Leggett and Anor v Aardvark Security Services Pty Ltd

Leggett and Anor v Aardvark Security Services Pty Ltd - [2000] NSWIRComm 188 - NSWIRComm 2000 case summary — Zoe

[11]

Application under s.106 of the Industrial Relations Act 1996. JUDGMENT 1 This application is brought pursuant to s.106 of the Industrial Relations Act 1996 ('the Act') by joint applicants, John Robert Leggett and Victor Cvetkovich. Both of the applicants performed work through their private corporate structures as contractors or sub-contractors to the respondent, Aardvark Security Services Pty Ltd, ACN 000 862 180 ('Aardvark'). Mr Cvetkovich remains with Aardvark on this basis. The arrangement with Mr Leggett has been discontinued. The claims for relief are advanced principally on the basis that the contract or arrangement under which the work was performed was an unfair contract within the meaning of s.105(c) of the Act, as a contract or arrangement "that provides a total remuneration that is less than a person performing the work would receive as an employee performing the work" and secondly, under s.105(d) as a contract or arrangement "that is designed to, or does, avoid the provisions of an industrial instrument". 2 The proceedings were, by an arrangement between the parties accepted by the Court, conducted on the basis that the Court would determine whether the contract or arrangements fell within the section and whether, having regard to the nature of the defence advanced, the Court would decline to exercise its jurisdiction to make an order for the payment of money to the benefit of the applicants. In the event that the determination was to make an order for the payment of money, the parties were agreed that it would be necessary for a detailed process of quantification to be engaged in and it was preferable, having regard to the nature of that process, for it to be deferred in the event that it might ultimately be unnecessary. Aardvark conceded that the case was one which satisfied the features of s105(c), in that the applicants had received in total a remuneration less than an employee would have received performing the work. However, the applicants pressed the view that the facts also supported a finding that the contracts were within s105(d) as being designed to, or did, avoid the provisions of an award; this was contested. This judgment deals with those issues and the question whether the Court would make no order as a matter of discretion because the applicants received a net financial benefit, taking all matters into account, which was at least equal to that available to an employee performing the work. Background 3 Aardvark is, on the evidence, a substantial operator in the security industry and provides security guards under contract to various clients. The two applicants have been or were engaged in that work now for a number of years. Mr Leggett first commenced as an employee of Aardvark and was, accordingly, paid pursuant to the terms of the Security Industry (State) Award (269 IG 1314). 4 Mr Leggett is 54 years of age and has had a variety of positions in his working life including work as a bank teller, a Commonwealth public servant and as a farmer. Between approximately 1987 and 1991 he worked as a security guard for Wormalds in Sydney and then on a casual basis for them in Brisbane. In 1991 upon returning to Sydney he was unable to get work with Wormalds Security and was put in touch with Aardvark. He visited Aardvark's offices in Cowpers Street, Marrickville and spoke with Warren Osbourne, who was the Operations Manager - Guards Manager. He was told in answer to his inquiry that "we pay the award rate. We have plenty of work." He commenced employment with Aardvark two days later as a casual employee on the Higher School Certificate marking at Sydney Showground. This work continued until 7 January 1992 when he was informed by Mr Osbourne that a permanent position was available at Digital Equipment at Rhodes. He started there as a permanent guard on 7 January 1992 on a 7-day, 24-hour roster. While working at Digital Equipment at Rhodes he became aware that some of the guards had become contractors. 5 The work at Digital Equipment required the use of computers which controlled doors, lifts and alarms. All staff had access cards to different areas at certain times, which cards were created, altered and cancelled by the security guards. They had an extensive close-circuit TV surveillance system and a central control room. The guards worked in pairs, one in the control room and one on patrol, turn about. They were required to alter the air conditioning, lighting and power to the building via the computer. Mr Leggett was being paid as a security officer/gatekeeper. An issue arose about their classification under the award. Mr Leggett asked Steve Cowell (a supervisor) about this and he suggested Mr Leggett ask Ian England, the Guards Manager. He told Mr England that he had been talking to the union and he believed that because of the computer input work they did they should be treated as Level 2 employees. Mr England said he would look into it but Mr Leggett never got an answer. 6 On 2 November 1992 he was transferred to the State Bank at Ashfield where he was paid on the same basis. The grading issue arose again, the duties required including the extensive use of computers. Again he approached Mr England and also Mr Osbourne, both of whom said they would look into the question of award classification but Mr Leggett again got no response. 7 On about 1 October 1992 he was telephoned by Mr Osbourne who asked "Have you thought about becoming a contractor" to which he replied "No I haven't, I don't know what is involved or how it works". Mr Osbourne then said "There is nothing to it just register a name as a sole trader and take out insurance you can save heaps on tax because you can claim so many things as a business."

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I said "This is a bloody rort and you know it." 16 He worked at Digital Equipment until 31 May 1995 when Aardvark Security lost the contract. He then did casual work at various sites until a position was found for him at the Defence National Supply Distribution Centre at Moorebank. Mr Leggett was still being paid $12.00 per hour flat rate. He said that it was necessary to work long hours to get a decent wage, about $600 per week before taxation. He found himself getting very tired. There were no restrictions on the number of hours worked. It was common to work 16 hour shifts and sometimes 24-hour shifts. On 1 September 1995 he returned to Zetland at the rate of $13.08 per hour and then on 1 June 1996 he commenced at the State Bank Ashfield. At this site he was operating computers at a flat rate of $13.00 per hour. He was working 13 days a fortnight to get enough hours up to earn about $750 per week. He had anticipated being appointed a senior guard at the State Bank but this did not eventuate. His hours commenced to be cut back by the senior guard present and Mr Leggett resigned effective on 31 March 1997. 17 Mr Cvetkovich had not a dissimilar experience with Aardvark. He is 42 years of age, having started work in 1975. He worked in a family business until 1981 when he joined the Public Service in the Stamp Duties Office attaining the role of Senior Assessor prior to leaving in June 1990. 18 In 1989 he with his brother had incorporated a share trading company called Vilnius Pty Ltd. In September 1989 the company had got into trouble as a result of the company's being placed in liquidation so he left the Public Service to concentrate on share trading to try to save the company. It became necessary for him to obtain full time employment because of the company's unhappy trading position. He had been a security employee as a second job while in the Public Service. On about 12 September 1991 he made contact with, and was interviewed by, Mr Osbourne of Aardvark. He was offered employment on evening shift at a Rosebery Housing Commission site. On the day he was due to start work, 20 September 1991, he was telephoned by Mr Osbourne who told him the job was no longer available and to come into the office for a discussion. He there met Mr England who told him that:

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I say that I did not authorise or direct any person to force Mr Leggett to change the status of his association with my company from employee to contractor. I say that the time Mr Leggett chose to change his status with the company that my company still employed other persons and paid those persons on a P.A.Y.E. Basis. After the 24 October 1992, any moneys paid to Mr Leggett for services provided by him on behalf of my company were paid through his registered business name on the provision by that business name of invoice submitted in respect of work performed. The financial arrangement was that my company would pay Tandem Security for services performed by Mr Leggett as a sub-contractor, and Mr Leggett, as a person responsible for his own financial arrangements, was required to pay any taxation in respect of money earned. Since that time no Group Certificate was ever provided to Mr Leggett for any services provided, and no request for any such documentation was ever made. My company has paid no taxation moneys for or on behalf of Mr Leggett since 24 October 1992. I have perused documentation, including taxation returns, prepared on behalf of Mr Leggett which confirm that from that time either he personally or a company known as Harle Group Pty Limited was responsible for the payment of all taxation moneys payable by either Mr Leggett personally or Harle Group Pty Limited, of which Mr Leggett remains a Director, for any work performed for or on behalf of either my company or other companies or persons by either Mr Leggett or persons directly or indirectly associated with his company. Annexed hereto and marked with the letter "A" is copies of taxation returns relevant to the financial years ending 30 June 1992, 30 June 1993, 30 June 1994, 30 June 1995, 30 June 1996 and 30 June 1997, which relate to incomes received and taxation moneys paid on behalf of Mr Leggett for services he provided and income received by him during that period of time. " 36 Mr Donald annexed a series of receipts in relation to Mr Leggett's insurance cover which he said:

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The idea that there was any negotiation involved in the rates of pay received by guards. What was described in the evidence was either a take it or leave it proposition or a "we'll get back to you" suggestion which led to nothing. This does not reflect negotiations in any sense that I understand; 70 The proposition for Aardvark is that the net benefit to the applicants was not less than the net benefit an employee would receive. While that may be so, by this process it seems to me that Aardvark has effected a transfer of the liability which would attach to employment, to a taxation arrangement which is said to be perfectly legitimate but with a tax minimisation element which may leave the guard in a position of no or little disadvantage. Put another way, the ordinary and usual costs of employment are simply avoided. While this may be commercial good sense from Aardvark's point of view, it seems to me to fall clearly within the scope of the provisions of s105(c) and (d) of the Act. These contracts or arrangements are distinguishable from employment in only one respect - the lower rates of remuneration and the absence of other conditions of employment. It is no answer to the absence of, for example, annual leave payments, to say, as does Aardvark, that is a matter for the subcontractor's company to cater for. If the remuneration cannot, in gross terms, satisfy the needs of the guard's corporation to satisfy its liability as an 'employer', the position is, both in theory and practice if this scheme be legitimate, incapable of giving to the person performing the work a reward for effort consonant with ordinary industrial standards. 71 This point is driven home by the idea the guard when absent might supply a replacement guard for whom a liability for employment might arise: the liability would necessarily exceed the income earned. 72 The question arose whether these arrangements are shams, as Ms Brus suggested at one stage of the case. However, that was not treated as an issue necessary to be determined. Nevertheless, Wilcox CJ held so in relation to a similar arrangement involving the guard with whom Mr Leggett established Harle Group Pty Ltd. That person, Richard Hartnett, was a radio room operator whose relationship with Aardvark was terminated. A claim for compensation was brought in respect of an alleged breach of Div. 3 of Pt VIA of the Industrial Relations Act 1988 (Cth). In judgment on a review of the decision of a Judicial Registrar (which held in favour of the breach claimed and assessed compensation) Wilcox J in the Federal Court (1998) 85 IR 315 said :

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The present contract or arrangement falls within the specific and literal terms of s88F(1)(e) in that it "was designed to . . . avoid the provisions of an award". It is difficult to see what force this provision of the statute could have if it did not apply in this type of case. Indeed, it was open to his Honour to determine the application on the basis of that provision alone - without entering, as he did, upon inquiry as to whether it did avoid the award or whether it failed to do so, and that, as a consequence of the failure, s92 applied. 74 That reasoning applies with equal force in the present case. 75 I find that, on the evidence in this matter, the concept of substituting independent contractors for employees was one which was devised and promulgated by Aardvark. Mr Donald's evidence that he found contractors preferable to employees because they were more effective in the sense that they had "job ownership" and that it made "commercial sense" for Aardvark to utilise contractors rather than employees puts paid to the idea that this was not Aardvark's concept. I reiterate his evidence in answer to the question whether in 1992 he made a decision to move to contractors; he said "It wasn't 1992. That has always been at the back of my mind as far as commercial sense" (sic). It is impossible to believe that a situation which could operate to such significant advantage for Aardvark could have been conceived by Mr Leggett and proposed by him to Aardvark. It is to be remembered that the minimal hourly rate received by him and other guards was a constant or flat rate whether it was being performed at the weekend or on public holidays or during the week. There was no payment for annual leave, sick leave or long service leave. These differentials between the rights of employees and the guards involved in these proceedings were costs which in substance Aardvark was able to avoid. This was the commercial sense or advantage to which Mr Donald referred. 76 Further, the arrangement only had a prospect of breaking even with the benefits of employment under an award if the tax minimisation programs were put in place and successful. This was something which appears to me to have advantaged nobody but Aardvark. 77 The contract or arrangement which bestowed these benefits upon Aardvark was in my view necessarily one which was designed to and did avoid the provisions of an industrial instrument within the meaning of s105(d). If one looks at the income earned by a guard as being the payment made to the guard's corporation according to the invoices there is no question that the total remuneration received according to those invoices is less than a person performing the work would receive as an employee performing the work within the meaning of s105(c) of the Act. 78 In this case I conclude that the applicants have satisfied the primary question of liability. I find the contracts or arrangements under which the applicants were provided to perform the work of security guards on behalf of Aardvark to be unfair contracts within the meaning of s105 of the Act. It remains to consider the supplementary question posed: would the Court decline, in the exercise of its discretion, to make any order? 79 The question of discretion involved in the contemplation of an order in a case such as this is not without difficulty. Were the applicants to benefit to the full extent of their claim, that is to say by receiving a compensatory order which was based upon the gross entitlements of employees, there is no doubt they would have been considerably advantaged over an employee performing the work, by virtue of their taxation arrangements. Mr Etmekdjian's evidence makes this point. However, if the effect of an employer's obligation to an employee is to pay wages in gross terms, with a deduction and transfer of tax to the Commissioner for Taxation, that must be the obligation with which s105(c) is concerned. There is, in my view, no basis for, in effect, exempting Aardvark from its obligations unless, as indeed Aardvark contends, the effect would be a gratuitous windfall for the applicants. 80 I am concerned that the applicants should not be permitted to "double-dip" by receiving employee (PAYE-type) levels of income while also maintaining the past tax advantages from the use of their corporate structures. The consequences of any order in that respect have not been addressed in the proceedings so far. 81 In the exercise of discretion, I consider the applicants are entitled to the benefit of an order which would compensate them for any shortfall as against the income at award level of an employee performing their work. That shortfall should be discounted to the extent that the structural arrangements of the parties' relationships gave the applicants a financial benefit which is immutable; that is, which is not reviewable or will not be reviewed by the Commissioner for Taxation. 82 I direct the parties to confer on that issue and to report the result thereof at a time and date to be fixed.

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