Running a company can be risky business, and it just became riskier. A recent Court of Appeal decision has thrown open the door to employment claims against directors personally, even when the directors might not realise the company has broken the law.
Some people in business use company structures to avoid personal liability for claims made against the business. The ‘corporate veil’ was put in place as a way of encouraging people to enter business and take risks they might not otherwise be prepared to take.
The company is considered a different person to the directors, and bears the liabilities itself. It is much easier to take a chance on a new concept or product when your home is not on the line. And so we see more economic activity.
But the veil has been gradually lifting.
Over the years the ‘corporate veil’ has perhaps allowed directors to take risks which can disproportionately affect more vulnerable parties. This has prompted Parliament to pass laws which can hold directors liable in these circumstances.
The most striking example of this was the Health and Safety at Work Act, which could penalise directors for failing to do their due diligence on risks to health and safety.
This trend has now crossed paths with the practice of engaging workers as independent contractors. Independent contractors do not have the benefit of mandatory holidays or minimum wages.
For this reason these contractor arrangements have been used by some businesses to avoid these liabilities. However, determining whether a person is an independent contractor or in fact an employee can be a tricky exercise.
Many employers have in good faith engaged persons as independent contractors only for it to be later found they were employees. Where these arrangements have been in place for years, the amounts in unpaid wages or holiday pay can be staggering.
Recently the Labour Inspectorate brought proceedings against a taxi company on behalf of four drivers who had been treated as independent contractors.
The drivers were paid on a purely commission basis and were owed roughly $80,000 in minimum entitlements between them if they were in fact employees.
When the courts came to look at the true nature of the relationship, it was apparent that they were actually employees and the minimum standards of employment had been breached. It was a largely unavoidable conclusion on the facts.
Normally this would be the end of the road, and the employees would be entitled to remedies from the company. However, by the time of the proceedings the company had been wound up.
The order for remedies was worth the paper it was written on (or slightly less), unless the employees could recover the money from the directors personally.
Before 2016, directors could only be held liable for breaches of employment standards if they knew of the company’s obligations, and directed or authorised the breach.
However, since changes to the Employment Relations Act in 2016, any officer (such as a director of a company) who has in any way been “knowingly concerned” with a breach, or party to the breach, can be personally liable.
This said, a director can be protected against liability by showing that they either reasonably relied on information given to them, or if they took all reasonable and proper steps to ensure compliance with the employment standards.
So the question arose with the directors of the taxi company – were they knowingly concerned in the breaches of employment standards?
It was accepted that they knew how the drivers worked – that they had hours of work set by the company, had jobs assigned by the dispatcher and had PAYE tax deducted from their payment, amongst other factors.
But the directors claimed they genuinely believed the drivers were contractors, not employees. That evidence was not contested and was accepted by the courts.
The Court of Appeal was asked to decide what amounted to being “knowingly concerned” in a breach.
Did the directors need to know the drivers were employees, or was it sufficient for them to know the essential facts that led to that conclusion, despite their belief to the drivers were contractors?
The Court of Appeal held that knowledge of the essential facts was sufficient. Mistaken understanding of how the law applied was not a defence.
The case was referred back to the Employment Court to apply the clarified test and decide whether the directors were liable.
The ramifications for directors of small to medium sized businesses is significant.
While the drivers in this case seemed fairly clearly to be employees, it is often not so obvious. Many businesses may make genuine mistakes as to whether or not a worker is an employee.
Directors of these companies may now be reluctant to use independent contractors where their status falls along the margins.
This is particularly so in the so-called gig economy, where businesses are genuinely trying to meet their obligations, but are competing in a business world where there are new ways that both employees and employers want to carry out work.
The risks for directors of large organisations on the other hand will be different. Directors in these companies are unlikely to be aware of the contractual arrangements made with most staff.
This will provide these directors a much more straightforward defence to any such claims.
Hopefully these increased risks for directors will deter exploitation of vulnerable workers, without unduly deterring people from taking up directorships.