Unfair dismisal and related entities

The issue whether an employer is a small business employer is often critical to whether or not an unfair dismissal application can be pursued. For example the minimum employment period for an employee to be protected from unfair dismissal is 12 months where the employer is small business employer and 6 months if the employer is not a small business employer.

Often critical the outcome of a dispute about this is whether the employer is a related entity to other corporations.

Here is a very good example of the legal perspective on this issue.

“Consideration

[46] Section 382 of the FW Act provides that a person is protected from unfair dismissal if they have completed a period of employment of at least the minimum employment period.

[47] Section 383 of the FW Act sets out the minimum employment period:

“383 Meaning of minimum employment period

The minimum employment period is:

(a) if the employer is not a small business employer — 6 months ending at the earlier of the following times:

(i) the time when the person is given notice of the dismissal;

(ii) immediately before the dismissal; or

(b) if the employer is a small business employer — one year ending at that time.”

[48] Section 384 relevantly provides:

“384 Period of employment

(1) An employee’s period of employment with an employer at a particular time is the period of continuous service the employee has completed with the employer at that time as an employee.

[49] Section 22 provides:

“22 Meanings of service and continuous service

General meaning

(1) A period of service by a national system employee with his or her national system employer is a period during which the employee is employed by the employer, but does not include any period (an excluded period) that does not count as service because of subsection (2).

(2) The following periods do not count as service:

(a) any period of unauthorised absence;

(b) any period of unpaid leave or unpaid authorised absence, other than:

(i) a period of absence under Division 8 of Part 2-2 (which deals with community service leave); or

(ii) a period of stand down under Part 3-5, under an enterprise agreement that applies to the employee, or under the employee’s contract of employment; or

(iii) a period of leave or absence of a kind prescribed by the regulations;

(c) any other period of a kind prescribed by the regulations.

(3) An excluded period does not break a national system employee’s continuous service with his or her national system employer, but does not count towards the length of the employee’s continuous service.

(3A) Regulations made for the purposes of paragraph (2)(c) may prescribe different kinds of periods for the purposes of different provisions of this Act (other than provisions to which subsection (4) applies). If they do so, subsection (3) applies accordingly.”

[50] In order to have been protected from unfair dismissal, the minimum employment period required to have been worked by Mr Rossi-Arja is one year if Ad on Adelaide is a small business employer but, if it is not, the minimum employment period is six months.

[51] It is not contested that Mr Rossi-Arja worked across a span of twelve months and eight days.

[52] If Ad on Adelaide was a small business employer and if nine days or more of this period are required to be excluded from the count then Mr Rosi-Arja did not work the minimum period required and is ineligible to make the claim.

[53] Alternatively, if Ad on Adelaide was a small business employer but if no days or less than nine days are required to be excluded from his span of service, then Mr Rossi-Arja is eligible to make the claim. This is because in that scenario Mr Rossi-Arja would have had more than twelve months of service.

[54] If, on the other hand, Ad on Adelaide was not a small business employer, then Mr Rossi-Arja is eligible to make the claim. This is because it is an agreed fact that the combined number of persons employed by Ad on Adelaide and the Ad on Group at the date of his dismissal was fifteen or more and that Mr Rossi-Arja had more than six months of service.

Was Ad on Adelaide a small business employer?

[55] “Small business employer” is defined in s 23 of the FW Act in the following terms:

“23 Meaning of small business employer

(1) A national system employer is a small business employer at a particular time if the employer employs fewer than 15 employees at that time.

(2) For the purpose of calculating the number of employees employed by the employer at a particular time:

(a) subject to paragraph (b), all employees employed by the employer at that time are to be counted; and

(b) a casual employee is not to be counted unless, at that time, the employee is a regular casual employee of the employer.

(3) For the purpose of calculating the number of employees employed by the employer at a particular time, associated entities are taken to be one entity.

(4) To avoid doubt, in determining whether a national system employer is a small business employer at a particular time in relation to the dismissal of an employee, or termination of an employee’s employment, the employees that are to be counted include (subject to paragraph (2)(b)):

(a) the employee who is being dismissed or whose employment is being terminated; and

(b) any other employee of the employer who is also being dismissed or whose employment is also being terminated.” (emphasis added)

[56] In this matter, the relevant time for this assessment is the time of the dismissal.

[57] Given that it is not in dispute that Ad on Adelaide employed less then fifteen persons at the time of dismissal 24 (and thus, on that number, was a small business employer), s 23(3) of the FW Act requires consideration of the associated entities issue. It provides that the number of persons employed by a small business employer includes persons employed by an “associated entity”.

[58] Section 12 of the FW Act states that an “associated entity” has the meaning given by section 50AAA of the Corporations Act.

[59] As noted, the Commission of its own motion raised this issue in advance of the hearing: 25

“The question which arises is what is meant by this, and whether there are “associated entities” and thereby employees of associated entities which the law requires the Deputy President to also take into consideration in deciding whether Mr Rossi-Arja’s minimum employment period was 12 months or 6 months.”

[60] “Associated entities” are defined by s 50AAA of the Corporations Act as follows:

“50AAA Associated entities

(1) One entity (the associate) is an associated entity of another entity (the principal) if subsection (2), (3), (4), (5), (6) or (7) is satisfied.

(2) This subsection is satisfied if the associate and the principal are related bodies corporate.

(3) This subsection is satisfied if the principal controls the associate.

(4) This subsection is satisfied if:

(a) the associate controls the principal; and

(b) the operations, resources or affairs of the principal are material to the associate.

(5) This subsection is satisfied if:

(a) the associate has a qualifying investment (see subsection (8)) in the principal; and

(b) the associate has significant influence over the principal; and

(c) the interest is material to the associate.

(6) This subsection is satisfied if:

(a) the principal has a qualifying investment (see subsection (8)) in the associate; and

(b) the principal has significant influence over the associate; and

(c) the interest is material to the principal.

(7) This subsection is satisfied if:

(a) an entity (the third entity) controls both the principal and the associate; and

(b) the operations, resources or affairs of the principal and the associate are both material to the third entity.

(8) For the purposes of this section, one entity (the first entity) has a qualifying investment in another entity (the second entity) if the first entity:

(a) has an asset that is an investment in the second entity; or

(b) has an asset that is the beneficial interest in an investment in the second entity and has control over that asset.

[61] I have made a finding that the relationship between Ad on Adelaide and the Ad on Group is not established by common ownership or directorship. They are not “related bodies corporate” within the meaning of s 50AAA(2) of the Corporations Act.

[62] Nor is there evidence of a “qualifying investment” in the other that would render them “associated entities” within the meaning of s 50AAA(5) or (6), or of a controlling “third entity” within the meaning of s 50AAA(7) of the Corporations Act. The licencing agreement does not represent a qualifying investment for the purposes of s 50AAA of the Corporations Act. I do not conclude, as Mr Rossi-Arja suggested, that up-front payments for customer leads made by Ad on Adelaide to the Ad on Group are “investments”. They are fees for services.

[63] The question falls to be determined by reference to s 50AAA(3) and (4), and in particular whether the principal (Ad on Group) “controls” the associate (Ad on Adelaide) or vice versa.

[64] Section 50AA provides:

“50AA Control

(1) For the purposes of this Act, an entity controls a second entity if the first entity has the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

(2) In determining whether the first entity has this capacity:

(a) the practical influence the first entity can exert (rather than the rights it can enforce) is the issue to be considered; and

(b) any practice or pattern of behaviour affecting the second entity’s financial or operating policies is to be taken into account (even if it involves a breach of an agreement or a breach of trust).

(3) The first entity does not control the second entity merely because the first entity and a third entity jointly have the capacity to determine the outcome of decisions about the second entity’s financial and operating policies.

(4) If the first entity:

(a) has the capacity to influence decisions about the second entity’s financial and operating policies; and

(b) is under a legal obligation to exercise that capacity for the benefit of someone other than the first entity’s members;

the first entity is taken not to control the second entity.”

[65] Thus, an entity will control a second entity if it can determine the outcome of decisions about the second entity’s financial and operating policies. Whether one entity controls a second entity involves a consideration of the practical influence the entity can assert and any practice or pattern of behaviour affecting the second entity’s financial or operating policies. 26

[66] In this matter, there is no evidence to support a proposition that Ad on Adelaide controls the Ad on Group. Consideration of s 50AAA(4) does not arise.

[67] Does the Ad on Group “control” Ad on Adelaide in the relevant sense?

[68] This assessment is to be made having regard to those matters in s 50AA(2) to (4) of the Corporations Act including the practical influence that can be exerted by the Ad on Group on Ad on Adelaide and any related practice or pattern of behaviour affecting Ad on Adelaide’s financial or operating polices.

[69] Factors such as shared directorships and integrated governance agreements are amongst the relevant considerations but, in light of my earlier findings, none of those factors apply in this case to support the notion of control.

[70] In this matter, the relevant considerations concern the terms of the licensing agreement between Ad on Adelaide and the Ad on Group and the contractual rights and obligations it establishes, as well as matters beyond enforceable rights such as how the relationship operates in practice.

[71] In MacInnnes v Gladstone CC Pty Ltd T/A Len Smith Carpet Court the Commission observed: 27

“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…”

[72] In deciding this question, I have regard to the practical influence that the Ad on Group can assert (particularly under the licence agreement) and the evidence of Mr Ragless concerning its effect upon Ad on Adelaide’s operations.

[73] There are provisions of the licence agreement which expressly give the Ad on Group capacity to exert practical influence on Ad on Adelaide’s operating and financial policies. These include but are not limited to:

  • The right to compel Ad on Adelaide to only secure sales by using marketing material authorised by the Ad on Group;
  • The right to compel Ad on Adelaide to only sell those products or services owned by and offered to the market by the Ad on Group;
  • The fact that Ad on Adelaide is the agent of the Ad on Group and is required to represent itself as such; and
  • That contact details supplied by Ad on Adelaide to customers must be those of the Ad on Group.

[74] There are also other provisions of the licence agreement which expressly give the Ad on Group capacity to specifically determine the outcome of decisions about Ad on Adelaide’s financial and operating policies. These include but are not limited to:

  • The right to itself of the full value of payment of monies from customer orders secured by Ad on Adelaide (“the commercial and billing relationship is between the licensor and the customer” 28);
  • The obligation to only pay to Ad on Adelaide the commissions as set out in the licence agreement for customer orders; and
  • The obligation on Ad on Adelaide to pay a monthly administrative fee to the Ad on Group.

[75] Ad on Adelaide would be in breach if it independently determined its financial or operating policies on terms inconsistent with or outside the framework of the licence agreement.

[76] Further, there is no evidence that Ad on Adelaide conducts business activities separate or additional to its contracted function as the South Australian agent of the Ad on Group.

[77] I take into account that the licence agreement specifically provides that Ad on Adelaide “is responsible for their own staffing, running their own office, managing their own accounts and all normal activities associated with running a normal business”. I accept the evidence of Mr Ragless that this is what in fact happens.

[78] However, this provision relates to Ad on Adelaide’s internal management of its business and its responsibilities as an employer but does not set aside other terms of the licence agreement which provide relevant and material controls on its finances and operations by the Ad on Group as set out in the agreement made between the two entities.

[79] Nor does the evidence of Mr Ragless as to the manner in which the business is conducted alter these findings. His evidence leads me to conclude that the business is conducted, in practice, largely in accordance with the terms of the licence agreement.

[80] I am satisfied that these controls are not of a minor or theoretical construct only. They are material to the relationship and material to the manner in which the business of Ad on Adelaide is conducted.

[81] Considered overall, I conclude that Ad on Adelaide, as a business agent for the Ad on Group in South Australia, is an associated entity of the Ad on Group within the meaning of s 50AAA of the Corporations Act. I find that the Ad on Group, as the licensor, has by virtue of the rights and obligations set out in the licence agreement, and having regard to the performance of that agreement, the capacity to determine the outcome of decisions about Ad on Adelaide’s financial and operating policies.

[82] I make this finding notwithstanding the fact that Ad on Adelaide is a separate entity and not a related body corporate. Whilst the Ad on Group cannot in any sense control the mind or corporate decision making of the sole director of Ad on Adelaide (Mr Ragless), by virtue of the agreement entered into by Mr Ragless with the Ad on Group he has agreed to legally binding controls over the operation of his business and its finances.

[83] As Ad on Adelaide and the Ad on Group are “associated entities” within the meaning of s 50AAA of the Corporations Act and thus the FW Act, the number of persons employed by Ad on Adelaide and the Ad on Group combined at the time of Mr Rossi-Arja’s dismissal was more than fifteen.

[84] Accordingly, Ad on Adelaide was not a small business employer within the meaning of the FW Act.

Are the periods of leave without pay excluded periods?

[85] Having made the aforementioned finding, it is not necessary to determine whether periods of unpaid absence by Mr Rossi-Arja should be excluded from his period of service. This is because it is not in dispute that Mr Rossi-Arja served the minimum employment period if his employer was not a small business employer at the date of dismissal.

[86] However, out of respect for the evidence and submissions made and in order to provide clarity to the parties in the event that I was wrong in the finding that Ad on Adelaide was not a small business employer, I now turn to whether the periods of leave without pay are excluded from the count.

[87] It is not in dispute that Mr Rossi-Arja was absent for seventeen days on leave without pay due to sickness and having exhausted his personal leave accrual, and a further two days of leave without pay for annual leave due to having exhausted his annual leave accrual. This much is clear from the evidence of Mr Rossi-Arja and Mr Ragless.

[88] In a somewhat different context (whether absence from work by a casual employee is an authorised absence) a full bench of the Commission in Affinity Education Group Limited v Kogler observed: 29

“We consider that the expressions “unpaid leave” and “unpaid authorised absence” in s.22(2)(b) connote periods of time off work which, but for the permission or authorisation of the employer, would have been expected if not required to have been worked by the employee.”

[89] For current purposes, the relevance of this observation is that Mr Rossi-Arja was permitted by Ad on Adelaide to be absent on each of the nineteen days of unpaid leave and would have otherwise been required to work on those days had he not been absent.

[90] The expression “unpaid leave” is to have its ordinary meaning, being absent from work with the employer’s permission but without pay.

[91] For the following reasons, I conclude that each of the nineteen days of unpaid absence by Mr Rossi-Arja were periods of “unpaid leave or unpaid authorised absence” within the meaning of s 22(2)(b) of the FW Act.

[92] Neither period was community service leave or a period of stand down within the meaning of ss (2)(b)(i) or (ii). No regulations have been made for the purposes of ss (2)(b)(iii). Thus the nineteen days are “excluded periods”.

[93] Nor does the FW Act concern itself with whether the unpaid leave was connected either in temporal terms or by subject matter to a period of paid leave the employee was entitled to take. Each day of leave is a separate period. A day of leave without pay that is granted at the employer’s discretion and which immediately follows a day of leave with pay taken due to an employee’s entitlement to that leave does not re-characterise the day of leave without pay other than as a period of unpaid leave.

[94] Nor does the FW Act concern itself with whether an employee felt “forced” to take unpaid leave. The FW Act concerns itself with whether the leave was in fact taken. The evidence in this matter is that each of the nineteen days was taken as leave.

[95] In any event, I am well satisfied that, in an objective sense, Mr Rossi-Arja was not forced to take unpaid leave. The text messages in evidence clearly indicate that on the occasions Mr Ragless suggested that Mr Ross-Arja remain on leave it was because Mr Rosi-Arja himself acknowledged that he was not fully recovered. Whilst Mr Ross-Arja understandably felt some economic pressure to return to work to earn income and was in that sense torn by the desire to work notwithstanding his continuing unwellness, this subjective feeling falls far short of an objective finding that the periods of unpaid leave were forced.

[96] It follows that the whole of each of the nineteen days of unpaid leave does not count for the purposes of Mr Rossi-Arja’s “service”.

[97] That being so, Mr Rossi-Arja served eleven days less than one year having regard to the FW Act’s definition of “service”.

Conclusion

[98] Having found, on account of its operational relationship and dependency upon the Ad on Group, that Ad on Adelaide was not a small business employer as defined, the minimum employment period required to have been served by Mr Rossi-Arja to be eligible to make an unfair dismissal claim was six months.

[99] Mr Rossi-Arja served that length of time. Accordingly, he is eligible to make this unfair dismissal claim.

[100] This would not be the conclusion reached had I found Ad on Adelaide to be a small business employer. In those circumstances, I would have found that Mr Rossi-Arja had served less than twelve months as I have concluded that all of the days of unpaid leave are required by the FW Act to be deducted from his service for these purposes.

Disposition

[101] The employer’s jurisdictional objection is dismissed. Mr Rossi-Arja’s unfair dismissal application is able to proceed.”

Rossi-Arja v Ad On Adelaide Pty Ltd (2022) FWC 2941 delivered 9 November 2022 per Anderson DP