Lifting the corporate veil in employment law

Lifting the corporate veil in employment law

Since the 1897 decision of the House of Lords in Salomon v A Salomon and Co Ltd it has been established that a company is a separate legal person separate from its shareholders and directors – if a company owes an employee money and cannot pay, the law does not require that directors or shareholders pay on the company’s behalf.

However, the law does not sit idly by where this fact is abused and exploited to unjustly escape liability – although a limited liability company generally provides protection, there are circumstances where this ‘corporate veil’ can be lifted.

There are two main consequences of lifting the veil (or ways the veil can be lifted):

1. shareholders or directors can be held personally liable for actions or obligations of the company; or

2. two separate companies can be treated as being the same.

This has been done by the Court and Employment Relations Authority in equity and good conscience on several occasions to do with justice where otherwise employees with genuine claims and grievances would have been left with nothing.

Key cases in the employment jurisdiction:

In the case of parent and subsidiary companies the Courts appear more willing to lift the veil – a parallel line of case law has developed addressing this situation, notably the cases Red Eagle, Gearbulk, and Silver Ferns.

However, a parent/subsidiary company relationship does not need to exist for the Courts to lift the veil. In the Employment Court there are two key cases dealing with lifting the veil outside of the context of a parent/subsidiary companies – the 1994 case Square One Service Group Limited v Butler, and the much more recent 2016 case Bennett v Michaels. Lifting the corporate veil in this context is a complex legal issue, however, broadly speaking the Courts will be willing to lift the veil where:

1. a sham or deliberate fraud is present with an intention to escape liability of some kind (whether or not the purpose is to escape liability in the employment claim or some other liability); or
2. a sufficient level of artificiality is present, including where the transactions were a mere technicality.

For example, in the Bennett v Michaels, it was apparent beyond all doubt the company structure was being used to conceal fraud – accordingly, the Court lifted the veil and held Mr Michaels personally liable for arrears of wages claims. Similarly, in McLennan v Best of the Best the Authority dealt swiftly with a situation where a director had changed the company name and sold the assets to a new company he had set up with the same name after receiving a personal grievance – he offered no explanation for the transaction and none were apparent on the facts. The Member had no difficulty in concluding the transaction was a sham or pretence to avoid liability and joined the new company to the orders made.

The 1996 case Barrett v Securitas Limited is an example of where the Authority treated two companies as being the same, finding the asset sale of one to the other was a mere technicality which did not alter the identity of the employer. Similarly in the 2001 case Doddrell v International College of Camille Ltd, the Authority noted among other things two companies had the same sole shareholder and director, and although an employment agreement was with one company the employee was paid by the other – the Authority treated both companies as being the employer.

Ultimately the Courts will cautiously issue an order lifting the corporate veil in employment law, however the power exists to do so – in equity and good conscience – to ensure justice is done where it otherwise would not.

 

If you have any questions or queries in relation to this topic, please get in touch with the Watermark team directly. We are happy to advise you.

Jonathan Charlton

Solicitor