Company directors may face personal liability for employment law breaches

Introduction

Company directors have been put on notice: they may be held to be personally liable for their company’s employment law breaches; even if they genuinely believed the company was complying with its legal obligations.   

In a judgment issued on 20 December 2021, the Court of Appeal in A Labour Inspector v Southern Taxis Ltd[1] considered a question of law regarding the level of knowledge required to establish personal liability for company directors involved in breaches of employment standards under the Employment Relations Act 2000 (“ERA”.).   

Background Facts

Southern Taxis Limited (“Southern Taxis”) operated a taxi business in Dunedin from 2002 to 2016, when it ceased trading.

Southern Taxis had a number of “commission drivers” whom it treated as independent contractors rather than employees. The taxi vehicles were owned by Southern Taxis.

Unfortunately, Southern Taxis had stopped trading prior to the above decision and it could not meet its obligations.  As such, the Labour Inspector brought proceedings against the two directors of Southern Taxis, Maureen and Ronald Grant (“the Grants”).  The Labour Inspector argued that the Grants were personally liable for the unpaid entitlements as they were “knowingly concerned in” Southern Taxis’ breaches from 1 April 2016 onwards, as defined in s 142W (1) (c) of the ERA.

The Employment Relations Authority found that the Southern Taxis drivers were employees and that they had not been paid their minimum entitlements. Southern Taxis was held liable to pay these drivers approximately $80,000 in respect of unpaid entitlements.

The Employment Court overturned the Employment Relations Authority determination in so far as personal liability was concerned by finding the Grants were not involved in the breaches by Southern Taxis because they genuinely believed the drivers were not employees.

The Labour Inspector appealed to the Court of Appeal.

Court of Appeal decision: Appeal allowed

The approved question of law for the Court of Appeal was: What is the level of knowledge required to establish liability for a person “involved in a breach” of employment standards under s 142W(1) of the ERA?

The Court of Appeal allowed the appeal and concluded that whether the Grants were involved in the breaches by Southern Taxis, and were personally liable for the amounts that Southern Taxis failed to pay the drivers, depended on whether each of them knew the essential facts establishing the breaches by Southern Taxis. The Court opined that it was the Grants knowledge of the primary facts that mattered, not their belief that the drivers were not employees while it was also irrelevant that the Grants believed the drivers were not employees.

The Court observed that the wording in s 142W (1) (c) of the ERA — “knowingly concerned in” — has been used in other legislative provisions providing for accessory liability in New Zealand, as well as Australia and England, where the courts have held that an accessory will be liable if he or she has knowledge of the essential matters that go to make up the contravention, regardless of whether they are aware those matters amount to a contravention.

As such, the Court of Appeal determined that the inquiry should focus on whether the Grants knew the primary facts relevant to the finding that:

-          the drivers were employees; and

-          Southern Taxis had failed to make the required payments to those drivers.

The case was referred back to the Employment Court, which is to determine the matter afresh in light of the Court of Appeals decision on the question of law. Given the facts set out in the judgment it will be a difficult task for the Grants to dispute the primary facts and avoid a subsequent and further finding of personal liability.

Conclusion

This case is an important reminder for company directors that you may not be able to evade personal liability for employment law breaches and unpaid minimum entitlements by hiding behind a company structure. As the Court in this case noted:

“A director cannot escape liability on the basis that they did not turn their mind to the legal consequences of what they knew. Nor can they escape liability in the basis that they genuinely but erroneously believed that the obligations in question did not apply, unless that incorrect understanding of the position was the result of reasonable reliance on information supplied by another person.”[2]

Personal liability is a daunting prospect for company directors. The best protection is to get quality advice before issues arise.  If you have any questions about directors’ obligations, please contact Jaesen Sumner, Jordan Todd, Ruth Williams, Lucy Aitken or Caylee Wood.

[1] A Labour Inspector v Southern Taxis Ltd [2021] NZCA 705

[2] A Labour Inspector v Southern Taxis Ltd [2021] NZCA 705 at [50].