FAILED ATTEMPT TO PIERCE EMPLOYER’S CORPORATE VEIL

Posted by Tony Sung on August 23 2022 in News

A recent decision in the Employment Relations Authority highlights the importance of assessing the corporate employer’s ability to pay compensation before issuing proceedings.

In De Sousa, De Sousa, Cavanagh, Keats, Kean, Araujo, Banphet and Morison v Bayside Fine Food Ltd (in liquidation) [2022] NZERA 253, the Employment Relations Authority had found in a previous determination that the nine employees of Bayside Fine Foods Limited (BFFL) were unjustifiably dismissed by BFFL and awarded remedies (for lost remuneration and compensation for humiliation, loss of dignity, and injury to the feelings) and costs in the employees’ favour. However, BFFL went into liquidation without paying any of the sums awarded by the Authority.

The nine employees subsequently asked the Authority to exercise its discretion under section 137 of the Employment Relations Act 2000 and make a compliance order requiring, the directors of BFFL, Mr. and Mrs. Dehlsen, to put monies into BFFL (in liquidation) for the purpose of meeting some or all of the awards.

Although the Authority accepted that the compliance orders sought by the nine employees could be made by the Authority if it is established Ms. Dehlsen and Mr. Dehlsen could take the steps necessary to ensure the liability was met, the Authority ultimately decided not to exercise its discretion.

First, the Authority made it clear that Mr. and Mrs. Dehlsen were not hiding behind the company entity to purposely avoid the employees’ claims and it is unlikely they would be able to recover the significant sums they have personally advanced BFFL as a result of its failure.

Secondly, the Authority noted that this was not a situation where Mr. and Mrs. Dehlsen have moved assets of BFFL in the face of the employees’ personal grievances or subsequent awards for their own benefit or to deprive the employees of those awards.

Thirdly, this was not a situation where Mr. and Mrs. Dehlsen could have taken steps due to BFFL’s then financial situation or BFFL’s (in liquidation) current financial position to ensure it met those awards.

In the circumstances, the Authority’s view was that there was insufficient information before the Authority to justify a compliance order and that an order requiring Mr. and Mrs. Dehlsen to meet the payments from their own pocket was not within the scope of s137 of the Act. The Authority’s decision was consistent with the fundamental principal of company law that a company is a separate legal entity and is separate from its shareholders and directors.

It is worth noting that parliament has made exceptions under the Act to the principle of corporate separateness. One type of situation is where directors or shareholders have incited, instigated, aided, or abetted any breach of an employment agreement. Another type of situation is where directors or shareholders have been involved in a breach of employment standards such as Minimum Wage Act 1983 or Holidays Act 2003.

It is important to assess the employer’s ability to pay compensation before issuing proceedings against the employer. If the employer is in a difficult financial situation, one must consider whether it would be able to join directors or shareholders of the employer company to the proceedings. Otherwise, obtaining an award from the Employment Relations Authority may be an empty victory.

If you would like more information regarding the above, or have any questions, please contact us.

Kalev Crossland | Partner | 09 300 8755 | Kalev.Crossland@shieffangland.co.nz

Tony Sung | Associate | 09 300 8766 | Tony.Sung@shieffangland.co.nz