The Supreme Court of New South Wales has provided guidance as to the meaning of “true employer” for the purposes of the external administration provisions of the Corporations Act 2001 (Cth) (the Act) in In the matter of Mosaic Brands Limited (administrators appointed) (receivers and managers appointed) [2025] NSWSC 959. The decision is important for liquidators and receivers of large corporate group where there are individual trading and employing entities and funds have been recovered from circulating assets. 

Key insights for liquidators and receivers 

• If funds have been recovered from circulating assets in a corporate group and there are insufficient funds to discharge liabilities to employees and secured creditors, receivers and liquidators should investigate which entity is an employee’s ‘true employer’ to assess how sections 433 and 561 of the Act may apply.
   
• An entity may be an employee’s ‘true employer’ despite the fact that a different entity is recorded as being an employer in an employee agreement.
   
• Relevant factors to consider whether an entity is a ‘true employer’ include:
  • which company paid the employees’ remuneration;
  • whether the employer of record has assets or revenue from which it could meet employee’s entitlements;
  • whether the employer of record had any purpose other than to be an employer of record; and
  • whether the employer of record exercised practical and legal control and direction over the employees (although this will be given limited weight where the putative employers are part of the same corporate group.

Case Background and Issues: Mosaic Brands Group in Administration 

Mosaic Brands Ltd (Mosaic Brands) is the ultimate parent company of the Mosaic Brands corporate group (Mosaic Group), formerly a fashion retail business with nine retail clothing brands and a network of 663 stores across Australia and New Zealand.

The receivers of Mosaic Brands (Receivers) realised funds totaling approximately $205 million (Funds) recovered almost entirely from circulating assets belonging to Mosaic Brands.

The Receivers estimated that the entitlements owing to employees (Employees) within the Mosaic Brands group (nominally employed by “Noni B”, an entity within the Mosaic Brands group) totalled $21,270,176.49. The Commonwealth had been subrogated to the rights of the Employees, having already paid those employee entitlements pursuant to the Fair Entitlements Guarantee Scheme (FEG).

The Funds held by the Receivers were insufficient funds to pay both the Employees and secured creditors in full. Having been realised from circulating assets, the Funds were potentially subject to sections 433 and 561 of the Act and would have to first be applied to pay certain employee priority claims before they could be distributed to secured creditors.

Given the manner in which the Employees had been contracted, there was uncertainty as to whether Mosaic Brands or Noni B was the actual (or true) employer of the Employees. Accordingly, the Receivers sought to determine this point. If Mosaic Brands was found to be the actual employer of the Employees, then the Employees would have a priority interest in the Funds having been recovered from the circulating assets of Mosaic Brands.

Legal Principles: How Courts determine the ‘True Employer’

Justice Black reviewed the case law regarding what constitutes a ‘true employer’ for the purposes of the external administration provisions of the Act, summarised as follows:

• the question is determined as a matter of substance and the totality of the relationship between the parties should be considered;
• a person may be an employee of a company even where they have an employment contract with a different company in the same corporate group;
• the ‘true employer’ of an employee is not necessarily the company nominated as the employer in the written contract of employment;
• courts are entitled to take a wide view of the putative relationship, including as to how the parties conducted themselves in practice and whether, where there is contractual documentation, the reality of the situation accords with the terms of that documentation or whether it points to another entity being the employer; and
• relevant factors to consider include:
  • which company paid the employees’ remuneration;
  • whether the employer of record has assets or revenue from which it could have met employee’s entitlements;
  • whether the employer of record had any purpose other than to be an employer of record; and
  • whether the employer of record exercised practical and legal control and direction over the employees (although this will be given limited weight where the putative employers are part of the same corporate group).

Court’s Decision: Why Mosaic Brands was the True Employer 

When considering the evidence in the case, Justice Black found that Mosaic Brands, and not Noni B, was the ‘true employer’ of the Employees because:

• the fact that the employment contracts (and pay slips) record Noni B as the relevant employer entity is the starting point for that question but is not determinative;
• the employment related policies adopted by the Mosaic Group are on Mosaic Brands letterhead (as are the employment contracts) and refer to Mosaic Brands as the employer;
• relevant employment decisions and strategies were set by the directors and senior management personnel of Mosaic Brands;
• most importantly, the relevant financial obligations with respect to the Employees’ wages and other entitlements were met, and could only be met, by the Mosaic Group, where Noni B:
  • did not carry out any business activities other than as a formal employer of record and as party to store leases;
  • did not receive any revenue and did not have a bank account;
  • had no intercompany arrangements to allow it to meet its liabilities;
  • did not change any fee to any other entity in the Mosaic Group;
  • there was no labour hire arrangement between Noni B and Mosaic Brands;
  • all employee payments were at made directly by Mosaic Brands itself; and
  • the employees of the Mosaic Group undertook work that was in substance for the benefit of Mosaic Brands as the operating and revenue-generating entity.
• there was no intelligible business purpose, or at least no proper rational purpose, for having an employer entity that was incapable of meeting its obligations; and
• there was no inter-company ledger and no evidence of money being notionally lent to Noni B to enable it to meet its obligations to employees. 

Justice Black directed the parties to provide a short form of order to give effect to his judgment. However, the practical effect is that the Commonwealth, through FEG, will have its debt paid in priority to secured creditors pursuant to either sections 433 or 561 of the Act.

What this means for Recoveries and Priority Payments

The ‘true employer’ of a corporate group can have a significant impact on how funds recovered from circulating assets may be distributed. 

Where liquidators and receivers expect that sections 433 or 561 may apply, careful investigation should be taken to determine whether an entity is only a notional employer, and whether directions should be sought to determine that funds are being distributed appropriately.