In many instances workers find themselves out of pocket in respect to wages when a company fails and goes into liquidation.
While general law in terms of personal liability for directors for reckless trading and trading while insolvent remain in place these are difficult thresholds to establish.
The Employment Relations Act does provide some protection for employees where the unpaid wages relate to minimum wage or holiday pay.
Section 234 of the Act makes a director liable where the director has authorised or directed such underpayment or failure to pay.
The labour inspector in such circumstances can bring an action against the director personally for recovery of those wages that have not been paid in that situation.
One of the key issues around establishing liability under section 234 has been what the labour inspector must show the director knew about the underpayments.
The Court of Appeal has recently clarified that the labour inspector must prove the director knew of the incorrect payment or non payment and that it was in default of the company’s obligations under either the Minimum Wages Act or the Holidays Act. The Court of Appeal indicated that the relevant knowledge may be proved by direct evidence or by inference but would not agree that this can be extended to deem the director had constructive knowledge of the situation. The Court of Appeal considered that would be going too far.
The Court of Appeal’s recognition that a director’s knowledge can be established by inference means directors must be very careful as to their obligations where wages are not being paid or are being paid at incorrect amounts. The closer the director is to the day to day running of the business and in particular payment of wages the more likely that such knowledge can be inferred.
The prospect of personal liability for unpaid wages therefore is a very real risk for directors especially of SME’s.
If you require any advice or further information on the matters dealt with in this publication please contact the lawyer at Farry and Co. who normally advises you, or alternatively contact:
Paul Farry
pfarry@farry.co.nz
09 379 0055 or 03 477 8870
The information contained in this publication is intended as a guide only. It does not constitute legal advice and should not be relied upon as such. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this publication, Farry and Co. does not accept liability for any errors it may contain.