June 2024
Many ‘employers’ in New Zealand, operate under a corporate identity through a limited liability company. There is a common assumption that if a company becomes insolvent, the directors or those that influence or control the company are protected by the ‘corporate veil’ – and can avoid personal consequences. In some circumstances, as this article explores, this common assumption is wrong.
Anyone following the media recently will have observed personal consequences being imposed on those acting in control of a business. Directors have received hefty personal penalties relating to health and safety breaches, including imprisonment or significant financial liability. Perhaps less known about are comparable obligations owed by directors relating to employment. All employers in New Zealand, large or small, need to have an understanding of enforcement measures that can result in personal liability, under employment related legislation.
There are a growing number of cases where the application of employment related legislation has resulted in penalties against individuals sitting at the controls of a business. These individuals are not protected by the corporate veil. This article sets out some of the ways individuals may face personal liability as employers, and how to avoid being on the wrong side of a claim.
It is a legal requirement under section 65 of the Employment Relations Act 2000 (the Act) that an employment agreement must be in writing and contain the name of the employer.
Straightforward…right?
However, many entities have both a company name and a trading name and will send documentation and correspondence from the personal name of a director or senior manager. It is crucial to ensure that the formal paperwork (i.e. letter of offer, employment agreement, payslips etc) correctly identifies the company as the employing entity – at all times.
Blurring of the Employer identity is one way an employee can have a legitimate claim against a director in their personal capacity.
Even for a small business the employing ‘entity’ is not always clear (to an employee). For example, the Employment Relations Authority (ERA) has awarded an employee more than $16,000 in remedies against a director personally, in circumstances where the limited company was in liquidation – because the employment agreement named the trading name of company as the ‘employer’ and was signed in the personal name of the director.[1]
Where directors have been named as the employer on communications or made personal payment (due to company financial constraints) the director can be ordered in their personal capacity to pay lost wages, compensation, and costs in the event of a successful personal grievance.[2]
Generally, the corporate entity is the ‘employer’ and carries liability for breaches of an employment agreement. However, the Act also provides for a penalty of up to $10,000 per breach to be imposed on a ‘person who incites, instigates, aids or abets any breach of an employment agreement.’ [3] It is important to understand that a breach of an employment agreement can include breach of a separate document that forms part of that agreement, for example, a company policy or handbook, and may also include breach of an implied term (e.g. duty of fair treatment). The ERA and the Court applied this extended definition of the employment agreement against a director of a liquidated dental clinic, who drove a redundancy process. He was found to have breached a redundancy clause within an agreement (specifying the degree of consultation required) and failed to comply with the process set out in the clinic’s employment documents.[4]
In 2016, the Act was amended to extend accountability to persons other than the ‘employer’ who were knowingly and intentionally involved in breaches of employment standards, with the intention that if a company could not rectify a breach, it could fall personally on decision-makers in a business.
Employment standards are the base requirements for an employment relationship, including:
Labour inspectors can investigate these breaches, and apply to the court for pecuniary penalty orders, compensation orders and banning orders. For the most serious of these breaches, penalties were increased to a maximum of $50,000 for an individual ‘involved’ in a breach of employment standards – that is, where they have aided, abetted, counselled, or procured the breach.[5]
An employee may also seek to recover from a person if they have been involved any way directly, or indirectly, knowingly concerned in or party to the beach.[6] That person does not have to be a director of the employer but can be involved in a breach if they hold a senior or influential role within the entity. Much of this enforcement has been targeted at employers hiring and sadly exploiting migrant workers, where the minimum standards have not been met. As the penalties can be imposed cumulatively, some individuals and entities have been ordered to pay significant amounts.
In 2021, the Court of Appeal looked at the level of knowledge that is required for someone to be personally liable for a breach, and held it was irrelevant that the directors genuinely believed their employees were not entitled to the employee entitlements (believing them to be contractors) because the liability turned on whether they had knowledge of the essential facts which led to the breach. As such, ignorance of the breach (or the law) cannot absolve against personal liability.[7]
The Health and Safety at Work Act 2015 also provides for the imposition of fines (in the event of workplace accident or breaches of the duty of care owed to employees and others) beyond the person conducting the business or undertaking (the PCBU) to ‘officers’ of the PCBU.
The legislation places a duty on the officer to exercise due diligence to ensure that the PCBU complies with its health and safety duties. An ‘officer’ may be a company director, a partner in a partnership, or any person who holds a position that allows them to exercise significant influence over the management of a business (e.g. a CEO). If you run or own a small to medium business, you are very likely an officer and as an officer you may be personally liable for failing to meet due diligence duties, which can result in penalties of up to five years in prison, or a $600,000 fine (or both).
In 2022, WorkSafe successfully prosecuted the owner of a painting business who failed to ensure a subcontractor was appropriately protected through the use of a harness and scaffolding. The subcontractor was fatally injured by falling from a roof. The owner swiftly liquidated his company but was still directed to pay personal reparations to the subcontractor’s family of $100,000. The award was conservative due to the owner’s personal financial position.
Remember, an outcome will always be case specific, and a decision-maker in the ERA/Court considering a penalty can consider many factors including (but not limited to):
If you are reading this article, no doubt you are inclined to understand your obligations and aim to be compliant.
It is of course crucial to seek advice if such claims arise for business owners or individuals who can attract personal liability. Often, taking steps to seek advice, and communicate in a pragmatic and solutions focused manner with those affected, can mitigate the risk or severity of liability. Your lawyer is well placed to assist in these situations.
[1] Sissons v Good Food Trading Company Ltd (in liq) [2017] NZERA Auckland 397
[2] Strachan v Moodie [2012] NZEmpC 95; Sissons v Good Food Trading Company Ltd (in liq) [2017] NZERA Auckland 397
[3] Section 134(1) of the Employment Relations Act 2000
[4] Nicholson v Ford [2018] NZEmpC 132
[5] From s 142A Employment Relations Act 2000
[6] Section 142Y Employment Relations Act 2000
[7] Labour Inspector v Southern Taxis Ltd [2021] NZCA 705