Martin: Welcome to the business owners podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory Team.
So welcome everybody, we’re on the second episode of Season 4 and in this Season I’m doing some interviews with some of Australia’s best lawyers, aka my partners at Mills Oakley. As a legal advisor to private business owners I’m very conscious of the need to bring them the best of breed skill sets for whatever their legal needs are because absolutely that ain’t me for all areas. We need to practice in a law firm that brings a variety of skills and the full suite of skills that our clients need to address their legal problems and one of our partners who I work very closely with, in conjunction with, advising private business owners is one of my employment law partners, Lisa Anaf who we have here in the studio. Welcome Lisa.
Lisa: Thank you Martin, thank you for having me.
Martin: Oh not, not at all it’s our pleasure Lisa. So the areas in which I particularly work with Lisa would be in relation to business exits, helping clients to get things right and to get their employment compliance right before we take a business to the market. That’s often a really important value add but also when things go wrong and certainly a trend that I’ve seen in recent years has been more and more claims by employees for all kinds of reasons and indeed by people who my clients might have thought were contractors or sub-contractors but who are claiming to be employees and seeking the full suite of protections. So Lisa, maybe can we start with business exits?
Martin: So if I were a business owner and I was preparing for sale, say I was a year out before looking to take the business to the market, what advice would you have for me from an employment law perspective?
Lisa: Particularly in relation to contractors and employees it’s always been an area of tension. What we have seen in the last five years is a number of decisions come out where even in circumstances where we and the parties genuinely believed at the time that the person was a contractor and that was the agreement that they struck but the courts are showing a willingness to over-ride that and basically rip it apart and dictate the relationship is actually one of employment. Now the danger when that happens is, all of a sudden a contractor with who is paid a higher rate of pay to recognise the fact that they are a contractor and do not have permanent employment will suddenly get the benefit of that higher rate of pay plus all the entitlements that an employee would otherwise get. Your annual leave, your sick leave and so on and so forth. So the danger of not being very clear about what your terms and conditions are and importantly marrying that with what you’re actually doing in the business …
Lisa: … is going to perhaps put you at risk that you are going to have your conditions and arrangements undone and a very large back-payment.
Martin: So that could be massive, couldn’t it, for a business owner looking to sell. You take the thing to the market, you employ 50 contractors but then when the buyer kind of unleashes the dogs and they go through the business on due diligence and some bright spark says well no no, actually they should be characterised as employees I can only imagine that that could kill the deal.
Lisa: Well it can and so the critical thing we would like to advise people and tell people when we look at these arrangements is don’t just assume because you’ve made an agreement with somebody that that status is actually legally correct. It is something you need to continually re-look at, you need to make sure that you’ve got strong agreements that confirm the status that you say that relationship is. If you say they’re contractors make sure the contract confirms that they are but the courts have clearly told us that that is not enough. You need to make sure that it matches the variables that the courts are currently saying is what makes a relationship a contractor one. So as an example, some of the things that we see coming out of the cases are if they’re wearing your uniform, if they’re not running their own entrepreneurial business, if they’re carrying your company business card, these are the things that the courts are telling us they would be prepared to consider are employment variables rather than contractor and so you need to look at those variables and make sure that you’re marrying them up with what you do as your practice in the business.
Martin: Boy, and just from you know, experience and anecdotally, I’m sure there would be many, many businesses in that position and unfortunately. So that to me seems to be a really big one in the context of preparing for sale, make sure that if you’ve got contractors, you’ve received some good advice about that and you’ve squared away their status appropriately.
Lisa: That’s right.
Martin: And it’s interesting isn’t because this isn’t something you can do 2 minutes before you take the business to market, this is a plan over I would imagine months or even years to negotiate and put in place these type of arrangements.
Lisa: Absolutely and I think for businesses that are you know SMEs and smaller and bigger for that matter, it’s important that you set up your structures right and I know that’s something you’re quite passionate about Martin. That you really need to make sure that the structure that you have in your employment relationships are the best for you when you start your business and that they’re reviewed. What is best for you when you start is not necessarily what’s best for you half way through…
Lisa: …and it’s equally not what is necessarily best for you when you’re thinking of selling. So these aren’t things that you want to look at necessarily just the moment before you sell because it might actually be too late. It’s something that you want to keep assessing and reviewing. If I can give an example, I recently had a client where the client actually provides masseurs to very large gyms and it’s quite a good and solid business but her frustration was that when she started the business she engaged everybody as contractors and that was a higher rate of pay but as her business grew, that was actually proving to be more expensive than if she had hired them as part-timers and so we’re working with her to assist her in reviewing her structures and seeing if there is a more financially better way to do it. Similarly it caused her distress when the contractor suddenly made a workers compensation claim that we suspect is not legitimate.
Marin: Oh, ouch.
Lisa: And again that raises issues in the difference in employment and contractor status.
Martin: Hmmm. Wow. Well there’s a salutary lesson there absolutely. So other than the employee contractor issue, what would be a couple of other really key take outs for business owners who are looking to take their business to the market and sell it from an employment perspective.
Lisa: My number one would be make sure that your employment contracts are No. 1, there and No. 2, assuming we get over that hurdle that they’re well drafted and that they cover off a couple of really important things because otherwise you will get stung and I’ll take you through some of those Martin if I can.
Martin: Oh, ok, thank you. Hey just before that and it’s fascinating you say make sure the contracts are there because you’re right, unbelievably we would see a reasonable minority of businesses that we are asked to help take to the market and sell that do not have employment contracts and in particular, they don’t have them for the key personnel, the very people who you’re kinda dangling in front of the buyer to say that these guys are, they’re gun senior staff and they’re going to help you the buyer take this to the next level. They’re not locked in.
Lisa: That’s so true and and look we do lots and lots of due diligence and that’s the first thing that we will ask for, do you have an employment contract, are you covered by an award, are you covered by an industrial agreement, like an enterprise agreement and if one of those three things are not clear we know we’ve got issues and it’s going to make us have a really careful look at the business and advise our client is this something that you really want to take on? So number one take home is you must have an employment contract for all of your employees from all the way to the top to all the way to the bottom because if you don’t have them you’re just going to have so many issues particularly when you come to sell, to move it on, to get investors, whatever your circumstance might be.
Martin: That’s great Lisa. So let’s assume we’ve got an employment contract, tell me about 2 or 3 key provisions that would be very important to see and particularly from the perspective of a buyer.
Lisa: Yep. So the very first thing that I want to, would want to see in that circumstance is a notice of termination clause. Under the current Fair Work Act there are minimum notice of termination periods depending on your length of service but generally range anywhere from one week to five weeks depending on your length of service and your age. However, if you do not have a notice of termination clause in your contract unfortunately for business owners, the courts are going to decide what it considers is a reasonable period of notice (Martin laughs) and I can almost guarantee you that it will be more than one to five weeks…
Lisa: …and where we see this come up all the time is the key people you have just mentioned. It is so common to see examples of CEO’s, of General Managers, the people of high position, who are key, who you will negotiate with, they may or may not want to transfer across but if they don’t have an employment contract with a valid notice clause they will have you in the courts and they will probably be getting somewhere between six and 12 months instead of one to five weeks.
Martin: Oh, absolutely. I’ve seen exactly that situation a number of times and as I understand it I’m no court lawyer but 12 months for a senior person isn’t uncommon.
Lisa: It’s not uncommon and it’s certainly the starting point for every court application we see (Martin laughs).
Martin: Thank you Lisa. So notice period very important. Ah, what else is important in the employment contract?
Lisa: Yeah. The other critical thing is making sure that you’ve got an employment contract that matches the position of what the person currently holds as their role. Again, my number two issue that I see time and time again is a person gets a contract when they’re more junior in the business. They then change their role once, twice, three times and they don’t get a new contract of employment. There are a couple of problems that come from that. Problem one is they might have had a contract that would be appropriate for a junior level person but they are no longer a junior level person (Martin laughs). So as an example it might have no restraints at all or it might be that the restraints are not sufficient to cover what is critical to your business and critical to have them not compete with the business you’re trying to sell.
Martin: And Lisa just for those who might not be familiar with that term can you just describe what a restraint is?
Lisa: Yeah. So a restraint of trade clause is effectively a clause that stops a person competing with you in the market place, once their employment comes to an end and there are two types of restraints. Restraints in employment not as concerning generally because you can direct them to do or not do something but if the restraints after employment that are so important because if you sell a business and you don’t have the proper restraints and they can then go and compete with that business …
Lisa: … you can imagine what your potential new investor thinks about the safety of purchasing your business.
Martin: Oh, absolutely and again we see this so often and of course, it either materially goes to the price or they seek to lock in that person through a condition precedent to completion. So in other words unless that person signs a new employment contract with the buyer then the deal ain’t going to happen …
Lisa: That’s right.
Martin: … and I’m sure those listening can only imagine the leverage that that gives the senior employee and so we, yeah we’ve seen that time and time again. What we’ve also seen before is exactly the situation that you describe where somebody joined the business as a junior person and worked their way up through the ranks but the contract never changed so we advised some buyers on an acquisition of a private business about 6-7 years ago. The CEO had joined that business 20 years prior and he was employed on a flimsy one page contract with no restraint of trade. Half way through the process he then lobbed in his own bid to buy the business…
Martin: …and started competing against my clients and wow! It was on for young and old, it just it was not a happy outcome. (Martin laughs)
Lisa: That’s right and the difficulty of course Martin, as you would know is that having worked in the business for such a long time that person is in a very strong position to really compete and to really put in a solid bid so it’s definitely an issue it also means that if the contract does not match the position they have those restraints that you might even have in the contract if you’re lucky enough to have them, are non-enforceable.
Martin: Yeah and talk to me about that Lisa, because this is a really key point that I think is not well understood in the business community and this is the point that restraint of trade obligations, so non-compete clauses, non-solicit clauses of customers and employees are void and unenforceable unless the person seeking to enforce them can prove that they are reasonable. So there’s kind of a reverse burden of proof if you like.
Lisa: That’s right. So if yours is so broad what we generally see now days because the case has told us it’s what we’ve needed to do was we often see cascading clauses and I’ll explain what I mean by that. So it might be that your restraint clause in your contract says that the area in which you can compete is 100 kilometres and then it’ll say 50 kilometres and then it’ll say 10 kilometres from your place of work and the same will go for the period. So 9 months, 6 months, 3 months, 2 months, so what you’ll see is the court is getting the opportunity to decided what it thinks is reasonable and only what is reasonable to protect the genuine interests of the employer. It’s not going to as a starting base assume that it’s going to be able to take the person and their right to work out of the market because you say they should and so the issue of reasonableness becomes very important and if you’re restraint clause is drafted so broadly and so widely it is only going to put you in a position where it’s more likely that it will be read-down or held to be unenforceable.
Martin: Yeah and if I can put in a shameless plug for Lisa and her team, this is the value of a good employment lawyer. This area of the law is so dynamic. There’s cases all the time on what’s an enforceable restraint and what isn’t, but without a good and a well written contact drafted by an expert who is across this case law. Your chances of enforcing it are so much lower so absolutely this is one area where it is very important to see a specialist.
Lisa: Yes and the other thing I’d say as well is, of course not everything gets to court Martin and we know that but it’s about your leverage and it’s something that we talk about with businesses all the time. If you’ve got a clause that you know is well drafted and you think has strong prospects of being enforced you’re in that better position to avoid the court costs but tell the employee who is looking to go and compete with you this is what I have, this is the deck of cards I have, we should come to a reasonable agreement about how long you’re going to absence yourself from a competing business and you’ll find that your leverage there is better and your ability to negotiate with them is something that will be in your best interest will be stronger and better.
Martin: That’s great Lisa, thank you.
So I’ll now turn to the question of employee claims and certainly in the last few years in my practice I’ve noticed a distinct up tick in the number of calls that I receive from clients who say I’ve just received an unfair dismissal claim, what do I do? Could you give some guidance, some hints and tips as to the best way to deal with this sort of claim?
Lisa: Absolutely. Look, I’ll take you through a couple of things that I think are really important for businesses in this space and they are that an employee will typically bring an unfair dismissal claim in circumstances where they are below the threshold. So the important thing to start with is to let our listeners know it’s $136,700. So that is the current threshold where a person can bring an unfair dismissal complaint.
Martin: So if they’re paid less than that …
Lisa: That’s right.
Martin: They can bring it.
Lisa: And that’s base.
Martin: Yeah, ok.
Lisa: So that’s the way that it works and if they’re under that threshold then they can do that. So if they are in the position where they can bring a claim and they’re eligible, then in those circumstances we need to be in a position where we have to think ok did we have a valid reason to terminate? Number 1 and number 2 did we do so procedurally fair in the circumstances? So that’s the critical thing that we need to look for and then it’s a question of process and is something that unfortunately businesses do often get wrong because although they typically will have a valid reason you generally get rid of someone in circumstances where they’ve done something pretty bad.
Lisa: What we often find businesses fall down on is the process. Have they followed due process and the extension of that is, had they had the difficult conversation with the employee before they made the move to terminate? So that’s the important thing that I would explain to businesses in this space is that too often we see managers not teach their people who are working for them, their supervisors and the like to have those difficult conversations if a person is not performing to the standard that you require and what you’ll find is if they don’t have those conversations ultimately they’ll perform badly, a decision will be made to let them go but when you get to the unfair dismissal, you’ve got problems procedurally because when they ask you, did the employee get told why it is that their employment was going to be brought to an end, did they get the chance to improve, did they get the chance to respond? The answer all too often is no and it makes it more difficult to defend.
Martin: Yeah, and again something that we see so commonly in private and family business. One of the real strengths of family business, I think is, is the sense of family and, and employees who, even if they’re not family members are often treated like family and that can be a very nice aspect of owning or working in such a business but I would say and I know that you act for some very big corporates Lisa is, as well as some smaller businesses, I’d say it’s more prevalent in the private and family business space because it’s just so much more difficult to have those kind of conversations.
Lisa: That’s right. In fact I had one yesterday and this is a great example of what happens with clients of these types where they run a business with 10 people, they are all like family but they have a particular employee who is bullying others and so what they decided to do was to terminate that employee but give a different reason for the real reason and the difficulty is they thought they were being nicer by simply saying there’s just not enough work but of course that person has brought an unfair dismissal claim and we are now in the awkward position of having to explain why we made our decision and what procedural fairness steps we took in circumstances where if they had just actually took that employee aside and said you’re behaviour is bullying and are you aware of this, what do you have to say, we need to bring it to your attention that there needs to be some changes because this is the impact it’s having on other staff. Their position would have been so much stronger.
Martin: Wow. What a lesson in openness and honesty. I mean a real lesson for families let alone for family businesses.
Lisa: That’s right. That’s right and look a lot of this stuff is hard Martin and I’ll be the first to say it can be difficult. Most people don’t like confrontation and they don’t like telling people things that they don’t want to hear but I think that as lawyers and advisors we would tell people it hurts them in the long run if you don’t have those open and transparent conversations with people before you make a decision to terminate.
Martin: Yeah. And talk to me about the economics of fighting an unfair dismissal claim because this is something that I often just feel is so unfair an employer has terminated somebody and as you say, often for a very very good reason but there might be some technical or …
Lisa: That’s right…
Martin: …procedural aspect as to why they’ve got a problem but even if they’ve got a great case it can cost money to fight it and to just and to take it to the court or tribunal. How do you navigate the economics of dealing with these claims?
Lisa: That’s absolutely right Martin. So we tend to work backwards is the answer to that question. So, for an unfair dismissal claim the maximum an employee can get is six months’ pay and/or reinstatement. So, although reinstatement is meant to be the primary remedy, we often don’t see that as a regular occurrence. So it comes down to money, six months’ pay. So working backwards we know what it’s going to cost us at the worst case scenario if we go to hearing. So what you’ll often find is there’s a conciliation listed as part of the process and then you will regularly see financial settlements take the end point into consideration. So if you know that six months’ is the worst amount you might end up settling for 1 to 2 months because you make a commercial decision that it’s worth it to get rid of it for the purposes of clearing your calendar in terms of this issue and the time and effort that it takes in doing it. But equally so, every once in a while you’ll have people who’ll want to take it all the way to the end because they need to show their workforce a particular outcome or a particular lesson of what will and will not be tolerated.
Martin: Hmm. Thank you Lisa that’s great advice. I finally wanted to turn to the question of Trade Unions.
Martin: So some private business owners have a unionised workforce, some don’t? Have you got some guidance in relation to how to deal with the Trade Unions?
Lisa: Yeah, absolutely. So look Martin that’s probably something I’ve spent the last 12 months battling. (Martin laughs) I’ve certainly had a number of clients who have been in the middle of Union campaigns and so with that experience, let me give you a couple of take home messages. I think the starting point is to say the Unions as a general rule are there to do a job. They have their role just as you have yours and in some respects it’s a dance that everybody plays of what their respective roles are in the process. I think that what we’ll often find is that a Union who approaches an employer particularly an SME will often try and take advantage of an assumed lack of knowledge. So the first thing I would say is, if you’ve got Unions coming into your business the first thing you need to do is get advice and make sure they’re not taking advantage because they will push it if they think that they can.
Lisa: So number 1 is be forewarned about what they can and they can’t do and make sure that they are not doing any more than they are allowed to by law because it is quite prescriptive as to what they can and can’t do. That’s number 1. Number 2 is, don’t allow them and their agenda to bully you in what the terms and conditions might be in your workplace or what a process might be in your workplace. Again, it’s, it often comes back down to getting some good advice and assistance so that you are not railroaded into an agenda that really will not work for you and often won’t work for your staff either. The third take home message I’d say is this: Unions have their place and they certainly do but they are not necessarily representing the interests of your particular workers. They are representing the interests of an agenda and a campaign which is set much higher than your business. So make sure that you’re talking to your staff because if you’re not you’ll probably find that the Union is and they will probably try and drag them on their agenda and that’s not helpful for you and it’s not necessarily helpful for your staff either. Make sure it’s You who are talking to your staff so that YOU get an outcome in your workplace that fits You, your people and your business.
Martin: Oh, there’s so much wonderful advice there Lisa, thank you. Those points are so clear and helpful. So look it’s been a delight to have you on the show today.
Lisa: Thank you so much.
Martin: Yeah, thank you very much for coming along. We really appreciate it.
Lisa: Wonderful. Thanks Martin and the listeners.
Martin: Thanks Lisa.