Director personal liability for employment law breaches

Company directors and senior managers are on notice that they may be held personally liable for employment law breaches, with significant financial consequences. 

All employers are expected to know minimum legal standards and abide by them. Where they are in breach, the courts have had little difficulty in holding individuals personally liable for payment of minimum entitlements, and/or penalties for the breaches. 

Being knowingly concerned in a breach – Labour Inspector v Southern Taxis Limited

In Labour Inspector v Southern Taxis Limited [1] , Southern Taxis operated a taxi business. Prior to it ceasing trading, it had commission drivers whom it treated as independent employees. The Labour Inspector brought proceedings against the two directors, arguing that they were personally liable for unpaid entitlements of the workers, on the basis that they were “knowingly concerned in” the breaches by Southern Taxis prior to it ceasing trading. [2]

The Employment Relations Authority found that the drivers were employees who had not been paid minimum statutory entitlements. It held that the company was liable for their minimum entitlements, amounting to $80,000 of unpaid wages and holiday pay. 

The case was appealed to the Employment Court, which overturned the Authority determination by finding that the directors were not involved in the breaches by the company because they genuinely believed the drivers were not employees, but independent contractors.

The Court of Appeal considered the level of knowledge required to establish liability for a “person involved in a breach” of employment standards. Ultimately, the Court of Appeal allowed the appeal, concluding that the directors were personally liable for the amounts that the company failed to pay the drivers. 

The Court held that the directors’ knowledge of the primary facts mattered, not their (erroneous) belief that the drivers were not employees. The Court observed the wording of section 134 of the Employment Relations Act had been used in other provisions providing for accessory liability, where the courts have held that an accessory will be liable if they have knowledge of the essential matters that go to make up the contravention (breach), regardless of whether they are aware those matters amount to a breach. 

The Employment Court now has the task to determine the matter in light of the Court of Appeal’s decision. 

Aiding and abetting a breach

This is not the first employment case to hold directors or shareholders personally responsible for breaches that occur within an employment relationship. Every party to an employment agreement who breaches the agreement is liable to a penalty under the Employment Relations Act, and every person who incites, instigates, aids or abets any breach of an employment agreement is liable for a penalty.

In Nicholson v Ford the Employment Court held the Chief Executive and sole shareholder liable for a $7,500 penalty for instigating, aiding and abetting breaches of terms of employment. In this case, the employee was made redundant following a restructure process that the Chief Executive was heavily involved in. 

When the employee sought financial information regarding the restructure, the Chief Executive threatened legal proceedings against him. The Court held that it is well established that the employer is required to provide information relevant to an employee in restructuring consultation, and that the requests were reasonable and reflected his legal entitlement to information.

The company went into voluntary liquidation. The employee successfully claimed a penalty against the Chief Executive under section 134 of the Employment Relations Act.

In making its judgment, the Court exercised its discretion to order a penalty, applying the following considerations:

• The object of the Employment Relations Act (including to build productive employment relationships through the promotion of good faith, and to promote the effective enforcement of employment standards);
• The nature and extent of the breach or involvement in the breach;
• Whether the breach was intentional, inadvertent or negligent;
• The nature and extent of any loss of damage suffered by any person or gains made or losses avoided by the person because of the breach or involvement in the breach;
• Circumstances of the breach, including the vulnerability of the employee; and
• Previous conduct.

These principles have been applied subsequently. In particular, the Labour Inspector has initiated and successfully brought cases (resulting in penalties against employer entities and individuals) including employers and owner/operators of liquor stores and in hospitality for the breach of minimum entitlement provisions contained in the Minimum Wage Act and Holidays Act. 

In cases involving the abuse of power of vulnerable workers, the Court has made significant awards of penalties, noting that deterrence is an important factor for the Court to communicate, and it needs to be emphasised that such behaviour will lead to substantial financial consequences for offending employers. It is not uncommon to see orders of $50,000 in penalties, together with payment of entitlement and costs being made against individuals.

Companies may also be barred from employing migrant workers, with infringement notices issued, and recorded in a publicly available register.

The Dairy sector has also seen successful claims and the order of penalties brought against farmers for breaching minimum entitlements, often the result of employers not keeping accurate wage, time and leave records, and therefore failing to provide these and be able to establish that minimum entitlements were paid.

Advice for employers

These cases demonstrate that where those directing a company act in breach of their legal obligations, there are consequences. This includes the risk of personal liability, and orders of penalties and the payment of minimum entitlements.

There is an expectation that the employer entity and those individuals knowingly concerned in the decisions of the employer are aware of and comply with minimum employment standards.

If an employer is unable to meet its obligations when a breach is identified, the person involved in a breach may be liable if they had knowledge of the essential facts.

A genuine belief of acting consistently with the law is insufficient to avoid personal liability, unless that incorrect understanding of the position was the result of reasonable reliance on information supplied by another person (i.e. if a person was legally advised and reasonably relied on that advice to their detriment and took all reasonable and proper steps to ensure the employer organisation complied).

Personal liability may be a daunting prospect. The case of Southern Taxis and others highlight the importance of sound legal advice to ensure awareness and compliance with minimum employment standards. In doing so, employees will be treated fairly, and potential personal liability will be minimised.

The DTI Lawyers specialist employment law team are available to assist on 07 282 0714, or you can email the team personally.