Fair work legal issue; employee or contractor?

This extract from a recent Fair Work Commission decision in an appeal contains a useful analysis of the legal principles used to determine whether a relationship is that of employer and employee or principal and contractor.

 

“Consideration

 

[22]    We are not persuaded that the Commissioner erred in concluding that Mr Feldschuh was not an employee and therefore was not dismissed within the meaning of the FW Act.

 

[23]    The law15 to be applied to the issue raised this appeal is as enunciated in Personnel Contracting and Jamsek and in particular the judgments in Personnel Contracting of Kiefel CJ and Keane and Edelman JJ, and Gordon J (with whom Steward J agreed as to the relevant principles but not the outcome).

 

[24]    The principles their Honours outlined have been conveniently summarised by the Full Bench in Chambers and O’Brien v Broadway Homes Pty Ltd:16

 

  1. When characterising a relationship regulated by a wholly written, comprehensive contract which is not a sham or otherwise ineffective, the question is to be determined solely by reference to the rights and obligations under that contract. It is not permissible to examine or review the performance of the contract or the course of dealings between the parties.17

 

  1. The subsequent conduct of the parties may be considered to ascertain the existence of variation of contractual terms.18

 

 

 

  1. The multifactorial approach only has relevance in respect of the required assessment of the terms of the contract.19

 

  1. It is necessary to focus on those aspects of the contractual relationship which bear more directly upon whether the worker’s work was so subordinate to the employer’s business that it can be seen to have been performed as an employee of that business rather than as part of an independent enterprise.20 The question is: whether, by the terms of the contract, the worker is contracted to work in the business or enterprise of the purported employer.21

 

  1. Existence of a contractual right to control the activities of the worker (including how, where and when the work is done) is a major signifier of an employment relationship.22

 

  1. The label or characterisation placed on the relationship by the contract is not relevant even as a “tie breaker”,23 or at least it is not determinative.24

 

[Footnotes in the original]

 

[25]    The Commissioner properly identified these legal principles and properly applied them to the matter at hand.

 

[26]    The decision discloses that the Commissioner took into account and gave appropriate weight to the relevant facts. Whilst the appeal grounds assert errors of fact, we find no such errors.

 

[27]    The essential contention on appeal is that whilst Mr Feldschuh was a shareholder and director of Strong Room Technology, there was a parallel employment relationship from at least the time Mr Feldschuh performed duties said to be those of an ‘executive director’.

 

[28]    For the following reasons we conclude that the Commissioner correctly rejected this contention. In doing so we address the appeal grounds raised by the Appellant, though not in the order presented in the Notice of Appeal.

 

[29]    Firstly, we agree with the Commissioner’s finding at [90] that the only written agreement between the parties is the Non-Executive Director Agreement dated 20 December 2020.

 

[30]    By the terms of the Non-Executive Director Agreement the parties expressly agreed to “formalise” Mr Feldschuh’s appointment “as a Director of the Company’s Board of Directors” and, amongst other matters, agreed that:

 

  • Mr Feldschuh’s position was subject to the Constitution of the Company;
  • Mr Feldschuh would devote such time and attention as is necessary for the proper discharge of his responsibilities as director and the effective performance of his duties;
  • Mr Feldschuh would spend not less than one day a month in the discharge of his duties; and

 

 

 

  • Mr Feldschuh “may from time to time be consulted by other directors on matters to which [his] experience, knowledge or skills are of relevance”.

 

[31]    The terms of the Non-Executive Director Agreement were stated to have effect on and from 20 December 2019, being the day that Mr Feldschuh was appointed as a director.

 

[32]    Secondly there is nothing in the terms of the Non-Executive Director Agreement that suggest that Mr Feldschuh and Strong Room Technology entered into an employment relationship on 20 December 2020. Similarly, there was no declaration or even an assertion in 2020 that Mr Feldschuh was an employee or had been an employee during the preceding year. The agreement does not confer a right to control Mr Feldschuh’s performance of functions (as a director or otherwise), nor does it specify the time at which any work was to be performed or services were to be rendered. Rather the agreement referred to engagement on matters drawing on Mr Feldschuh’s experience as being “subject to [his] availability”.

 

[33]    Thirdly, by a special majority resolution of shareholders on 25 August 2021 the directors resolved to “renew the agreement for Mark Feldschuh for the next 12 months”. The Commissioner properly found that the reference in this resolution to the “agreement” was to the Non-Executive Director Agreement of 20 December 2020. There was no evidence of a separate contract or agreement between Mr Feldschuh and Strong Room Technology.

[34]    Fourthly, there was no evidence that parallel relationships were intended or entered into before or after that date.

 

[35]    For these reasons, we reject appeal ground 6 and the proposition that the Commissioner erred in not finding an employment relationship to have existed.

 

[36]    We now turn to appeal ground 5 in which it is said that the Commissioner failed to take into account, or give appropriate weight to, the fact that the quantum of work performed by the Appellant exceeded that which was contemplated by the written agreement made in 2020.

 

[37]    We take into account, as did the Commissioner, the evidence that Mr Feldschuh undertook functions associated with the operational management of the business, and that these functions became substantially more extensive than contemplated by the written agreement as the months and years transpired, resulting in Mr Feldschuh commonly engaging in full time work.

 

[38]    We agree with the Commissioner that these were functions and duties beyond that of a director merely attending board meetings and providing oversight and participating in strategic decision making. As the Commissioner observed, they added material value to the business. However, the evidence also indicated that whilst Strong Room Technology secured benefit from these services (drawn largely from Mr Feldschuh’s industry experience and networks) it was mutually productive and had developed this character before Mr Feldschuh and the company agreed to “formalise” their relationship in the terms of the 20 December 2020 agreement.

 

[39]    The fact that a director may, in a given set of circumstances, also be an employee in parallel to their directorship is well established and non-controversial. A managing director is an obvious example. However, not every director providing executive services associated with

 

 

 

the conduct of a business of which they are a director is necessarily an employee by virtue of doing so. The particular facts matter.

 

[40]    We accept, as the Commissioner observed, that the governance of Strong Room Technology left much to be desired by allowing the delivery of, and reliance on, business services by Mr Feldschuh to progressively increase yet remain conducted under the auspices of the agreement. Notwithstanding this, to find the existence of a parallel employment relationship between Mr Feldschuh and the Respondent would require clear evidence given that the question is to be determined solely by reference to the rights and obligations under the terms of the contract entered into between the parties. Those terms were set out in the agreement of 20 December 2020. We find no evidence that the agreement of 20 December 2020, as varied by the shareholder’s resolution of August 2021, was not a reflection of the entire relationship between the parties. We reject appeal ground 5.

 

[41]    We now turn to appeal grounds 2 and 3. We take into account, as did the Commissioner, that Strong Room Technology provided payslips that referred to superannuation, leave accruals and a “salary”, and that the special resolution of directors of 25 August 2021 stated that a “salary is recommended to be $200,000 per annum salary or equivalent value of shares at 20% discount of the current valuation”. However, that same resolution referred to the subject matter of the motion as “directors compensation” requiring a “special majority approval from shareholders”. This evidence falls short of permitting a conclusion that the shareholders resolved, in agreeing to increase compensation to Mr Feldschuh from $120,000 to $200,000 in August 2021 evidently in his capacity as a director, to enter an employment relationship with him. We reject appeal grounds 2 and 3.

 

[42]    We now turn to appeal ground 1 which asserts that the Commissioner failed to take into account, or attach sufficient weight to, the Appellant performing functions in, that which the Appellant says, was an executive director role.

 

[43]    We take into account, as did the Commissioner, that the founder and current CEO, Mr Mito, described in his evidence that Mr Feldschuh was, from the date of the shareholder resolution in 2021, an “executive director” and that he had a business card to this effect.25 The Appellant submits that this evidence points to an employment relationship having then been created given, it is said, that a distinction exists in corporate governance between a non- executive director and an executive director. We agree that this evidence, limited though it is, points somewhat in this direction. However, two factors mitigate its value. Firstly, it cannot be safely concluded that Mr Mito was using the expression “executive director” in the context of an employed director. A fair reading of Mr Mito’s evidence on this point suggests that he was referring to a director who performed executive services for the benefit of the business beyond mere participation in board meetings. Secondly, as noted, it does not necessarily follow that a director who provides nominated operational or executive services does so pursuant to a parallel contract of employment.

 

[44]    The issue before the Commissioner was whether an employment relationship existed, not whether services the Appellant performed fitted into some particular notion (defined or undefined) of an executive director as distinct from a non-executive director. The Commissioner rightly turned his mind to the relevant question. We reject appeal ground 1.

 

[45]    Finally, we turn to appeal ground 4 in which it is said that the Commissioner failed to find that the written agreement had ceased to operate by at least August 2022 and did not apply

 

 

 

at the time of termination. We reject this ground of appeal. We do so for two reasons. Firstly, determining whether a relationship was one of employer and employee is assessed by reference to the character of that relationship at its point of creation or subsequent variation, not at the time of termination. Self-evidently, an act of termination does not re-characterise the true nature of a relationship. Secondly, the relationship which existed between Mr Feldschuh and Strong Room Technology at the time of termination was the relationship entered into by the written agreement of the parties in December 2020 as varied following the shareholder’s resolution of August 2021. That relationship continued beyond its stated term given that rights and obligations under it continued to be exercised. Mr Mito’s evidence was that he had authority to do so for up to three years.26 No evidence was before the Commissioner of it having ceased to operate. As we have noted, the Commissioner correctly found that no evidence of a parallel contract existed.

 

Conclusion

 

[46]    The Commissioner concluded that the evidence was insufficient to establish that an employment relationship existed. We agree with that conclusion.

 

[47]    As we do not find that the Commissioner erred in finding that Mr Feldschuh was not an employee of Strong Room Technology it follows that the Commissioner was correct in dismissing the general protections application on jurisdictional grounds.

 

[48]    Although the factual scenario before the Commissioner was somewhat unusual, as we have found that the Commissioner applied the correct legal principles to the facts in an orthodox manner, and reached the correct conclusion, we see no broader issue of principle arising that would warrant granting permission to appeal. As we have observed, each case turns on its own facts, including where it is required to characterise the relationship between a company and a director of a company who performs specified executive functions.

 

Disposition

 

[49]    Permission to appeal is refused.

 

 

Appeal by Feldschuh v Strong Room Technology Pty Ltd – [2024] FWCFB 254 – 7 May 2024 – Gostencnik DP, Anderson DP and Easton DP