It may not always be the parent's fault

In what appears to be a first under harmonised WHS laws, a Court has held that a parent company will not necessarily owe duties to workers at the operations that are controlled by a wholly owned subsidiary.

What you need to know

• This decision is significant for parent companies.

• A judge of the District Court of NSW (Kearns DCJ) has found that operations of subsidiaries may not form part of the business or undertaking of the parent company for the purposes of the harmonised WHS Acts.
• In what appears to be a departure from case law and the approach of regulators under predecessor WHS laws, the Court has also expressed the view that more than a legal right to control is required for a parent to have control over its subsidiaries' operations.
• The subsidiary company was separately found guilty of a breach of s19 of the Work Health and Safety Act 2011 (NSW) and the matter is listed for sentence shortly.

What you need to do

• It is unknown at this stage whether one or both of these decisions will be appealed. Given the importance of this decision, this should be monitored.

The prosecutions

The parent company was charged with an offence under the WHS Act. The Prosecutor alleged that the parent company had breached its duty under the WHS Act (section 19) in connection with an incident that concerned two workers at a mine in Broken Hill. A wholly owned subsidiary was also prosecuted for an offence under the WHS Act in connection with the incidents and separately found guilty.

The decision

The Court found that for the Prosecutor to prove the charge against the parent company it must establish beyond a reasonable doubt four elements, being:

• that the parent company was conducting a business or undertaking (in this case, in respect of the operation of the mine)
• that the workers' activities in carrying out work were influenced or directed by the parent company while they were at work at the business or undertaking
• that the parent company failed to comply with the health and safety duty to those injured workers; and
• that the failure exposed the workers to risk of death or serious injury.

The Court concluded that the Prosecutor had not established the first of these elements; that is, that the parent company was conducting a business or undertaking.

But this decision is not a free pass for parent companies. Rather, it focusses attention on precisely how a corporate group is structured and confirms that whether a person is conducting a business or undertaking, and the extent of that business or undertaking, is a question of fact to be determined in each case. Whether the business or undertaking is being conducted by a person will be assessed having regard to all of the circumstances. In the case of company groups, there may be overlapping businesses and undertakings conducted by a parent company, subsidiaries and other related entities, which affect the health and safety of workers at a particular workplace.

Significantly, the Court found that just because the subsidiary was the nominated mine operator under mining safety laws, did not mean that the parent company was the owner or manager, or one of the owners and managers, of the mine. The Court noted that the WHS laws provided that the parent company may also be a PCBU and be under the same duties as the subsidiary. This decision confirms that, subject to the facts, a parent company's business or undertaking may extend to and overlap with the business or undertaking of its subsidiaries.

The Court expressed the view that what was required was an examination of the relationship between the parent and its subsidiary and the role, if any, that the parent company had in the operation of the mine where the incident had occurred.

The Prosecutor sought to rely on evidence, including the following, to establish that the parent company's business or undertaking extended to the operation of the mine:

• the parent company published documents that pronounced that it owned and operated the mine
• HSE management documents were published in the name of the parent company and stated that the Board had a role to ensure effective and appropriate systems were in place
• the Board received HSE reports in relation to the operation of the mine; and
• the parent company controlled the financing of HSE for its subsidiary.

Based on evidence led at the hearing, the Court was prepared to find that when the published documents, which arose as a result of the parent company's duty of disclosure as a publicly listed company, referred to the parent company, this was merely, "clear, concise, simple language so that the message could be readily understood by the ordinary shareholder" and was in fact a reference to the group of companies, of which the parent company was a part.

The Court considered in detail a corporate group restructure which occurred in 2008 and the consequences of that restructure. Those consequences were that the Board of the parent company had no day-to-day involvement in the activities of its subsidiary and the parent company dis-established its HSE board sub-committee. The Board of the parent company resolved to leave HSE as the responsibility of the subsidiary's Board. The subsidiary was a stand-alone business unit. The parent company's Board was to focus on its "oversight functions", which the Court accepted was a reference to the parent company protecting its shareholder's interests.

The Court also examined an “HSE Management System Overview“ document that set out various responsibilities of the parent company and its officers concerning safety. The Court acknowledged it was a document published under the name of the parent company and referred throughout to the role of the parent company and it’s Board. But witness evidence established to the Court's satisfaction that the references to the parent company were erroneous and the author did not think clearly enough about making the distinction between the parent company and its subsidiary.

While the parent company Board received and considered HSE reports, the Court found that it did not make any decision on them. The Court further accepted that the parent company received HSE reports by reason of its corporate disclosure obligations.

The Court ultimately found that the Prosecutor had not established beyond reasonable doubt that the parent company was a person conducting a business or undertaking (in respect of the mine). This was because the evidence was that:

• the parent company did not own the mine; and
• the parent company did not operate the mine, noting that while the parent company’s 100% shareholding gave it a position in law to control the subsidiary, the control was not put into practice as it did not have the resources or manpower to do so, and the control and day-to-day management of the mine was in the hands of the subsidiary.

A question of control

The Court found that this was not a case of the parent company transferring its duty to another, nor of an agreement or arrangement purporting to limit the parent company's capacity to influence and control the matter in respect of which it had a duty. Instead, this was a case where the parent company ceased to have control of the mine and its operations.

The Court also noted that whilst the parent company was in a position at law to control its subsidiary by virtue of its shareholding, that was not put into practice. In his final remarks, his Honour went further to express the view that:

"control must be more than a legal right to control otherwise every parent company with a 100% shareholding of a subsidiary would be, without more, under a duty under s19."

This view, in particular, seems to be a departure from the position taken by Courts and by regulators under predecessor WHS laws.

Authors: Julia Sutherland, Counsel; and Trent Sebbens, Partner.