STEPHAN v PACESETTER CLEANING SERVICES PTY LTD

an express contract of service, the question was whether it was possible to infer the necessary contractual intention between the company and ie injured director from conduct of the kind described in the case. Rushes Pty Ltd v Thomas, Court of Appeal (NSW), unreported, 9 May 1990; [1990] NSWJB 56 applied; (2) The proper inference from the facts proved was that a contract of service existed between the company and the working directors, including the injured claimant; (3) Accordingly, proceedings returned to the Compensation Court for determination of the worker's entitlement under the

Workers Compensation Act 1987. Workers Compensation Act 1987.

2. Award of the Compensation Court of New South Wales (his Honour Judge Thompson) set aside;

3. In lieu thereof order the proceedings be remitted to the Compensation Court for the determination of remaining issues in connection between the parties;

4. Order that the respondent pay the appellant's costs of the appeal but have, in respect of such costs, if otherwise so entitled, a certificate under the Suitors' Fund Act 1951.

Kirby ACJ I agree with Rolfe AJA. Cole JA I agree with Rolfe AJA

The appellant, who was born on 10 July 1964 and who was the applicant in the Compensation Court, and Mr David John Cooper, who was about the same age, had, as at 1989, known each other for a number of years and were good friends. Each had regular employment of a clerical nature and the appellant was undertaking a course at TAFE seeking to obtain an accountancy certificate. By mid-1989 Mr Cooper, in addition to his regular employment, had some part-time employment cleaning offices during evenings. In mid-1989, or shortly thereafter,

the appellant and Mr Cooper decided to undertake office cleaning work together in the evenings, in addition to their regular employment. They purchased three office cleaning contracts from a Mr Michael Mack for $39,000, the contracts providing for the cleaning of bank premises at Chatswood and North Sydney and the premises of Flick Pest Control at Chatswood.

They commenced this joint venture, in effect, in partnership, on | August 1959 and, on 1 September 1989 Pacesetter Cleaning Services Pty Ltd was incorporated. It was not in issue that the appellant and Mr Cooper were the sole directors of that company and the evidence established they held all the issued shares in it. Thompson CCJ, from whom this appeal is brought, found that upon the incorporation of the company a bank account was opened in its name, invoices were printed in its name and it purchased the three contracts from the partnership. The bank account was opened at the Mona Vale Branch of the State Bank of New South Wales and it was not in issue that after incorporation all moneys received for the carrying out of the cleaning work was banked into that account. Nor was it in issue that after incorporation accounts were rendered for the services performed in the name of the company. Further, in addition to the physical cleaning work carried on by the appellant and Mr Cooper, part-time assistants were employed and they were paid by cheques drawn on the company's bank account.

The evidence, as I have indicated, was that the appellant and Mr Cooper continued, after incorporation, to carry out the physical cleaning work. They did not enter into any written employment agreement with the company, nor did they have any discussion between themselves to the effect that they would employ each other to work for the company. So far as finance was required by the company it was provided either from income derived from the carrying out of cleaning work or from money advanced by the appellant and/or Mr Cooper to the company. There is no evidence that either took any salary or wages from the company prior to 3 December 1989 although, on 25 October 1989 a cheque was drawn on the company account in favour of Mr Cooper in the sum of $1,000, the cheque butt designating the payment as "loan A/C".

The appellant said, AB15, that he and Mr Cooper planned to build up some capital in the bank account:

«.. to a level where we felt safe, we have some income behind us, and then we'd put ourselves in a situation where one of us would give up our day-time jobs, the other would start and go out and look for more contracts, to expand the business, and then we would both give up our day-time jobs and take on the cleaning business full time, when the cleaning business could sustain income for both of us, we would then work as supervisors and have employees work under us to do the manual work at the job sites."

At AB45 Mr Cooper said the intention was to establish the business "initially" and:

"., just stabilise everything, consolidate, and then Greg or myself were going to give up their full-time employment, the other one was going to go on with their full-time employment, because we believed the income in the business was not enough to support both of us, and we were going to build it up from there and, hopefully, the second member could then join the business on a full-time basis."

It was not in issue, as I understood it, on the appeal that the appellant and Mr Cooper, as directors of the company, were intent on building up its business to a stage where it would, ultimately, support them on a full time basis in the manner about which they gave evidence. Nor was it disputed that the company had the

URJ = STEPHAN v PACESETTER CLEANING SERVICES PTY LTD (Rolfe AJA) 3

contracts and was deriving income from their performance. However, it was submitted on behalf of the respondent, that the business between | September 1989 and 3 December 1989 was in its infancy and that while the company was carrying on the business there was no evidence to support the view that it was employing the appellant and Mr Cooper. The significance of 3 December 1989, and whether the company was employing the appellant and Mr Cooper, is that on that date, in the course of a motor vehicle journey, which the appellant was undertaking to perform work on behalf of the company, he was involved in a motor vehicle accident as a result of which he was rendered a quadriplegic. He brought proceedings in the Compensation Court against the company for compensation, which raised several principal issues, the first being whether he was employed by the company. Thompson CCJ held he was not. This made it unnecessary for his Honour to pursue the second main question, namely the nature of the journey the appellant was undertaking, the competing issues, as I understand it, being whether he was travelling in the course of his employment or whether he was travelling to his employment.

The accident happened on a Sunday afternoon when the appellant was travelling with the ultimate intention of going to the premises of Flick Pest Control at Chatswood and mowing lawns in company with Mr Cooper. It was not in issue this was part of the business of the company.

This short narration of the facts, without more, leads me to the conclusion that each of the appellant and Mr Cooper was, from 1 September 1989 to and including 3 December 1989, a director of and working for the company in the course of its office cleaning business. The very nature of the operation entailed, and was intended to entail, that the appellant and Mr Cooper would work physically in the business for some time. This they were doing. The income derived from carrying out the work was paid to the credit of the company's bank account. The company had purchased from the appellant and Mr Cooper cleaning contracts. The only missing elements of employment were evidence of a contract between them and the company and the making of some regular payment to them. However, in the circumstances of this case, I do not regard either of those considerations of any significance. Looked at realistically, he would hardly have expected the appellant and Mr Cooper, in the circumstances, I have outlined, to have fussed themselves about entering into a contract to do precisely what they intended should be done by the company. So far as the failure of the company to make a payment, other than the payment by way of loan to Mr Cooper, I find nothing strange about that. It was the intention of the appellant and Mr Cooper to allow the company to build up its capital base. This is what was happening and, as the sole shareholders in the company, they were the parties, subject to any claim by creditors, entitled to those moneys. Their permanent employment during the daytime made it unnecessary for them to withdraw money from the company at that stage. However, in my opinion, this did not mean that they were not entitled to reimbursement from the company at some future stage for the work they had carried out from its inception.

Notwithstanding the view to which I have come Thompson CCJ found the appellant was not an employee of the company. WorkCover Authority of New South Wales, ("WorkCover"), became involved in the matter because the company had no workers compensation insurance.

His Honour set out the history, including the incorporation of the company, and the circumstances in which the appellant was injured. At AB203 he recorded that neither the appellant nor Mr Cooper had received any money from the company, which was not strictly accurate because of the amount paid to Mr Cooper by way of loan, that expenses were paid from the personal accounts of the appellant and Mr Cooper, which once again was not strictly accurate because casual employees were paid from the company's account, that the company slid not keep books or records, save for receipts for expenditure and his Honour repeated that the appellant and Mr Cooper paid expenses from their personal finances. He said they did not receive any accountancy or legal advice on the running of the company and, after dealing with the circumstances of 2 and 3 December 1989, he repeated, at AB205, that Mr Cooper did not obtain any accounting advice and was not reimbursed by the company for any money he spent or for the use of his telephone or for petrol he used in his car.

At AB207 his Honour referred, at some length, to the decision of this Court in Rushes Pty Ltd v Thomas (9 May 1990 - unreported) and, commencing at the foot of AB207, he repeated that as at 3 December 1989 the company had a bank account and one cheque book and he said it did not have an office or office equipment or telephone or furniture. He said it did not hold meetings or keep records or any books other than an invoice book, and it did not pay the appellant or Mr Cooper any money nor did it make any provision for the payment of salary or wages, nor did it fix a rate of pay. It did not make any provision for the deductions of income tax and did not have workers compensation insurance or insurance of any description. His Honour did not explain why such a business necessitated an office, office equipment or furniture nor what further records he considered would have been appropriate. In so far as the bank account had increased to a credit balance of some $10,000 there was adequate provision for the payment of salary or wages. His Honour said the equipment the company possessed was purchased by the appellant and Mr Cooper out of their own money and they were not reimbursed by the company, and he referred again to the absence of any reimbursement for use of their cars and to the absence of reimbursement for the use of the telephone. He noted there was no written contract of service and he repeated there was no evidence that provision had been made for holidays, sick leave, sick pay, holiday pay or any arrangements for superannuation or for the rate of pay they were to receive as cleaners. At the foot of AB208 he said: "The only difference between August 1989 and September 1989 is that the company became incorporated. They had a bank account in the company name and they said they had some invoices printed and the company purchased the three contracts from the partnership. They were still doing the same work as they were doing in August 1989. There is no written contract of service and on the evidence and considering the totality of the relationship between the parties, I cannot infer a contract of service."

The appeal has proceeded on the basis that the Court should determine whether his Honour's conclusion was correct, it being agreed this was an appeal both on fact and law, and if the conclusion was reached that it was not correct the matter should be returned to the Compensation Court so it can decide the issue raised by the journey question. The question is whether error has been shown.

It was pointed out by counsel for the appellant that the difficulty confronting the respondent was well illustrated by the written submission at 5 paral 1:

URJ = STEPHAN v PACESETTER CLEANING SERVICES PTY LTD (Rolfe AJA) 5

"The second respondent submits that in all probability, the appellant should properly be characterised as carrying on a cleaning business in partnership with Mr Cooper and, although at some stage in the future it may have been intended to bring the operations of the business under a corporate structure, no effective steps to do so had been put in place at the time of the appellant's accident on 3 December 1989."

In the course of oral submissions Senior Counsel for the respondent submitted, Tp.15, that the arrangement, as his Honour found, was one whereby the appellant and Mr Cooper "set up their own business and they continued in the conduct of that business notwithstanding the fact that a company had been incorporated and that at the time of this man's accident no formal steps whatsoever to formally place the company into a position of an employer of those two men had been put in place".

In answer to the direct question as to whether, whilst the business was establishing itself, the appellant and Mr Cooper were employees, Senior Counsel for the respondent said they were the directors "and one would properly describe them in law... as the promoters of the company and the business".

This gave rise to what they were doing whilst carrying out the cleaning activities and why they were allowing the remuneration to be paid to the company. It was suggested, by way of submission, that the company was their agent for the purposes of rendering invoices for the work performed and distributing moneys to persons who were retained in the business. As I understand it this meant that the company was, in some way, a service company sending out invoices and receiving and distributing money on behalf of the appellant and Mr Cooper, who continued to carry on business in partnership. This led to a concession that "obviously" they were working, but the question for determination was "in what capacity and in particular what was the evidence that a contract of employment" had arisen. Great reliance was placed upon the fact that there was evidence, which it was suggested showed there had been no change in the way in which the business was being conducted. This stemmed from some evidence at AB58, during the cross-examination of Mr Cooper. He said:

"Q. Where was the money being paid before the incorporation?

Q. But certainly you were working before the incorporation?

Q. And PHYSICALLY, nothing changed after the incorporation, is that right?

Q. It was just the same business carried on in the same way?

Q. You and Mr Stephan, out to make a quid, if I can put it in that term, out of the contract cleaning business?

Although great store was placed upon that evidence by the respondent it does not seem to me to lead to the conclusion that there was no differentiation between what was happening prior to 1 September 1989 and what was happening thereafter. It may have been, if such a submission was made to the trial Judge or if he had this evidence in mind, this would make explicable his statement at AB208 that "the only difference" between August and September 1989 was the incorporation of the company. In my opinion this showed a misunderstanding of the effect of incorporation. I am not to be taken as suggesting incorporation,

without more, would establish the existence of the relationship of employment by the company. But it does give rise to the possibility that the company may be the employer, which has to be decided by a consideration whether the totality of the evidence leads to the conclusion that a contract of employment, whether express or implied. thereafter came into existence.

In my view Mr Cooper's answers were totally correct, because it is clear from a reading of ie question that he was simply being asked about the way in which the work was carried on physically and the nature of the work. He was not being asked about any legal characterisation, which the uncontradicted events should bear after 1 September 1989.

Counsel for the respondent relied upon an absence of evidence in relation to control, dismissal, wages and remuneration, regulation of hours and work schedules, supply of equipment and transport, arrangement of insurances, sick leave and holidays, the delegation of work and organisation. In many cases where one is seeking to ascertain whether a person is an employee each or, perhaps, all of these will be relevant matters to take into account. However it seems to me that where one is concerned with two working directors of a company, each of whom has an equal number of shares in it, many of these questions fall by the wayside. Those who control, dismiss, regulate, delegate and organise are the directors and, in the present case, the directors were the workers. They made the arrangements, which were all predicated around the work being carried out. The absence of full books of account, an office, office equipment and other such trappings of a business seem to me totally irrelevant, because it was not in issue that the company was carrying on the business, nor was it in issue that to carry on the business the company did not need an office or office furniture. There was not a total absence of records. The company had its invoices, receipts for payments made on its behalf, and a bank account. While these were somewhat rudimentary that is hardly surprising having regard to the activities in which the company was engaging and the time for which it had been operating. Those documents would have provided the basis for any further records, which were to be kept. Nor was any submission made as to the types of meetings the appellant and Mr Cooper were supposed to have been holding in the period of some three months since the incorporation of the company.

In the circumstances, which have been proved and which are not really in dispute, I do not accept the submissions of the respondent. I think his Honour's error stemmed, to some extent, from an attempt to find indicia of employment, which would apply in the case where there was not the coincidence of directorship and employment, which applied in the present case.

In my opinion, with respect, his Honour placed far too much significance upon these matters in the circumstances of this case.

The decision in Rushes was one concerned with whether the trial Judge gave adequate reasons and, secondly, whether his reference to Lee v Lee's Air Farming [1961] AC 12 was correct. Samuels JA, who gave the principal judgment of the Court, acknowledged that whether the appellant was working under a contract of service "was ultimately" a question of fact, which had to be reached in the light of legal principles. He concluded that the trial Judge had given insufficient reasons. This was the main reason, as I understand it, the appeal was upheld. However, Samuels JA also upheld the appeal because the reference to Lee established an error of law, the reason being that Lee was a case in which the Articles of Association created the contract giving rise to the contract of service. Such an express contract did not exist in Rushes. However, notwithstanding,

URJ = STEPHAN v PACESETTER CLEANING SERVICES PTY LTD (Rolfe AJA) 7

Samuels JA proposed that the matter be remitted to the Compensation Court upon the question only of "whether at relevant times (the applicant) was employed by Rushes Pty Ltd as a worker within the meaning of the Workers Compensation Act".

Handley JA, after holding that Lee had no application, said:

"The first question in this case therefore on the contract of service issue is whether such a contract arose in this case by implication from the acts of the appellant and the respondent prior to the respondent's injury on 14 January 1984.

The second question is whether any such relationship which may have existed at earlier times, when the respondent was engaged full time in the company's business and was in receipt of a regular salary, still persisted in January 1984 when the respondent was not in receipt of any salary and after a lengthy period when he had not been working full time for the company.

"The artificiality of the legal distinction which must be maintained between the natural person who controls the company and the company so controlled acting through and by its controller in cases such as this prevents the automatic implication of a contract from the acts of the same person if two different capacities. The conduct which is relied upon as establishing the implied contract of employment may, as matters of fact and inference, be referable to the respondent's status and powers as a controlling director and shareholder or to irregularity or irregularities in the conduct of the company's affairs. In some cases it may but in other cases it may not be possible to infer the necessary contractual intention from conduct of kinds relied upon here."

In my respectful opinion in the present case it is possible to infer that relationship from the circumstances of this case, and, for that reason, I consider Thompson CCJ was in error in finding that the relationship of employer/employee did not exist.

CONCLUSIONS I would propose the following orders:

1. Appeal allowed.
2. Award of the Compensation Court of New South Wales (his Honour Judge Thompson) be set aside.
3. In lieu thereof, the proceedings be remitted to the Compensation Court for determination of remaining issues in contention between the parties.
4. The respondent pay the appellant's costs of the appeal but have, in respect of such costs, if otherwise so entitled, a certificate under the Suitors' Fund Act 1951.

Counsel for the Appellant: P Webb QC with GM Watson Counsel for the Respondent: PJ Deakin QC with PL Perry Solicitors for the Appellant: McClellands

Solicitors for the Respondent: Solicitor for the WorkCover Authority