No more hiding behind the corporate veil

31 October 2016
In a recent precedent setting case Judge Jarrett of the Federal Circuit Court ordered Owen Jennings, the sole director and controlling mind of Step Ahead Security to personally back-pay eight employees who were underpaid by his security guard company.

The employees were paid a flat-rate instead of rates of remuneration set out in the relevant Modern Award. In doing so Step Ahead Security and Jennings failed to pay the employees the correct minimum wage rate, casual loadings, broken shift allowances and ignored overtime and penalty rates for work performed on Saturday, Sunday and public holidays. In total, the employees were underpaid $22,779.72 over approximately three months in 2014.

In his judgment, Judge Jarrett unleashed a scathing review of the business operations of Jennings holding the contraventions to be “calculated and deliberate” amounting to “a blatant disregard for Australia’s workplace laws.” Judge Jarrett found that Jennings had ignored a number of warnings and complaints from the Fair Work Ombudsman regarding Step Head and two predecessor security businesses and he and Step Ahead had both failed to express any contrition for their actions.

Importantly, this case was the first time that a Court, after hearing argument on the question, imposed personal liability for underpayments on a director who was involved in a company’s contravention.  Step Ahead Security and Mr Jennings were ordered to jointly pay the $22,889.72 owing to the employees. This order was made pursuant to section 550 of the Fair Work Act (2009) which provides that a person who is “involved” in a contravention of the Act is taken to have contravened that provision themselves and section 545(1) of the Act which provides that the Court can make any order it considers appropriate if satisfied a person has contravened a civil remedy provision. Section 545(1) had previously been interpreted narrowly so that it did not extend to the imposition of liabilities for compensation on directors personally. However, Judge Jarrett held that the section was “clear and unambiguous” and there was no immediately apparent reason for it to be limited.

This finding was significant because the company was in the process of being wound-up and a compensation order would otherwise have been largely unenforceable. Judge Jarrett acknowledged the importance of specific deterrence as Jennings was “the sole director of two previous companies offering security services that were each wound up, the second one in circumstances where there were complaints of outstanding remuneration owed to employed security guard and that were not pursued following the employer’s deregistration.” Furthermore, Jennings had already begun operating a new security company out of the same premises.

His Honour held that in awarding compensation in this manner, it “would go some way to discouraging those that control a corporate employer from allowing the corporation to fail only to continue the business via a new corporation. It would encourage them to take steps to ensure the corporation they control meets its statutory obligations as they arise.”

Judge Jarrett went on to impose record penalties of $51,300 on Jennings personally and $257,000 on his business as well as ordering an injunction restraining Jennings from underpaying employees in the security industry in the future meaning that should Jennings transgress again, he could face contempt of court proceedings for further underpayments.

This decision has significant implications for deterring phoenix company activity and represents a preparedness of the Courts to make flexible orders to deal with rogue business operators who try and avoid their statutory obligations by liquidating their companies and hiding behind a corporate veil.

Fair Work Ombudsman v Step Ahead Security Services Pty Ltd & Anor [2016] FCCA 1482

 

Practice Areas: