ATC Digest

A selection of articles writen by me and published by ATC Digest.

Fair Work Act – Is it Unfair?

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Fair Work Act Update – Is it really fair?

Given the economic climate there is little room for failure of performance by employees, especially where it may be damaging to the business. How Employers terminate an employee can be risky and many finding themselves before the Fair Work Commission because they got it wrong. A claim for unfair dismissal is an accessible and cheap process for many employees and can end up costing employers a lot of time and money. Below we review some of the tips, traps, and various risk management measures available to Employers.

Should employers have a Social Media Policy?

The dramatic increase in use of social media platforms poses significant challenges in the workplace. If employers want to restrict potentially damaging comments by employees on social media about their organisation, they need to write and implement a suitable social media policy.

Glen Stutsel v Linfox Australia Pty Ltd [2011] FWA 8444

The employer terminated the employee for serious misconduct following the employee and friends making racially derogatory and sexually discriminatory comments about managers on his Facebook page.

The sexual comments about one manager were not made by the employee and the Commission considered it strange to hold the employee accountable for the comments of others. It was relevant that the employer did not have a social media policy and no other employees who made derogatory comments were the subject of any sanction by the employer. The Commission concluded the employee was not guilty of serious misconduct and there was no valid reason for termination, and therefore he had been unfairly dismissed. The Commission ordered he be reinstated and receive lost wages following termination. The case is currently the subject of appeal.

The Commissioner was critical of the employer for not having a social media policy.

Is the termination a Genuine Redundancy?

Employers who fail to observe the Fair Work Act 2009 (Cth) (the Act) redundancy requirements can find themselves exposed to unfair dismissal claims. A recent decision before the Fair Work Commission highlights these legal requirements which include the need to consider alternative positions and to consult with the affected employee about the redundancy.

Horn v Mastermyne Engineering Pty Ltd [2012] FWA 10846

The employee claimed he was not genuinely redundant because:

  • there was no consultation or any demonstrated effort to identify alternative positions in the employer’s business;
  • after termination, his duties were allocated to other employees not qualified to undertake the work; and
  • the employer subsequently advertised positions the employee was qualified for.

The employer claimed employee’s role was no longer required to be undertaken by anyone due to changed operational requirements, in response to a downturn in the coal industry. Senior Deputy President Richards considered it did not matter whether the employer redistributed the employee’s former duties to other employees, who were not qualified, as that was a matter for the employer.

The employer established it had investigated the availability of alternative positions in the employers group of companies; however, those investigations were unsuccessful. The positions advertised after the employee was terminated, were for fitters undertaking underground work – which the employee did not meet the regulatory requirements for. Richards SDP determined that there was no obligation on the company on this occasion to overcome the difference in skill and experience by retraining the employee.

The employer had held a “pre-start meeting” with employees at which the organisation review was explained, the record of that meeting was publicly available and employees had been invited to proffer suggestions to offset, avert or mitigate the proposed changes. Thus the employer had complied with the consultation provisions of the relevant Award.

Richards SDP concluded that the employee had been made genuinely redundant and the employee’s application was dismissed.

Is a system of employee warnings advisable?

A failure to document performance management procedures such as communicating expectations and issuing warnings properly, may expose an employer to an unfair dismissal claim if the employee is later terminated for poor performance.

Moumtzis v Dolina Fashion Group Pty Ltd [2013] FWC 501

In a business that has a large amount of creativity and experience as part of the role, it is difficult to define the boundaries of employment agreement. The employee in this case was terminated on the basis she was unfit for her position as a designer of women’s clothing. The employer had informed her that she had not achieved the required profit margins for the business and was purchasing expensive fabrics.

The employer did not put forward any evidence concerning performance discussions had prior to the termination and Vice President Watson was left to consider the uncontested evidence of the employee. She did not have any KPI’s, budgets or annual reviews and therefore her employer’s perception she was not performing, did not amount to a valid reason for termination.

The evidence did not establish that the employee had been warned of unsatisfactory performance prior to the termination. The fact there was no valid reason for termination, no chance for the employee to respond and no prior warnings, led to the conclusion the employee was dismissed unfairly. VP Watson ordered the employer pay the employee 22 weeks remuneration as compensation. Ouch!

Termination without an investigation is dangerous

Employers must keep clear records of all investigation processes particularly if they may have disciplinary consequences such as termination. Employers must warn employees that the specific conduct may lead to dismissal. The case of Read shows following proper procedures in the investigative stage and during disciplinary action is vital.

Read v Gordon Square Childcare Centre Inc T/A Gordon Square Early Learning Centre [2012] FWA 7680

Here the employee at a childcare centre had a parental complaint against them. The substance was their child was left unattended when upset by the employee, was not given breakfast, and on another occasion had been allowed to play with electrical outlets. This was investigated by the childcare centre management.

The evidence found that the employee had admitted she left the child unattended and that this was a failure to supervise and was a significant breach of childcare regulations. This was deemed serious misconduct which was not so serious that the employee’s employment should not continue and they were summarily dismissed..

It was significant that the employee was not warned that her conduct could result in termination. The Commissioner concluded the employee did leave the child unattended and unsupervised. This was a breach of the National Law and the Supervision Policy of the Centre. It was accepted, that the employee had previously allowed children to play under her reception desk where there were dangerous wires.

The employee was informed that her failure to supervise of a child was the reason for termination of employment. The childcare centre afforded the employee procedural fairness in the process of investigation because they had presented the allegations, allowed her to respond and then made a finding which in turn was communicated to her. The employee was also allowed a support person at both meetings with the employer. While previous discussions about performance did not constitute warnings, ultimately the Commissioner concluded that summary dismissal was fair.

Attend Fair Work Commission Proceedings

If a former employee brings an unfair dismissal claim before the Fair Work Commission, employers cannot afford to ignore such a claim. Regardless of size, time and resources, employers who ignore a claim run the risk of the Commission making adverse findings against them in their absence.

Bargmann v Stilnovo Pty Ltd T/AMurano and Gullotti [2013] FWC 1080

In this case the employer did not attend the scheduled telephone conference or provide submissions on request from the Commission. On that basis the Commissioner accepted the applicant employee’s evidence unchallenged and found that the employee had been unfairly dismissed.

What does this mean to Employers?

The following points must be noted:

  • Implement a suitable social media policy– without it, you are lacking a valuable system in managing the social media behaviour of your workforce;
  • Redundancy may not mean redundancy under the Fair Work Act unless you stick to the rules;
  • Failure to implement and document a warning process will damage your ability to defend performance based terminations;
  • Appropriate investigation, and compliance with natural justice requirements, can significantly assist in the defence of unfair dismissal proceedings;
  • Do not fail to respond to  the Fair Work Commission as it will find against an employer in absence of submissions

We have identified some common sense points arising from dealing with employees and the Commission but keep in mind the utmost effort is given to support employees if they file a claim. There are no cost consequences generally so you must factor in the time and expense of responding and representation if allowed.

Always keep your records clear and ask for the employee to sign an acknowledgement of the meeting record if possible. Seek assistance and try to mediate any emotional situations by always having a witness present in any discussions.

Real Value of Due Diligence and Independent Advice.

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The enemy within

It never ceases to amaze me how people can be so trusting when entering into a business transaction with someone they don’t know very well.

As part of small business management, it is usual when acquiring an asset that the director exercises a reasonable level of due diligence before committing to the transaction. Certainly, a high level of scrutiny is given to the purchase of such items as plant and equipment or stock. One can only wonder why a director would leap into a financial or structural change without the same degree of scepticism.

Recently, I encountered another example of a business that had been created with a potential significant time bomb lodged in the structure.

My clients were skilled construction individuals who had created a unique method of surface material application and decided to start their own business.

Lacking the acumen, advice and funding, they accidentally discussed the matter with an unknown third party, who decided to offer them start up finance. A company was duly formed and, on the advice of the accountant for the third party, a change in the constitution occurred.

This was a significant moment in the life and destiny of the business. The accountant made it clear that he was acting only in the interests of the third party investor, but for some inexplicable reason, this did not trigger a warning to the other two to seek independent advice.

As a result, a special class of shares was issued to the third party and highly restrictive voting powers imposed upon the two original shareholders. In fact, the third party forced a change to the constitution to the extent that, at any time, the third party could appoint himself as a director.

The two working directors, who had taken the majority of the business risk, were left having no real control over the company, could not seek out further or alternative funding and certainly could not complain about the management style of the third party.

Regardless of their predicament, they set about working hard in the business seven days a week; taking risky contracts with difficult time lines; employed and managed the staff; juggled cash flow; and somehow managed to repay the third party the principal and interest on time. To make matters worse, from the outset, the spouse of the third party shareholder had a registered first charge over all the assets and undertaking of the company pending receipt of the final payment of principal and interest.

Effectively, upon a minor or technical default, such as production of figures or reports, the spouse could have appointed a receiver at any time.

Eventually, the two original directors reached the end of the period of repayment and, due to the growth in the business and increasing complexity of financial management, they finally sought independent accounting advice. The accountant was surprised to find the change in voting rights and the registered charge had been orchestrated from the outset and gave the directors their first independent view of their position.

It came as a shock for them to understand that they could lose all that they worked for at any time and that, in fact, they at no stage really controlled the company.

No formal meetings were ever held and surprisingly, the third party sat back and let the principal and interest repayments come in without inquiring further.

The next stage of the relationship became critical. Now they had obtained this independent advice they were angry at the way that it had occurred, but understood all to well that now was not the time to incite an argument with the third party or his spouse as secured creditor.

Two crucial outcomes were sought:

  1.  To ensure that at the point that the loan was repaid in full, a release of charge would be provided in exchange; and
  2. At the same time, a change to the constitution would occur whereby the voting rights would become equal again.

You can well understand that they felt a little intimidated, calling a meeting to resolve the matter. On advice, they were open about the agenda for the meeting, the changes they were seeking and produced an independent valuation for the shares. They now realised that they were not guaranteed to free themselves of the existing shareholder with higher voting rights and that, as the company improved its financial position, so too did the value of the shares. The longer they waited to address the matter, the higher the exit price would become for the third party.

From an innocent first handshake discussion they had been outmanoeuvred carefully and had indeed helped create an enemy within.

The choices were:

  • Pay a premium on the shares; or
  • Liquidate the company and start again.

All the hard work could be undone in a matter of one moment of disagreement with the third party.

Thankfully, the share price reflected a very good capital gain for the third party and the element of risk for the future was enough to convince them to take a clean exit. The two original directors have learned a valuable lesson about business due diligence and they are addressing several other outstanding issues:

  • A formal shareholder’s agreement and a business succession plan, and
  • A review of their trading terms and conditions and the structure of their finance.

They have formal meetings which are recorded and copied to the accountant. The lesson is always the same: If it sounds too good to be true, it usually is.

ATC Digest Edition #75

Director’s Duties Become More Onerous

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Carefully consider your responsibilities.

Many of us are company directors and often sit on boards to assist in the efficient management of the business operations.

Below are a couple of cases worth noting as they have wide implications for those bold enough to put themselves up as an ‘officer’ of a Corporation.

Shafron v. Australian Securities and Investments Commission [2012] HCA 18 considered the extent of the duty owed under s.180(1) of the Corporations Act 2001 (Cth). In particular, it considered the extent of the phrase ‘in their position and with their responsibilities’ and the definition of ‘officer’ under the Corporations Act. The applicant was the company secretary and general counsel of James Hardy Industries Ltd (JHIL) and it was alleged that he had failed to display an appropriate degree of care and diligence in that he failed to give appropriate advice to the board of JHIL on two separate occasions, and on one occasion also failed to give appropriate advice to the chief executive officer.

The principle question before the trial judge, Court of Appeal and High Court was whether the applicant’s responsibilities under s.180(1) extended to his duties as general counsel or were limited to his responsibilities as company secretary. There was no argument that, as company secretary, the applicant was an officer of JHIL, but the applicant argued that his ‘responsibilities’ as an officer should be limited to the role that made him an officer, i.e. his position as company secretary. Notwithstanding that the Court ultimately found him to be an officer in either capacity, the High Court held that the duties of an officer under s.180(1) extends to all roles undertaken by the officer within the corporation unless there is a clear distinction between actions undertaken in one capacity and actions undertaken in another. The applicant was not able to demonstrate any such distinction.

It was further argued by the applicant that his duties as company secretary did not extend to the provision of legal advice and that it was not, therefore, a breach of s.180(1) for him to fail to give that advice. The trial judge, Court of Appeal and the High Court all rejected this assertion, concluding that a company secretary with a legal background would be expected to raise legal issues to the board. Even if the applicant was not the general counsel of JHIL, he would still owe this responsibility.

The applicant claimed that he was not, as general counsel, an officer of the company (admitting to being an officer as company secretary) because the general counsel did not make, or participate in making, decisions that affected the whole or a substantial part of the company, as required by s.9(b)(i) of the Corporations Act 2001 (Cth). He submitted that a person participates in making a decision only if they had a part in actually making the decision.

The High Court rejected this argument. The Court held that participating in making a decision required more than simply offering advice and information, but found that the applicant, as a senior executive of JIHL had gone beyond the mere offering of advice. He had played an active part in formulating the proposals that went before the board so, though it was the board that ultimately made the decision, he participated in making it. This was deemed sufficient to make him an officer in his role as general counsel of JIHL.

Omnilab Media Pty Ltd v. Digital Cameras Network Pty Ltd [2011] FCAFC 166 considered both the duty of directors to not disclose business opportunities to a rival company and the accessorial liability of that rival company for the loss occasioned by the first company.

In regards to the duty owed by the director, the Federal Court found that the means by which the business opportunity had been acquired was irrelevant, as was any reluctance by the person giving the business opportunity to grant it to Digital Cinema Network Pty Ltd (DCN). What was important is that it was a maturing business opportunity that DCN was actually pursuing. By diverting the business opportunity to another company with which he was associated, the director breached his duty. There was significant evidence that Omnilab Media Pty Ltd (Omnilab) knew that the director was breaching his duty by diverting the business opportunity to them and they therefore had accessorial liability for his breach.

Australian Securities and Investments Commission v. Healey and Others [2011] FCA 717 considered the duty of directors in relation to annual financial reports.

The directors in that case had relied on management and external advice when adopting and approving the 2007 financial statements. The 2007 statements contained misclassifications and failed to make full disclosure. As a result, the company suffered loss. The Federal Court found that the directors were required to exercise due care and diligence under s.180(1) of the Corporations Act 2001 (Cth) when considering the financial statements and, further, under s.344 then had to take all reasonable steps to ensure the financial statements complied with financial reporting provisions. The Court held that the directors were not entitled to delegate their responsibilities under these sections and, by failing to read, understand and consider the financial statements they had each breached their duties to the company.

This certainly raises the bar for the level of compliance for company officers and all directors or secretaries should take notice!

ATC Digest Edition #87

Business Succession and Property

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Each business will have its unique requirements.

I assisted some clients in relation to a business succession agreement for four partners in a successful business.

At the time of formation of the original business entity, there was a simple husband and wife team. Over the years, the business grew. They were joined by their management executive and they sold shares in the company as a result.

The business expanded again and they sold a further tranche of shares to another key management person.

During the expansion phase they also had the opportunity to purchase the business real property from which the business was conducted.

As it was around the time of the last manager’s buy in, he could not afford to purchase an interest in the property as well.

So the end reality was four business owners and three property owners.

They acquired the property in a separate family discretionary trust as tenants in common in one-third shares each. A commercial lease was established between the business trading entity and the three trusts as owners of the property.

All simple so far…

The question arose as to how to deal with the property interests upon death of a principal in the business.

It is a simple matter for the one that did not buy in, as it is simply the value of his interest in the shares of the trading entity. However, when it comes to the buy/sell agreement for the three that have an interest in the property, this was a completely different matter.

The issues are

  1. Does the deceased business owner need a continuing interest in the real property
  2. Is there a greater inherent value to the property in light of the commercial lease linked to the business
  3. Should the principals be able to leave the property interest to their family in their estate as a separate matter from the business
  4. Does the buy/sell agreement take account of the goodwill attached to the business premises?

These questions were more difficult to answer than I first thought. It was always a regret of the last owner to buy in that he did not acquire an interest in the property as well. It may be that this is dealt with separately and there is no requirement to sell down the interest in the property.

In the interim, a solution was reached so that the value placed upon the business had a recognition of the business premises, pursuant to the long-term lease in place with the current owners.  A simple buy/sell agreement was prepared to allow for self insurance of the principals in the business.

Further, self-owned policies were put in place for the property ownership via the family trusts. It was an issue as to how the mortgage facility was structured and the parties are considering a variation to the agreement that governs the holding of the property. I have recommended that this be included in the buy/sell agreement, to allow the continuing owner that presently does not have a share in the property, a right of first refusal to buy that interest of the departing principal.

All sorted, for now…

ATC Digest Edition #86

Do You Know Your Shareholders?

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You probably can’t stop disputes, but you can diffuse them more easily.

It is a critical step for a business owner to understand the implications of an agreement with the people they own the business with and the rules, should they have a dispute.

Commonly, parties confirm how a company should be managed by the terms of a Shareholder’s Agreement.  However, often I find that people do not bother with such an agreement. They feel when times are good there is less chance of an argument, or they have a perception the costs of preparing this document are too high.

The reality is that, if the parties have a dispute, the costs will be enormous.

Here are a few tips and pointers in preparing a document and understanding its importance.

Directors

  • Directors should be carefully chosen to ensure that control and daily management of the company occurs in a way that reflects the understanding of all concerned.
  • There are very serious obligations on directors, including Workplace Health and Safety liability, tax liability and Corporate Act penalties for non-compliance. This includes keeping proper accounts, acting in the interest of the company as a whole and not obtaining a benefit where there is a conflict of interest.
  • The specific roles of each director should be set out clearly, whether it is finance, accounting, marketing, legal or management of staff.
  • The degree of delegation and authority to a director, including signatures required on cheque accounts or transfer of funds from a bank, should be clearly stated. Often small companies have at least two directors that must sign for the capital account and just one director or a secretary for a smaller operational account.

Limitations

  • A Shareholder’s Agreement should describe the limitations placed on directors in acting on behalf of the company. That might be the credit limits that apply for which they can commit the company and should state the maximum debt a single director can write off or compromise. It should also state how many directors must sign cheques and other negotiable instruments or contracts.
  • The quorum or number of directors required to form a valid meeting should be clearly outlined. The ability to appoint a proxy or alternate director in writing should be described. If there is a managing director with a casting vote, then that should be very clearly enunciated within the document.
  • The role of managing director should be described sufficiently including the process and frequency of appointment.

Voting

  • The equality of votes, or otherwise, by the directors appointed to the board should be clearly stated.
  •  If there is to be a casting vote on certain issues by a managing director, or if there is a deadlock, that should be included.
  • Whether a shareholder has the right to one vote at a shareholder’s meeting or whether votes are attributable to the number of shares held, then that should be clearly stated.
  • Whether the shareholders votes are affected by restricted issues should be included and it should identify the input of a non-shareholding director in the management of the company.
  • Any Shareholder’s Agreement should be resolved in general meeting to override the constitution, when appropriate, on specific issues.
  • Points such as a full sale of the business might need a unanimous decision of shareholders, as well as the admission of new shareholders or transfer of shares.
  • The events of default of a director or shareholder, including breach of agreement, insolvency, disability or perhaps death should be dealt with.
  • The process of meetings including how regular, where and agenda decisions should be included.
  • On exit of a shareholder there should be a reference to an independent valuation and perhaps a conditional grant of options subject to the event. A notice of retirement of director and whether that triggers a compulsory sale of their shares should be considered.
  •  The methods of dispute resolution should be canvassed including compulsory mediation and whether that appointment is by way of a professional expert.

Other issues

  • In reality, this Shareholder’s Agreement will be the document that is used if the parties cannot agree. It should have a positive emphasis, including the specific vision for the company and perhaps growth targets anticipated by the shareholders within an agreed time frame if they aim to grow the business or sell within a specific period.
  • If there are specific business planning issues, targets such as achievement of quality control or accreditation, then they should be included.
  • Specific qualities of a director or financial position of a shareholder should be specified as well.
  • Requirements regarding retirement of a director or exit of a shareholder by voluntary notice should be clearly stated in writing. This should take account of the position of the company and the financial framework.
  • If the shareholders are contributing capital then they should record any loans on the balance sheet.

If the directors require further loans from working capital or stock or plant and equipment, then each director and perhaps each shareholder should guarantee the loan equally in accordance with their shareholding to make sure there is fairness between them. If there are different levels of contribution of capital loans by shareholders or directors to the company then that should be recorded in formal loan documents and interest paid.

By having a clear checklist of these issues completed by the parties at the outset, it is less likely that a surprise or a point of dispute will occur in the future.

Independent accounting and legal advice should be obtained by each shareholder on a proposed Shareholder’s Agreement to ensure that all parties understand their obligations and requirements.

At the end of the day, people get together to create company value. It is, therefore, important to ensure that the rules are understood so that that value is preserved wherever possible.

ATC Digest Edtion #85