ERA probes management's personal liabilities for unpaid claims
The Employment Relations Authority (ERA) recently dealt with a case involving a fast food store in TaupÅ, where two workers claimed they were employees of the company running the store.
The workers brought personal grievances, minimum entitlement, and other claims against the company and its directors, who opposed the claims.
The case highlights the complexities of determining employment status and the potential consequences for companies and their directors when disputes arise.
Case’s preliminary determination
In a preliminary determination, the ERA decided that both workers were employees of the company, at least for the first worker's first 40 hours of work per week.
The question of whether the second worker was a casual employee and the status of any remaining hours were left open for further determination, along with the grievances, wages, and other matters.
During the proceedings, the company and its directors were initially represented by a lawyer but later took over representing themselves. Subsequently, the company's accountant took over representation.
In May 2024, the ERA was informed that the directors had been declared bankrupt in March 2024. The workers' representative expressed doubts about the genuineness of the bankruptcy, suggesting it was an attempt to evade responsibilities.
Claims against bankrupt directors
Given the imminent investigation meeting, the ERA arranged a case management conference to discuss the progress of the matter. Despite the directors' and their representative's unavailability, the conference proceeded.
The ERA indicated that the investigation meeting could continue regarding the company, but the question of the directors' involvement would need to be decided before investigating the claims against them. The ERA also notified the Official Assignee's office of the proceeding.
The key issue for the ERA's determination was whether the claims regarding the directors could proceed, given their bankruptcy status. This determination was not an assessment of the claims' merits or the directors' earlier ability to pay if ordered to do so.
The claims against the directors were:
- Did the directors aid and abet breaches of employment agreement(s), namely failure to pay wages, and if so, should penalties be imposed?
- Should leave be granted to pursue recovery against the directors as people involved in breaches of employment standards, namely failure to pay wages?
The ERA examined the Insolvency Act 2006, which deals with bankruptcy and restricts the progression of certain proceedings. The Act states that "on adjudication, all proceedings to recover any debt provable in bankruptcy are halted."
The ERA as an ‘investigative body’
The ERA considered whether its proceedings were caught by this provision, given that the Authority is an investigative body rather than a court.
However, the ERA concluded that a more purposive interpretation was appropriate, as Authority determinations requiring individuals to pay money should not be treated differently from court judgments in the bankruptcy context.
The ERA then assessed whether the claims against the directors constituted provable debts, which are debts or liabilities owed by the bankrupt at the time of adjudication or after adjudication but before discharge, arising from obligations incurred before adjudication.
The ERA noted that the existence of a claim does not necessarily establish a provable debt until liability is determined. However, there has been a shift towards recognizing more contingent liabilities as provable debts.
The ERA concluded that if penalties were imposed or leave granted and orders to pay were made against the directors, these would be liabilities relating to obligations incurred before their bankruptcies.
High Court’s permission
In the absence of permissions from the High Court, the ERA determined that the claims against the directors were halted under the Insolvency Act and could not proceed. As stated in the decision:
"In the absence of any permissions from the High Court, the claims regarding the [directors] are halted under s 76 of the Insolvency Act and cannot currently proceed."
However, the ERA clarified that the workers were entitled to proceed against the company, which was still a registered entity and not in liquidation. The decision said:
"The [workers] are entitled to proceed against [the company], which is still a registered company and is not in liquidation but not against the [directors]."
Bankruptcy during employment disputes
The ERA's determination highlighted the legal complexities that arise when company directors face bankruptcy during employment disputes.
The decision clarified the application of insolvency legislation to ERA proceedings and the implications for claims against bankrupt individuals.
As the ERA noted, "If penalties were imposed, or leave granted and orders to pay imposed on the [directors], those would be liabilities which the [directors] owed after their bankruptcy adjudication." This underscored the potential consequences for directors who incur liabilities related to employment matters.
The case serves as a reminder for companies and their directors to ensure compliance with employment laws and agreements to avoid potential legal issues and personal liabilities.
