the directors being conduct of the relevant companies

67    The parties agreed that Mr Wright’s conduct and state of mind was the conduct and state of mind of Contracting Solutions and LCS. The parties also agreed that the conduct and state of mind of Mr Lenkic was the conduct and state of mind of Blue Steel. Section 826 of the WR Act provides:

Conduct by officers, directors, employees or agents

    (1)    Where it is necessary to establish, for the purposes of this Act or the BCII Act, the state of mind of a body corporate in relation to particular conduct, it is sufficient to show:

(a)    that the conduct was engaged in by an officer, director, employee or agent of the body corporate within the scope of his or her actual or apparent authority; and

(b)    that the officer, director, employee or agent had the state of mind.

    (2)    Any conduct engaged in on behalf of a body corporate by:

        (a)    an officer, director, employee or agent of the body corporate within the scope of his or her actual or apparent authority; or

        (b)    any other person at the direction or with the consent or agreement (whether express or implied) of an officer, director, employee or agent of the body corporate, where the giving of the direction, consent or agreement is within the scope of the actual or apparent authority of the officer, director, employee or agent;

shall be taken, for the purposes of this Act or the BCII Act (as the case requires), to have been engaged in also by the body corporate.

    (3)    A reference in this section to the state of mind of a person includes a reference to the knowledge, intent, opinion, belief or purpose of the person and the person’s reasons for the intent, opinion, belief or purpose.

LCS and Mr Wright

68    The Ombudsman and LCS and Mr Wright agree that between 31 March 2007 until November 2007, Contracting Solutions through Mr Wright represented to Miss Langmead that she was an independent contractor in circumstances where:

(a)    Miss Langmead was a schoolgirl and Contracting Solutions was aware of that fact;

(b)    Contracting Solutions was reckless as to the fact that Miss Langmead was not a bona fide, self-employed, independent contractor running her own business;

(c)    Contracting Solutions was reckless as to the fact that in applying the Odco model to a schoolgirl to work as a retail food assistant at a pretzel shop, it was using the Odco model for a purpose quite removed from the purpose for which the Odco licensor had said the Odco model was designed;

(d)    Contracting Solutions was aware that Miss Langmead had been referred to it by Blue Steel and that this referral was inconsistent with the licensor’s stated requirements in relation to advertising for and recruitment of contractors;

(e)    Contracting Solutions knew of the licensor’s requirement for remuneration of contractors to be no less favourable than award wages and conditions for employees doing comparable work, yet did not ensure that all of the rates satisfied this requirement; and

(f)    Contracting Solutions understood the risk that by departing from the Odco purpose and requirements, there was a risk that the arrangements it put in place for Miss Langmead would constitute an employment relationship between Contracting Solutions and Miss Langmead.

69    It is not clear why the parties chose the start date of 31 March 2007 when Part 22 commenced on 1 March 2007. The date of 31 March 2007 is also inconsistent with the declaration sought in the originating application. I think it is an error on the parties’ part.

70    Mr Wright admits that by his conduct Contracting Solutions was reckless as to the fact that the arrangement it had put in place with Miss Langmead created an employment relationship, instead of an independent contractor relationship.

71    Mr Wright also admits that as a director of Contracting Solutions, and the person who directly handled the operations of Contracting Solutions including the engagement of Miss Langmead, he was a person knowingly involved and concerned in the contravening conduct.

72    LCS and Mr Wright admit that from late November 2007 when LCS made the relevant offer to Miss Davis, until April 2008 when Miss Davis ceased working at the shop, LCS through Mr Wright represented to her that she was an independent contractor in circumstances like those that existed between Contracting Solutions and Miss Langmead, which I have described in paragraph [68] of these reasons. The representation continued throughout the period of Miss Davis’ employment at the shop.

73    LCS and Mr Wright also admit that LCS through Mr Wright, while maintaining that representation, was reckless as to the fact that LCS was actually offering and maintaining an employment relationship between LCS and Miss Langmead. Mr Wright also admits that as a director of LCS, and the person who directly handled the operations of LCS including the engagement of Miss Davis, he was a person knowingly involved and concerned in the contravening conduct.

74    Based on the agreed facts, LCS admits that it has committed a single contravention of s 900 of the WR Act in relation to Miss Davis.

75    Mr Wright admits that:

(a)    Contracting Solutions has committed a contravention of s 900 of the WR Act in relation to Miss Langmead;

(b)    LCS has committed a contravention of s 900 of the WR Act in relation to Miss Davis; and

(c)    He was, pursuant to s 728 of the WR Act, a person involved in Contracting Solutions’ and LCS’ contraventions and, accordingly, has himself twice contravened s 900 of the WR Act.

Blue Steel and Mr Lenkic

76    The Ombudsman and Blue Steel and Mr Lenkic agree that Blue Steel through Mr Lenkic was aware:

(a)    Miss Langmead and Miss Davis were under the age of 18, were still attending school, and were not bona fide, self-employed, independent contractors running their own businesses and wishing not to be bound by the constraints of the wages system;

(b)    Of the circumstances and manner in which Miss Langmead and Miss Davis were hired to, and performed, work in the shop;

(c)    That Miss Langmead and Miss Davis performed retail food assistant work in the shop at all times under the direction of Mr Lenkic or Ms Harrison; and

(d)    There was a risk that Miss Langmead was an employee of Contracting Solutions and that Miss Davis was an employee of LCS.

77    Blue Steel and Mr Lenkic admit that:

(a)    At all relevant times the contract between Contracting Solutions and Miss Langmead was, in reality, a contract of employment under which she performed work at the shop as an employee, as opposed to the representation made by Contracting Solutions that it was a contract for services under which she performed work as an independent contractor;

(b)    The offer made by LCS to Miss Davis was one of employment under which she was to perform work at the shop as an employee, as opposed to the representation made by LCS that it was a contract for services under which she would perform work as an independent contractor; and

(c)    At all relevant times the contract between LCS and Miss Davis was a contract of employment, under which she performed work at the shop as an employee, as opposed to the continuing representation made by LCS that it was a contract for services under which she performed work as an independent contractor.

78    Blue Steel and Mr Lenkic do not contend that Contracting Solutions or LCS are entitled to the benefit of the defence in s 900(2) of the WR Act.

79    Blue Steel and Mr Lenkic admit that Contracting Solutions contravened s 900 in relation to Miss Langmead from 31 March 2007 until late November 2007, and admit that LCS contravened s 900 in relation to Miss Davis from late November 2007 until April 2008.

80    Blue Steel and Mr Lenkic also admit that they were each persons involved in the contraventions of s 900 of the WR Act by Contracting Solutions and LCS, and that pursuant to s 728 of the WR Act, they have each committed those contraventions.

81    The statements of agreed facts and the admissions contained therein meant that the respondents admitted contraventions of s 900 of the WR Act. They also agreed that the contraventions meant that a penalty would ensue.

82    The hearing was limited to the question of the penalties to be imposed.

Penalty

83    Section 904 of the WR Act provides for the imposition of a pecuniary penalty on a person who has contravened s 900(1) of the WR Act. The maximum penalty that may be imposed is 60 penalty units for an individual, and 300 penalty units for a body corporate: s 904(2) of the WR Act. A penalty unit has the same meaning given by s 4AA of the Crimes Act 1914 (Cth), which defines a penalty as $110: s 4(1) of the WR Act.

84    Accordingly, the maximum penalty for a single contravention of s 900 of the WR Act by an individual is $6,600.

85    The maximum penalty for a single contravention of s 900 of the WR Act by a body corporate is $33,000.

86    The parties addressed the issue of penalty in their statements of agreed facts, in written submissions, and on the hearing. Whilst fixing a penalty is ultimately for the Court, where parties agree on a penalty, the Court should not disturb it unless it falls outside the appropriate range: NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (“NW Frozen Foods”); Furlong v Australian Workers Union & Ors [2007] FMCA 443; Hills v Sutton [2007] FCA 2033; Ponzio v B & P Caelli Constructions Pty Ltd and Others (2007) 158 FCR 543 (“Ponzio v B & P Caelli”).

87    In NW Frozen Foods, Burchett and Keifel JJ stated, at 291:

The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case.

88    Justices Burchett and Keifel continued, at 294:

It is well settled that, in the assessment of a penalty, a respondent withdrawing defences and acknowledging liability is entitled to special consideration of reduction of the amount that would otherwise be assessed.

89    In Hills v Sutton, Tracey J stated, at [7]:

The Court is not bound to accept and impose these proposed penalties but will do so if persuaded that, in all the circumstances, they fall within the permissible range.

90    In Ponzio v B & P Caelli, Jessup J expanded on the meaning of “permissible range”, at 565:

I consider that the phrase refers to a range which would be permitted by the court, that is, a range within which the penalty is neither manifestly inadequate nor manifestly excessive.

91    The purpose of deterrence must be served in fixing any penalty: Ponzio v B & P Caelli. In Construction, Forestry, Mining & Energy Union v Coal & Allied Operations Pty Ltd (No 2) (1999) 94 IR 231, Branson J said at 232:

The following matters, which are not intended to comprise an exhaustive list, seem to me to be considerations to which the Court may appropriately have regard in determining whether particular conduct calls for the imposition of a penalty, and assuming that it does, the amount of the penalty:

(a)    The circumstances in which the relevant conduct took place (including whether the conduct was undertaken in deliberate defiance or disregard of the Act).

(b)    Whether the respondent has previously been found to have engaged in conduct in contravention of Pt XA of the Act.

(c)    Where more than one contravention of Pt XA is involved, whether the various contraventions are properly seen as distinct or whether they arise out of the one course of conduct.

(d)    The consequences of the conduct found to be in contravention of Pt XA of the Act.

(e)    The need, in the circumstances, for the protection of industrial freedom of association.

(f)    The need, in the circumstances, for deterrence.

92    The matters to which Branson J has referred are matters which will ordinarily be relevant in determining whether a penalty should be imposed and, if so, the amount of that penalty.

93    However, the Court will also take into account matters subjective to the party upon whom the penalty is to be imposed. In that regard, the Court may take into account, if the respondent is a corporation:

(a)    its size;

(b)    its assets and liabilities;

(c)    its profitability;

(d)    the effect of any penalty upon its employees; and

(e)    its ability to absorb the penalty.

94    The Court will, in considering a penalty against a person not a corporation, have regard to:

(a)    the person’s assets and liabilities;

(b)    the person’s income;

(c)    the person’s ability to pay a penalty.

95    In all cases, the Court will have regard to the conduct of the contravenor, whether a corporation or a person, in cooperating with the regulator and the cost to which the contravenor has been put by the cost of any investigation, the overall effect on the contravenor’s business, and any contrition or remorse exhibited by the contravenor.

LCS and Mr Wright

96    The Ombudsman, LCS and Mr Wright jointly proposed a penalty range of 45% to 60% of the maximum penalties available:

(a)    in the case of LCS, $14,850 to $19,800 (out of a maximum $33,000);

(b)    in the case of Mr Wright, $5,940 to $7,920 (out of a maximum of $13,200 for two contraventions).

97    In relation to Mr Wright’s conduct, the Ombudsman and Mr Wright agreed that the two contraventions of s 900 are separate and distinct. Section 900 of the WR Act is concerned with conduct directed at an individual employee, and each breach is a separate contravention, notwithstanding that it arose out of a single course of conduct: Fair Work Ombudsman v Maclean Bay Pty Ltd (No 2) [2012] FCA 557 at [18].

98    In relation to these agreed penalty ranges, the Ombudsman, LCS and Mr Wright said that I ought to be satisfied that the ranges fall within the permissible range of appropriate penalties having regard to the following factors. First, the contravention stemmed from an inappropriate application of the Odco model to school children but was not part of any deliberate plan to misclassify workers as independent contractors rather than employees. It was reckless. Secondly, there is no evidence of LCS or Mr Wright having previously breached Commonwealth workplace laws. Thirdly, LCS and Mr Wright have each demonstrated genuine remorse, by the agreement with the Ombudsman that they will each bear a 25% share of compensating Master Cocks and Miss Langmead for the contravening conduct, and by admitting the contraventions without recourse to a contested liability hearing, which reveals a level of contrition and a readiness to accept responsibility for their wrongdoing. Fourthly, on 26 October 2010, the licensor advised LCS and Mr Wright not to engage minors and there is no evidence that LCS or Mr Wright has engaged minors since that day. Finally, LCS and Mr Wright cooperated with the Ombudsman throughout its investigation.

99    The Ombudsman accepts that there is no need for specific deterrence. The Ombudsman asserts, however, that there is a need for general deterrence so that the penalty therefore should be of a kind that it will be likely to act as a deterrent in preventing similar contraventions by like-minded persons or organisations: Ponzio v B & P Caelli at [93].

100    LCS and Mr Wright asked me to take into account that during the relationship between LCS and Blue Steel, LCS received gross revenue of only $4,921.20. LCS and Mr Wright asked the Court to assume that, after operating costs, LCS’ profit was significantly less. LCS and Mr Wright were unable to provide any details of Contracting Solutions’ gross revenue during the time that it was trading because Mr Wright no longer has access to Contracting Solutions’ financial records.

101    The Court was also informed that LCS and Mr Wright had incurred over $100,000 in legal fees in relation to the Ombudsman’s investigation and this proceeding. They submitted that in those circumstances they had already suffered a significant penalty.

102    I am concerned that LCS and Mr Wright have incurred such substantial legal fees in a proceeding of this kind.

103    The Ombudsman’s investigation that preceded this proceeding took more than three years. No explanation was offered for the time taken to complete the investigation, even though I requested counsel to address that matter. The Ombudsman has prosecuted the proceeding rather languidly. It amended its originating application and statement of claim to include further claims of contraventions, and then abandoned those claims prior to this hearing. The Ombudsman did not proceed with all of its claims against the respondents.

104    The regulator has an obligation, of course, to ensure that relevant parties comply with their obligations under the relevant workplace legislation. However, the regulator also has an obligation to bring proceedings and to prosecute those proceedings in a manner which causes the least cost to the persons against whom the proceedings are brought.

105    This matter was referred to mediation, but did not settle at mediation.

106    I was asked by the second, third, fourth, and fifth respondents to obtain a report from the District Registrar who conducted the mediation about the course of the mediation. However, the Ombudsman would not permit me to obtain that report, claiming that the mediation should remain confidential.

107    In the absence of the Ombudsman’s agreement, I was not able to obtain that report.

108    During the hearing, I expressed my concern about the manner in which this matter had proceeded.

109    I think, having regard to the costs already incurred, some of which were thrown away by reason of the way in which this proceeding was prosecuted, it would be appropriate to order penalties at the lowest end of the proposed range.

110    There will be an order that LCS pay $14,850 by way of civil penalty.

111    There will be an order that Mr Wright pay the sum of $5,940 by way of civil penalty.

Blue Steel and Mr Lenkic

112    The Ombudsman, Blue Steel and Mr Lenkic jointly propose a penalty of 20% of the maximum penalties available:

(a)    in the case of Blue Steel, $13,200 (out of a maximum of $66,000 for two contraventions);

(b)    in the case of Mr Lenkic, $2,640 (out of a maximum of $13,200 for two contraventions).

113    In relation to these agreed penalties, the Ombudsman, Blue Steel and Mr Lenkic said that I ought to be satisfied that they fall within the permissible range of appropriate penalties having regard to the following factors. First, the contravention stemmed from an inappropriate application of the Odco model to school children but was not part of any deliberate plan to misclassify workers as independent contractors rather than employees. It was reckless. Secondly, there is no evidence of Blue Steel or Mr Lenkic having previously breached Commonwealth workplace laws. Thirdly, Blue Steel and Mr Lenkic have each demonstrated genuine remorse, by the agreement with the Ombudsman that they will each bear a 25% share of compensating Master Cocks and Miss Langmead for the contravening conduct, and by admitting the contraventions without recourse to a contested liability hearing, which reveals a level of contrition and a readiness to accept responsibility for their wrongdoing. Finally, LCS and Mr Wright cooperated with the Ombudsman throughout its investigation.

114    I was informed that Blue Steel and Mr Lenkic had also incurred substantial costs in the order of $50,000. They made the same complaints as LCS and Mr Wright about the manner in which this proceeding has been prosecuted. The comments I made in relation to LCS and Mr Wright apply to these respondents.

115    However, in this case, the actual penalty has been agreed between the parties and there is no range.

116    There will be an order that Blue Steel pay the sum of $13,200 by way of civil penalty.

117    There will be an order that Mr Lenkic pay $2,640 by way of civil penalty.

118    Prior to the hearing, the parties provided proposed minutes of declarations and orders to be made by consent. At the hearing, I put to the Ombudsman’s counsel that the draft declaration that Contracting Solutions had contravened s 900 of the WR Act was not a declaration that could be made in light of the fact that the Ombudsman was not proceeding against that party. The Ombudsman’s counsel agreed and the parties agreed on an amended declaration.

119    The proposed declaration concerning the representations made to Miss Langmead refers to contraventions of the WR Act for representations made from on or about “1 March 2007 to 27 November 2007”. As I have said, the starting date to be included in the declaration is inconsistent with the statements of agreed facts, which refer to the representations having been made from “31 March 2007” until late November 2007: see the statement of agreed facts as between the Ombudsman, LCS and Mr Wright at paragraph 53, and the statement of agreed facts between the Ombudsman, Blue Steel and Mr Lenkic at paragraph 59.5.1. As I have already said, I think the date in the statements of agreed facts to be in error. The declarations sought are consented to by the relevant parties and in light of that, and the fact that the representations made are agreed to have arisen from continuing conduct that commenced prior to March 2007, I am prepared to make the declaration sought using the date 1 March 2007.

120    The Ombudsman sought an order that the penalties be paid within three months. LCS and Mr Wright agreed to payment within that time.

121    Blue Steel and Mr Lenkic asked for six months to pay. In view of my earlier remarks, I think that Blue Steel and Mr Lenkic should have six months to pay the penalties imposed.

Associate:

Dated:    15 January 2013