Unfair dismissal; related entities and small businesses

This extract from an unfair dismissal case decision of the Fair Work Commission deals with the practical manner in which the Commission goes about determining whether companies are related entities for the purpose of deciding whether the Small Business Fair Dismissal Code applies to the termination of employment.

“Was Smokemart a small business at the time of the dismissal?

[37] The Respondent submits that as it had less than 15 employees at the relevant time, it is a small business consistent with s.23 of the FW Act. It is not in dispute that the Respondent employed less than 15 employees at the relevant time, and this is confirmed by the evidence 9 before the Commission. Further, whilst the Respondent conceded that it does have associated entities which it controls, the evidence10 confirms that these do not employ anyone. However, it is contended by Mr Ismail that there are (other) associated entities that must be included and that the total employment numbers involved would then readily exceed the defined limit. In particular, it is contended that SEPL Pty Ltd (the Peregrine Corporation) is an associated entity on the basis that they control, or exercise significant influence over, the Respondent. I observe that, given the earlier (undisputed) evidence, if that other entity is considered, many more than 15 employees would be included for present purposes and the Respondent would not be a small business. Conversely, unless there are other employing associated entities included and, in effect, treated as the same entity as Safico for the present purpose of assessing employment numbers, the Respondent will qualify as a small business employer under the FW Act.

[38] The Respondent contends that it is solely responsible for the operation of Safico, the Safieddin Trust, and the three stores. Further, it asserts that “the Peregrine Corporation is not involved with the day-to-day running of the business, nor do they have any interest, control, or financial interest in Safico, the Safieddin Trust, or vice versa”. The profits generated by Safico are stated to be distributed between 4 directly related members of the Safieddin family, all named beneficiaries under the Safieddin Trust. The Respondent states that “there is no relationship between Safico, the Safieddin Trust and SEPL or the Peregrine Corporation other than a commercial agreement for the use of the “Smokemart” trademark”.

[39] The Respondent also submits that Peregrine Corporation, including SEPL Pty Ltd, has no control or influence over Safico or any qualifying interest in the three stores of the Safieddin Trust. Further, it contends that Safico is run solely by Mohsen and Rosa Safieddin, and no control is exercised by any other entity in the running of the retail stores. As such, the Respondent contends that there are no relevant associated entities within the meaning of s.50AAA of the Corporations Act.

[40] The Applicant contends that Safico is an “associated entity” of SEPL consistent with s.50AAA(3) of the Corporations Act, as Peregrine exercises “significant influence” over its operations. He submits that Peregrine has “direct contractual control” over purchases of cigarettes, prices to be paid and charged, and rebate entitlements. Further, he contends that Peregrine directs Safico how to promote, display, and position promotions for tobacco companies in its stores.

[41] Mr Ismail’s witness statement in reply 11 also stated that:

“the five independent Smokemarts are all owned by Charlie Shahin’s (the boss of Peregrine)’s relatives and all linked to Peregrine’s Smokemart. Peregrine Smokemart does the contracts with the cigarette companies for the pricing of all cigarettes supplied to both Peregrine’s Smokemart and the “independent” Smokemarts (including Mohsen’s business) including quantity sales rebates paid back to both Peregrine and the “Independents”. They also contract special promotions etc. on behalf of the whole group. Peregrines arranges for promotion meetings for all staff in the group, all of whom are expected to attend without pay after hours every three months”.

[42] The evidence before the Commission reveals the arrangements set out below.

[43] The Respondent is the trustee of the Safieddin Family Trust and the directors are Mohsen and Rose Safieddin.

[44] The Respondent is licensed by SEPL through a formal licence agreement to operate three retail stores as follows:

  • Smokemart Parabanks
  • Smokemart Welland
  • Smokemart Avenues

[45] The “Peregrine Corporation” is a group of companies owned by the Shahin Family, being founded by Mr Safieddin’s late uncle, Fred Shahin in 1984. SEPL Pty Ltd, which is part of the Peregrine Corporation, owns the registered trademark ‘Smokemart’.

[46] There is no common ownership or board directorships between the Respondent and SEPL. There are no investments in the Respondent made by SEPL (or any part of the Peregrine Corporation).

[47] In late 1999, Fred Shahin made a verbal agreement with Mr Safieddin to license the use of the trademark “Smokemart” to the Safieddin Family Trust. In October 1999, Mr Safieddin opened up the Avenues store. In March 2017, a formal licence agreement was made between SEPL and the Respondent to confirm the arrangements in the following terms:

“1. (No Franchise) The Business is independently owned and carried on by the Business Owner and is not a franchise granted by SEPL. The Business Owner does not carry on its Business under a system or marketing plan substantially determined, controlled, or suggested by SEPL (or any associated entity of SEPL). The Business Owner is not required to pay to SEPL any franchise fee or other amount in order to carry on its Business.

  1. (Purchasing) SEPL and the Business Owner will continue to purchase tobacco stock from suppliers on materially the same basis as they presently do.
  2. (Share discounts, rebates etc) SEPL and the Business Owner will continue to seek discounts, rebates, and other incentives from suppliers, and will share the benefit of those discounts, rebates, and incentives between themselves on materially the same basis as they presently do.
  3. (Brands) SEPL is the owner of the Brands. The Business Owner may continue to use the Brands in its Business under license from SEPL for so long as the Business Owner owns and carries on the Business at the Business Address. No licence fee or loyalty is payable to SEPL.
  4. (Term of Agreement) This agreement expires on the first to occur of the following events.

5.1. 90 days after the Business Owner gives written notice of termination of this Agreement without cause

5.2. The day on which the Business Owner ceases to own and carry on the Business at the Business Address.

5.3. The date on which SEPL gives written notice of termination because of an Event of Default of the Business Owner under clause 6.

  1. An Event of Default of the Business Owner occurs if:

6.1. The Business Owner becomes non-compliant with any of the trading terms, display and pricing agreements in place currently, or in the future, and such non-compliance is not remedied within 7 days after written notice by SEPL requiring that the non-compliance be remedied; or

6.2. The Business Owner uses or allows the Brands to be used otherwise than at the Business Address in the course of carrying out the Business; or

6.3. The Business Owner commits any illegal trading activity in the Australian tobacco industry, or becomes insolvent or is placed into liquidation, receivership, bankruptcy, or administration in insolvency.

  1. (Effect of Termination) All obligations and rights of the parties cease or termination of this agreement.
  2. (Other Obligations) The parties agree to the other obligations (if any) set out in Item 5 of the Schedule.
  3. (Give effect to this document) Each party must use best efforts to give effect to this document (including giving any consent and signing any document or form)”. 12

[48] There are no other written agreements operating between SEPL and the Respondent and there are no other obligations stated in schedule 5 of the licence agreement. No fee is payable, or paid, by the Respondent to SEPL in connection with the licence agreement or otherwise.

[49] The Respondent holds tobacco and e-cigarette merchant licences for Smokemart Avenues, Parabanks, and Welland. It does not operate under the merchant licences of any other business.

[50] The Respondent has contracts with tobacco manufacturers/suppliers in its own name and receives the products and invoices directly from those companies and makes direct payments. The tobacco companies supply the Respondent with a (wholesale) price list.

[51] SEPL has licence agreements with other entities that operate as Smokemart, and these are conducted by other relatives of the Shahin family. I will refer to these arrangements as the “independent stores”, without making any findings about their relationship to SEPL. I observe that there is no suggestion that these independent stores are associated companies to the Respondent. SEPL operates a large number of Smokemart stores (also badged as ‘Giftbox’) in its own right.

[52] The Respondent has certain obligations that arise under the regulatory regime applicable to the supply of tobacco, including those set by the Australian Taxation Office. That regime includes providing data to monitor the sale of cigarettes (to assist to detect the sale of illicit tobacco) and incorporates being accountable for all the sales made, which must be reported back to the tobacco companies for audit. Further, certain commercial arrangements are made between the tobacco companies and the retailers, including for the payment of rebates on sales, which require that the pricing of the products be within a certain range, or at least not more than a ceiling price or outside of certain price margin parameters that are also set by tobacco companies.

[53] During the hearing, the Respondent tendered a copy of the national price list of a major Tobacco company 13, and the 2022 Promotional Plan, for Smokemart.14 Mr Safieddin explained that these contained the maximum selling price of cigarettes to qualify for the relevant rebates, and he also confirmed the sales data that would be sent to British American Tobacco (and other tobacco suppliers) via Peregrine at the end of the month. The Respondent’s evidence, which I accept, is that similar arrangements also exist with other tobacco companies with which it does business.

[54] SEPL, the independent Smokemart stores and the Respondent, have encouraged the tobacco companies to consider them as a group for buying purposes. This has led to tobacco companies making rebate offers to the independents, including the Respondent, as a group. It is not clear whether SEPL negotiates those arrangements, but it has significant buying power in its own right and this “group” negotiation role for the Smokemart independents is certainly feasible, if not probable, and I have determined this matter on that basis.

[55] However, there are no contractual arrangements between SEPL and the Respondent regarding how to promote and price cigarettes. There are also no such arrangements in which SEPL and the Respondent have jointly entered into contractual terms with any of the tobacco companies.

[56] The Respondent is not bound to offer the same product range as the Smokemart independents (or SEPL) and is subject to its own contractual arrangements with the tobacco companies, subject to the constraints applied by those companies and discussed above. The Respondent makes its own pricing decisions and approaches the tobacco companies for variations to the “Smokemart” rebate offers and has been successful in gaining concessions from time to time.

[57] The Respondent does not have the technology to directly report the detailed product sales to the tobacco companies in the format required for regulatory purposes. It reports the product sales for the combined 3 stores to SEPL which provides a consolidated report to the tobacco companies, keeping the Respondent’s figures separated. The reports that are provided via SEPL do not disclose the price, only the sales volume (packets) for each product for regulatory audit purposes. The tobacco companies subsequently send a reconciliation document for the sales directly to the Respondent, which confirms/approves the information as part of the process for rebates to be paid, again directly, to the Respondent.

[58] The tobacco companies audit the Respondent, and other retailers from time to time, to ensure that their products are not being sold above the prices set out in the (Smokemart independents) rebate offers or outside of the margin parameters set by the tobacco companies. This is necessary for the Respondent to retain the recognition as a tobacconist by the tobacco companies.

[59] There are no store fit out conditions applied to the stores under the Licence Agreement and the Respondent determines that fit out and any changes at its stores from time to time without reference to SEPL. The Respondent has determined that the Smokemart logo and signage are however to be kept consistent for marketing purposes.

[60] The Respondent conducts the stores with the understanding that it is operating them without payment of a licence fee or any other payments to SEPL, in effect, because of the family connections. Mr Safieddin additionally outlined that no contractual arrangement existed between the Respondent and the other independent Smokemart stores; noting these were conducted by individuals that were “cousins, uncles, and brothers” of his.

[61] The profits generated by Safico are earned for the sole benefit of the beneficiaries under the Safieddin Trust. There is no contractual relationship between Safico, the Safieddin Trust and SEPL or the Peregrine Corporation other than a commercial licence agreement for the use of the “Smokemart” trademark.

[62] The licencing agreement would not represent a qualifying investment for the purposes of s.50AAA of the Corporations Act.

[63] The Respondent employed a total of 11 Full-time, Part-time, and Casual Team Members at the relevant time.

[64] The question then becomes whether SEPL, as the principal, controls the associate, the Respondent. 15 This, in turn requires the Commission to consider whether SEPL has the capacity to determine the outcomes of decisions about the Respondent’s financial and operating policies.16 This assessment is to be made having considered those matters provided in s.50AA(2) to (4) of the Corporations Act including the practical influence that can be exerted and the practice or pattern of behaviour affecting the Respondent’s financial or operating polices. The full terms of this provision have been set out earlier in this Decision.

[65] In submissions, the Respondent referred to several decisions of the Commission in which factors such as shared directorships and governance arrangements 17 and funding agreements18 were important factors. I accept that these are amongst the relevant considerations and that none of these factors apply in this case to support the notion of control. However, it is the terms of the Corporations Act that must be applied to the given circumstances of the case at hand.

[66] Accordingly, I need to consider whether SEPL has the practical capacity to influence the Respondent’s financial and operating policies. There are no written contractual arrangements that provide this influence. The licence agreement and associated arrangements do not in my view provide that capacity. However, when assessing the practical influence, the constraints of contractual terms do not apply. That is, the consideration includes looking beyond the enforceable rights 19 and a pattern of behaviour may be taken into account even if this involves a breach of an agreement.20

[67] Given all the findings above, which generally do not support the notion of control within the meaning of s.50AA of the Corporations Act, there are 2 aspects that come closest to potentially demonstrating the required influence. Firstly, whether the joint tobacco products buying power and associated arrangements and/or secondly, the family connections between the ownership of the entities, lead to the practical capacity to influence the Respondent’s financial and operating policies.

[68] Mr Safieddin gave the following evidence in response to questions from the Commission about an element 21 of the licence agreement:

“THE COMMISSIONER: Perhaps you might provide the context for that. What did that mean, at least at the time that the licence agreement was entered into?

MR SAFIEDDIN It’s like a buying power. We share. When they look at us – for example, British American Tobacco wants to promote in Smokemart, give us a discount. Instead of looking at us having that number of stores, they look at us when they give us the rebate, like as we share our buying power.

So you act collectively? When I say ‘you’, I mean your business, SEPL and the independents? — No, we get looked at as – but we don’t compete against each other. Okay, we do in the market a little bit, but not as – we get looked at as collectively, big volume for purchasing power.

So it’s mutually helpful at least for the tobacco companies to see you as a group? —Exactly, more organised for them as well and easier to deal with.

What understanding, if any, do you have between your company and SEPL about that? Nothing. You need to understand the arrangement between me and SEPL is a little bit odd and weird at the same time in Adelaide. It is a family arrangement. I bought – for example, I bought my first shop, it was called Avenues Tobacconist. Because maybe at that time I wasn’t a good boy, I wasn’t given permission to use the word Smokemart for another five/six years. I needed to prove myself first and then my uncle let me use the word Smokemart. You know what I mean? Like it benefits me. When I put the word Smokemart at my other shop in Salisbury, it was without Smokemart for three or four years, and then he allowed me to put the word Smokemart. The moment I put the word Smokemart, sales went up by 30 per cent because it’s a known name, it’s a respectful name.

The non-written agreement between us is I adhere not to sell illicit tobacco, not to sell nicotine vapes, which I’m not allowed because it reflects on the whole brand name Smokemart. ‘I allow you to use the word Smokemart as long as you respect Smokemart as such.’ I don’t know. As I said, you know, I can explain it till tomorrow. It’s a family arrangement. The influence of SEPL, and I would like Mr Hardie to hear this, it’s more my uncle picking up the phone and saying, ‘Come over here, I want you to do something for me’, but it’s not influence on my business, it’s influence on me personally.” 22

[69] I have found that SEPL has some influence over the rebate offers that the cigarette companies make to the Respondent and the other Smokemart independents. However, this does not establish the capacity to control (contractual or practical capacity) to determine the outcome of the Respondent’s decisions about financial and operating policies. Those arrangements set some of the context in which pricing decisions are made, but within the framework of the prices provided by the tobacco companies, it is the Respondent that makes the relevant product purchasing and pricing decisions. The basic propositions advanced by Mr Ismail in support of the notion of control by SEPL were contradicted by direct and persuasive evidence led by the Respondent.

[70] In terms of the capacity for control associated with the family relationships, I do accept that these set some of the context and the desire to maintain and respect those relationships is a relevant consideration. However, the evidence demonstrates that there is no practice or a pattern of behaviour so as to become relevant control within the meaning of s.50AA of the Corporations Act. That is, these relationships do not provide SEPL (or the Peregrine Corporation) with the legal capacity or practical influence to determine the outcomes of the decisions about the Respondent’s financial and/or operating policies.

[71] I observe only for completeness, that even if the individual owners of SEPL were relevant entities in their own right for present purposes, 23 it was not suggested that they (directly) employed staff in that capacity. On that basis, this would also not change the small business status of the Respondent.24

[72] I also do not consider that there is any other basis to suggest that SEPL has the capacity to determine the outcomes of decisions about the Respondent’s financial and operating policies or that it is an associated entity. That is, I do not consider that SEPL has the contractual or practical influence that can be exerted on, or that there is a practice or pattern of behaviour affecting, the Respondent’s financial or operating polices as contemplated by s.50AAA of the Corporations Act.

[73] As a result, I find that the Respondent has demonstrated that it was a small business employer under the FW Act at the relevant time.”

Ismail v Safico Pty Ltd T/A Smokemart (2022) FWC 2349 delivered 19 October 2022 per Hampton C