Associated entities in unfair dismissal; the issue of control

The issue of corporate control in determining whether companies are related entities is quite complex. Here is a passage from a recent Fair Work Commission case dealing with it.

“Are Solar and Parke Electrical associated entities?

There is material before the Commission with contested dates as to when Mr Sutton commenced employment with Solar. However, it is uncontested that Mr Sutton completed a period of employment with Parke Electrical prior to his employment with Solar which carried through to his subsequent employment with Solar; there was no break in Mr Sutton’s employment with Parke Electrical and his employment with Solar.

If it is the case that Parke Electrical and Solar are associated entities, then it can be said with certainty that following Mr Sutton’s employment with Parke Electrical there was a transfer of employment to Solar and his service with Parke Electrical will count towards his employment period for the purposes of s.382 of the Act.

Pursuant to the provisions of the Corporations Act set out above, Solar and Parke Electrical will be associated entities if Mr Parke ‘controls’ both of those entities.

In Budden v Finke Enterprises Pty Ltd ATF M&L Carlson Family Trust T/A Fused Café Pender Place [2015] FEC 8675, Commissioner Saunders considered whether a sole director of multiple different entities can ‘control’ those separate entities and found:

“[21] Section 64A of the Corporations Act defines “an entity” to include “a natural person”. It follows, in my view, that Mrs Carlson is “an entity (the third entity)” within the meaning of subsection 50AAA(7) of the Corporations Act. My conclusion in this regard is supported by a decision of Judge Riley of the Federal Circuit Court of Australia in Director of the Fair Work Building Industry Inspectorate v Vic Metro Brick and Blocklaying Pty Ltd [2015] FCCA 2266. In that case, Judge Riley held (at [85]) that a natural person who was the sole director and shareholder of two corporations was “an entity [who] controls both the principal and the associate” within the meaning of subsection 50AAA(7) of the Corporations Act.”

In Salgras v Fingal Glen Pty Ltd atf the Adelaide Riviera Trust T/A Comfort Hotel Adelaide Riviera [2011] FWA 1401 (Salgras), Commissioner Steel considered a scenario of three different hotels each owned by a separate unit trust and partly managed by an external accounting firm, where each trust shared a single sole director who was also employed by the accounting firm. Commissioner Steel considered that the sole director and another employee of the accounting firm:

“[26] …are effectively controlling these trusts and trustee companies as employees of [the accounting firm] and the operations, resources or affairs of those entities are material to [the accounting firm].

[27]…[the accounting firm] being a third entity controls the trustee companies being the principals, as [the director], an employee of [the accounting firm] is the sole director of such companies. The unit trusts, the associates are likewise controlled though the trustee companies by [the director]. The operations, resources or affairs of the principal and the associate are both material to the third party.” 8

In MacInnnes v Gladstone CC Pty Ltd T/A Len Smith Carpet Court [2016] FWC 8838, Commissioner Booth considered a scenario where the sole director of the Respondent ‘Carpet Court’ store was also the sole director of three other ‘Carpet Court’ stores. Commissioner Booth noted the similarity to Salgras and considered:

“[36] The Corporations Act definition of associated entity includes the control (as defined by s.50AA) by another entity. “Entity” is defined in the s.64A of that Act to include not only other companies but also trusts and individuals. Further ‘control’ is described in s.50AA(1) as “capacity to determine the outcome of decisions about the second entity’s financial and operating policies”.

[37] Does then Mr Jack, as sole Director of all 4 companies and other shareholders at the time of termination have the capacity to control the outcome of decisions about entities other than Gladstone CC Pty Ltd?

[38] The notion of control is not restrictive, and extends to, for example a power to veto: Re A Reference to the Federal Court of Australia by the Australian Broadcasting Tribunal Pursuant to Section 22b of the Broadcasting and Television Act 1942 in relation to applications to the Australian Broadcasting Tribunal of Approval [1987] FCA 6, [66] (Full Court, Bowen CJ). Further the test seems not to be limited to operations (for example were decisions of the character ever actually made; did the stores function completely independently), but about the capacity to make such determinations. That capacity will flow from the authority to make determinations rather than historical facts, although past facts might well indicate an actual control, such as joint board meetings.

[39] Here, the entities are owned by the same shareholders and at the time of the dismissal, under the same sole Director, Mr Jack. It is clear that the “capacity to determine the outcome of decisions” about the employer’s financial and operating policies was vested in Mr Jack as sole Director and the shareholders. It follows that the other entities are associated entities within the meaning of s.50AAA.

[40] Additionally, the long service letter exhibited by Mr Johnson indicates that Mr Coughlan’s claim was paid in full, and while the outcome was apparently the product of negotiation, it is not inconsistent with the position put by the Applicant that the entities were related.

[41] In summary, I am satisfied the 4 corporate entities are associated entities on the basis of the common ownership, directorship, and capacity to control the outcome of decisions. [original emphasis]”

In the present matter and relevant to s.50AAA(7) of the Corporations Act, it must be determined if Mr Parke as a natural person and as the ‘third entity’ controls both Solar and Parke Electrical. Having considered the test of ‘control’ set out in s.50AA of the Corporations Act, I determine that Mr Parke has the capacity to determine the outcome of decisions about Solar’s and Parke Electrical’s financial and operating policies.

I have had regard to the capacity that Mr Parke, as the sole director of each entity can exert over the manner in which Solar and Parke Electrical operate, and the practical influence that Mr Parke can exert as opposed to the rights he can enforce. He is ultimately responsible for both businesses.

I consider that the operations, resources or affairs of both Solar and Parke Electrical are material to Mr Parke, and indeed were material on 18 September 2018, insofar as Mr Parke is responsible for the management of each company.

I find that Parke Electrical and Solar are associated entities.

Was Solar a small business employer as of 18 September 2018?

There is limited information before me as to the employees that make up the Solar and Parke Electrical businesses. In the contract signed by Mr Parke and Mr Sutton on 15 March 2018, the number of employees at Solar is stated as eight. However, Solar submitted in its response to Mr Sutton’s application that it had four employees. No material has been filed regarding the number of employees employed at Parke Electrical.

Mr Sutton has not filed evidence or made submissions suggesting that the combined number of employees of Solar and Parke Electrical is 15 or more. With the limited information I have before me, I consider that Solar had less than 15 employees as at 18 September 2018 and was a small business employer for the purposes of the Act. The minimum period of employment that Mr Sutton must have completed is therefore one year.

Did Mr Sutton complete the minimum employment period of one year?

Having found that Parke Electrical and Solar were associated entities throughout the relevant period in this matter and that Mr Sutton’s employment with Solar commenced not more than three months after his employment with Parke Electrical ended, I am satisfied that there was a transfer of Mr Sutton’s employment from Parke Electrical to Solar pursuant to s.22(7)(a) of the Act and that Mr Sutton’s service with Parke Electrical therefore counts towards his period of service with Solar. 9

Conclusion

Mr Sutton’s period of employment with Solar and its associated entity, Parke Electrical exceeded the minimum period of employment of 12 months. As at 18 September 2018 Mr Sutton was a person protected from unfair dismissal.

Solar’s jurisdictional objection that Mr Sutton did not complete the minimum period of employment is dismissed.”

Sutton v Solar and Batteries Direct Pty Ltd (2019) FWC 1560 delivered 10 April 2019 per Hunt C