Former executives of collapsed Sydney finance company fined $17,000 for sham contracting

Businesses have been put on notice to ensure their contracting arrangement are legal, after a court fined two former executives of a collapsed Sydney finance company $16,950 for placing employees on sham contracts.

The Federal Magistrates Court in Sydney yesterday found that Rolf Mertes, the owner and sole director of Centennial Financial Services, and Christopher Chorazy, the company’s human resources manager, had breached workplaces laws in 2007.

Centennial, which went into liquidation in 2009, underpaid employees $33,864.59 in wages, plus failed to pay annual leave entitlements of $5,669.93.

Federal Magistrate Robert Cameron said while Chorazy was merely following instructions, and submitted that the negative publicity had effectively ruined his career in human resources, as human resources manager, he nonetheless “should have been aware of, and at least attempted to give advice on, Centennial’s obligations under the Workplace Relations Act.”

Cameron said former owner Mertes must bear “principal responsibility” for the company’s contraventions, adding that as sole shareholder, Mertes was “also to be the principal beneficiary of any advantage which Centennial gained from its failure to pay its employees their full wages and entitlements.”

He added that Centennial was sufficiently large enough to afford proper advice and to have ensured that its employment practices complied with the law.

Mertes was fined $13,200, and Chorazy was fined $3750.

The case was not only the first sham contracting prosecution brought by the Fair Work Ombudsman when it was launched in 2009, but is the first time the ombudsman has secured penalties against an HR officer for sham contracting breaches.

Fair Work Ombudsman Executive Director Michael Campbell says the case illustrates that just because a worker has an ABN and has been labeled a contractor does not necessarily mean they can legally be classified as a contractor.

The nine employees – who were fired, told to get an Australian Business Number and then rehired to do the same work as contractors – were underpaid $39,533 as a result. The staff were paid on a commission-only basis, and were no longer paid employee-related entitlements.

Cameron said the fines, which contained an “element for specific deterrence”, were to be paid to help cover the underpayments.

Cameron added the penalty should “serve as a warning to others not to engage in similar conduct.”

“Further, in order to discourage repetition of these contraventions by Mr Mertes, Mr Chorazy or by others … such penalties as are imposed should be imposed at a meaningful level … in this regard, the law’s disapproval of the conduct in question should be marked,” Cameron said.

Cameron added that while it had not been demonstrated that Mertes or Chorazy knew that the company’s actions amounted to contraventions of the Workplace Relations Act, they understood and intended the financial outcomes produced by the outcomes in which they had found to have been involved. Neither party had shown any evidence of contrition, he added.

Andrew Douglas, of Macpherson + Kelley, said the case demonstrated that when people use a contracting arrangement to avoid entitlements, not only will be the company be liable but managers might be personally fined for trying to pervert the process.

“This case says if you’re an HR manager and you’ve involved, we may punish you,” Douglas told SmartCompany.

Douglas says with the administrative costs of running a contractor no longer low, there isn’t really a case for using contractors.