When entrepreneurs set up small businesses, they often do not think of themselves, the business owners, as employees. They make payment and leave arrangements that work for them, and don’t pay much attention to their entitlements under the Fair Work Act 2009 (Cth). This can cause problems if the relationship between an entrepreneur and his or her co-founders breaks down.
For example, in Re Optimisation Australia Pty Ltd [2018] NSWSC 31, a director and majority shareholder of a small business agreed with the other shareholders in the business to accept a higher rate of commission in lieu of his entitlements to annual leave under the National Employment Standards.
After the relationship broke down, that director made a claim for his annual leave entitlements. Brereton J held that the director’s entitlements to annual leave could not be displaced by the agreement to accept a higher commission.
Avoiding problems of small business owners as employees
Small businesses which find themselves in this position, have to come up with enough money to pay an often significant amount of annual leave that has accrued over many years. It can be a crippling financial hit to a new company. If one of the co-founders is also covered by a Modern Award, the financial hit may be even bigger.
As part of the process of planning a new small business, all entrepreneurs should determine:
- Whether they or any of their co-founders will be employees of the business;
- Whether they or any of their co-founders will be covered by a Modern Award that sets minimum wage rates;
- Whether they or any of their co-founders will be entitled to annual leave and long service leave;
- Whether their shareholder or partnership agreement needs to be supplemented by an employment contract or management agreement.
We are experienced in advising on all aspects of employment law, including setting up a new business or ensuring an existing business is compliant. If you would like help call us on (02) 9199 8597 or email wehelp@jfmlaw.com.au
The information contained in this post is current at the date of editing – 20 September 2024.