What happens if management affairs turn sour – is there immunity from termination?
The Fair Work Commission (FWC) dealt with an unusual termination case where two company founders went head to head in their claims about employment status.
One of them was dismissed over allegations of “serious misconduct,” which has been understood as “wilful or deliberate behaviour that is inconsistent with the continuation of the employment contract.”
“A number of decisions have considered the notion that serious misconduct strikes at the heart of the employment relationship,” the FWC explained, which then begs the question – are co-founders, by virtue of their status, immune from company dismissal?
Background of the case
The company’s founders, met through an online video game in 2017 and jointly founded Low Latency Media Pty Ltd (LLM). The dismissed founder was a software engineer, who brought to the business his technical software skills to embed advertisements into video games. Low Latency Media was a start-up company, and they were business partners and co-founders when the company was incorporated in January 2018.
Until his termination, the dismissed founder was the sole director and an employee of Low Latency Media Pty Ltd. On the other hand, his co-founder held the role of adviser to LLM, paid as a contractor by the dismissed founder's other business, not LLM, while he resided in Australia.
In July 2019, on recommendation from the co-founder, the entire LLM shareholding was transferred into Frameplay Holdings Corporation (the Holdings Corporation), a US company. Later on, he moved to the US and assumed the roles of CEO and director of the Holdings Corporation. The change in the business structure made LLM an Australian subsidiary of the US corporation. The dismissed founder was also the largest shareholder of the Holdings Corporation and a board member.
The dismissed founder was then paid director fees from LLM’s inception until November 2019 but drew a salary from the business in late 2018 for the Chief Technology Officer (CTO) position.
The Australian subsidiary employed the engineering team and was managed by the dismissed founder. Other employees were employed by Frameplay Holdings Corporation and based in the US.
As a start-up company, the co-founder focused on securing investors in the business. However, at times, it faced difficulty covering operating expenses. In April 2020, the dismissed founder secured a loan of $100,000 with the Commonwealth Bank of Australia. He maintained that the loan was necessary to cover LLM’s operating expenses during the COVID-19 lockdown, particularly concerning the payment of employee wages. The dismissed founder was the guarantor for the loan and was personally liable in the event of default. Additionally, he loaned several amounts to LLM in 2020.
Things took a turn when reported violations were made against the dismissed founder. Due to allegations of serious misconduct, including “unlawful harassment, sex discrimination, wilful disobedience, wilful breach of duty, wilful breach of company policy and wilful neglect of duties,” he was dismissed.
The parties’ arguments
The dismissed founder was removed as the director of LLM in July 2022. The company stated that the reasons for the dismissal were “sound, defensible and well-founded,” saying that the dismissal letter referred to his poor performance and misconduct.
As for his defence, he denied the allegations and said the dismissal “was harsh, unjust and unreasonable,” stating that he was dismissed via phone and advised to refer to the termination letter sent via text.
Can you dismiss the company’s co-founder?
The company’s identity is separate and distinct from its management, even its co-founders, given that it was incorporated to have its own legal personality.
The dismissed founder entered into an employment contract with the company, and thereby, the latter became his employer. He bound himself to fulfill his prescribed roles and duties. As co-founder, “he has greater responsibility and accountability to set an example,” the FWC noted.
The FWC’s consideration
The FWC highlighted that apart from being co-founder, he “invested financially into the business,” including “taking pay reductions and placing himself at serious financial risk when LLM lacked funds and ensuring employees were paid to which the [co-founder] and executive paid no regard.” By weight of the evidence presented by both parties, the FWC found that he was unfairly dismissed.
What is the co-founder’s remedy?
The dismissed founder sought reinstatement as his remedy, but the company submitted that reinstating him would “further cause a breakdown in working relations, trust and confidence between [him] and [their] employees.”
“Ultimately, the question is whether there can be a sufficient level of trust and confidence to make the relationship viable and productive. In making this assessment, it is appropriate to consider the rationality of any attitude taken by a party,” the FWC said.
The Commission found that there would be “some loss of trust” due to his dismissal, however, it also explained that “the co-founders have worked together in the past” and had a “productive business relationship.” “Despite their differences, they could continue to do so,” the FWC added.
In its decision, the FWC found that the co-founders live and work in different countries. “With [the] development of appropriate policies and procedures, it would be in their interest to maintain a working relationship.” Thus, the dismissed founder was reinstated to his position and awarded loss of pay.
