Director Overboard - Directors of NB Employers To Be Personally Liable for Unpaid Wages
July 19, 2013
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Note: On December 3, 2013 the NB Government introduced Bill 21 to amend Chapter 13. Chapter 13 was never made effective, but would amend the NB Employment Standards Act to impose personal liability on directors of NB employers. Read McInnes Cooper’s: NB Government Throws Directors of NB Employers a Life Preserver.
On June 21, 2013, Bill 46 – An Act to Amend the Employment Standards Act – and in it a new section 65.1 to the NB Employment Standards Act – received Royal Assent. Section 65.1 is not yet in effect, but it is already making waves with NB employers – and their directors:
- New Directors’ Liability. Bill 46 imposes a new liability on directors, making them jointly and severally liable with the employer for unpaid wages and vacation pay earned by current and former employees while the director was on the board.
- Multiple Avenues Available. Employees can use the employment standards process or the courts to seek payment from directors.
- No Defence. Directors can sue other directors and the corporation if they have to pay – but even if they are a diligent director while on the board, they have no defence to the new liability – and, depending on the insurance policy, possibly no insurance coverage.
- Bankrupt and Insolvent Employers. It’s not clear whether directors will be personally liable to employees when the employer is bankrupt or insolvent.
- Limits. There are some limits to the new liability –but not many.
Section 65.1 is making sitting and prospective directors think hard about whether to jump ship or stay the course – and corporations think hard about how this will impact them.
The NB Employment Standards Act (ESA) establishes the minimum employment standards for provincially regulated companies in NB. The NB Legislature introduced and passed Bill 46 (now referred to as Chapter 13) adding Section 65.1 to the ESA – with little fanfare or publicity in light of the significant impact of s.65.1 on NB employers and their directors.
Section 65.1 is small but mighty: it makes directors jointly and severally liable with the corporation to an employee or former employee of the corporation for:
- up to six months of wages owing to an employee or former employee that were earned or became due and payable while the person was a director; and
- up to 12 months of vacation pay or pay in lieu of vacation owing to an employee or former employee that accrued or became due and payable while the person was a director.
Joint and Several Liability. The corporation and each of its directors is individually liable for 100% of the amount owing under s.65.1: one or more employees can recover 100% of the amount owed under it from any single director or from the corporation.
“Wages” and “Vacation Pay”. “Wages” means salary, commission and compensation in any form for work or services measured by time, piece or otherwise. Wages does not include public holiday pay, pay in lieu of public holiday, vacation pay, pay in lieu of vacation, gratuities or honoraria, but s. 65.1 specifically makes directors also liable for vacation pay and pay in lieu of vacation.
Administrative Penalties. The Director of the Employment Standards Branch (Branch) can also impose administrative penalties of $150 to $900 on a director under s.65.1.
Not-For-Profits. Section 65.1 won’t apply to directors of not-for-profit corporations.
Effective Date. Chapter 13 – and s. 65.1 – will only be effective on the date the Province sets; the Province says it has not determined this date because it must still draft regulations.
Click here to read Chapter 13, An Act to Amend the Employment Standards Act.
A NEW LIABILITY – AND NO LIFEBOAT IN SIGHT
It remains to be seen just how employees will (or will try) to use s. 65.1, how the Branch will apply it, and how courts will interpret it – leaving a great deal of uncertainty. However, it seems s. 65.1 imposes a brand new and broad liability on directors – without any defence except time and the courts.
New Liability. Several other Provinces impose similar liability on directors in the business corporations legislation in addition to employment standards legislation. NB’s business corporation legislation does not. Section 65.1 imposes a completely new personal liability on directors for unpaid employee wages and vacation pay.
Civil Liability. It appears that s. 65.1 imposes civil liability on directors. This means employees can enforce their rights through the court as well as the ESA’s administrative process – and need not pursue the ESA process first. Furthermore, an employee can pursue a director personally without first trying to recover from the employer corporation.
NB Employers. With few exceptions, the ESA applies to all provincially regulated employers in NB, whether incorporated in NB or not. In turn, s. 65.1 will apply to their directors – including “non-resident” directors. Practically, it will be more difficult for employees to recover from directors not resident in NB; on the flip side, the ESA only protects the unpaid wages and vacation pay of NB employees.
No Due Diligence Defence. There does not appear to be a “due diligence” defence to s.65.1. A due diligence defence allows a director to avoid liability if he can prove the conduct happened without his knowledge or consent, he did not acquiesce, and the conduct occurred even though he exercised reasonable diligence performing his responsibilities to the corporation. Employment standards legislation in most Provinces and Territories imposes liability on directors for unpaid employee wages – but often includes a due diligence defence or some other limit. Section 65.1 does not include a due diligence defence. Section 84 of the ESA deems a director to have committed the same offence as a corporation – but also gives director(s) a due diligence defence to such an offence. However, s. 84 does not readily apply to the liability under s. 65.1.
Director’s Lawsuit. If a director does pay employees the wages or vacation pay owing – of his own volition or in compliance with an order from the Branch – the director can sue the corporation or other director(s)/former directors to get his money back. Of course, there are costs to sue and to recover if successful.
Insurance. Directors typically have recourse to directors and officers liability insurance for liability incurred in their capacity as a director; some have additional insurance in the form of employment practices liability insurance. Some such policies may cover the type of liabilities s. 65.1 imposes – and some do not cover it at all, or only cover it above a threshold amount. There is a good chance that the question of whether a policy covers liability under s.65.1 will end up before the court.
Bankruptcy and Insolvency. A significant question is whether s.65.1 will apply to impose personal liability for unpaid wages and vacation pay on directors when the employer is insolvent or bankrupt. There is a good chance this question will end up in front of the courts. The amendments to the ESA in Chapter 13 do change employees’ wage claims from an insolvent – or nearly insolvent – employer: a new s. 38.1 will allow the Branch to file an Employee Lien against the employer’s real and personal property for the full amount of pay owing to an employee – instead of limiting the amount to the current sliding scale percentage of the pay owing. However, s.38.1 does not deal with an Employee Lien against the property of an employer’s directors.
Limits. There do seem to be some limits on the personal liability of a director to employees under s.65.1:
- Pension Benefits. Section 65.1 does not likely impose any liability on directors for pension benefits – “wages” does not include “benefits”, and director liability for pension benefits falls under the NB Pension Benefits Act.
- Liability While Sitting. Section 65.1 imposes liability for only the unpaid wages and vacation pay earned and accrued while the director was on the board.
- Limitation Period. An employee has only one year after the employer breaches the ESA to file a complaint with the Branch. However, this limitation only applies to complaints under the ESA – not to a court action.
- Two Years’ Tail. A director’s liability under s.65.1 does not end when he stops being a director, but the Branch can only make an order against a former director up to two years after the director stops being a director.
CHARTING THE COURSE FOR DIRECTORS – AND CORPORATIONS
Bill 46 will affect corporations of all kinds that employ people in NB – and their directors.
Practically, the risk of liability and the amount of exposure to directors is on a spectrum. At one end, the chance a director of a start-up will be liable under s.65.1 is high, but the exposure is likely low: start-ups often have limited resources and unlimited demands – but they also typically have few employees and a small payroll. At the other end, the chance that the director of a large but financially stable corporation will be liable under s.65.1 may be lower – but since the number of employees and the payroll can be significant, if there is liability the exposure may be high.
People asked to sit, or already sitting, on a corporate board with NB employees will be wary; this will make it tough for companies with NB employees to recruit strong directors in the first place, or keep them aboard when the waters get rough – when the corporation likely needs them the most. Here are a few ways directors and corporations can be prepared.
Review Your Insurance. Both directors and corporations should review their directors and officers liability insurance policies – and if they have it, employment practices liability insurance – carefully to determine whether they cover the personal liability s.65.1 imposes on directors. If not, coverage may be available – but at a cost.
Before Saying Yes – Due Diligence. Section 65.1 imposes liability on a director regardless of how diligent he is while in the role – so prospective directors will need to do their due diligence before agreeing to a board appointment. This will likely entail more time, effort – and possibly cost – for prospective directors. Corporations seeking new directors will need to anticipate this increased scrutiny – and the time, documents and cost to respond.
Micromanaging Directors. Section 65.1 conflicts with “good” corporate governance principles – and increases the demands and costs for both directors and corporations. Governance principles tell directors to leave the management of day-to-day affairs – like payroll – to management; yet directors will want to closely monitor the status of employee wages and vacation pay to protect themselves from liability under s.65.1. Exercising such diligence won’t give a director a defence. However, since they are liable only for unpaid wages earned and vacation pay accrued while on the board, sitting directors will want to be able to make decisions about whether to jump ship early – before such a liability arises or when it is low. Corporations should anticipate the likely demand for increased reporting to directors and the related time and cost to satisfy it.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Corporate Governance and Compliance Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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