A Director Can Be Made to Pay the Wages and Holiday Pay. Not the Compensation.

In October, the Employment Relations Authority ordered a tattoo and piercing company to pay a former tattoo artist more than $47,000. Before the hearing, the company’s director had written to the Authority to say the business had closed and there was “no money and nothing to liquidate”. Five months earlier, the same company had been ordered to pay a former piercing apprentice more than $30,000, and the Authority had declined to let her pursue her unpaid wages from the director personally.

Both workers won. Whether either will be paid is a different question, and the answer turns on a part of the law that rarely comes up until a company is empty. A director can be made to pay an employee’s unpaid wages and holiday pay. A director cannot, through the same door, be made to pay the compensation. In these two cases the compensation was most of the money, and it was awarded for the worst of the conduct.

A third case, decided by the Employment Court in the same month, shows what it looks like when the system works.

Two wins against one company

The first case was brought by a woman who answered a Facebook advertisement for a piercing apprentice. She was told the role would be unpaid until she was trained. She was later given a “Contractor Agreement” that paid her 30 per cent of each piercing, and she had to work out what she was owed herself and ask for it. Payments were late, and towards the end they stopped. When she complained, she was called to a meeting with no notice of what it was about. In that meeting she was told she would not be paid, that she was not welcome back, and that the director wanted to “smash” her.

The Authority found that she was an employee, not a contractor, applying the Supreme Court’s approach in the Uber case (Whitham at [34]–[38]). The dismissal fell well short of the minimum fairness requirements in s 103A(3), because the concerns were raised and the decision was made in the same meeting ([53]). She was awarded unpaid wages, holiday pay, three months’ lost wages, and $15,000 in compensation ([82]).

The second case was brought by a tattoo artist on a work visa that allowed him to work only for that company. After a member of the public came into the shop, shouted at him, and threatened him with violence, he asked his employer for support. He was told to “act like a man” and “harden up”. When he went on sick leave with a medical certificate, his pay stopped. When he raised a personal grievance, the director texted him that she would ring Immigration and tell them he had abandoned his job (Gonzales at [13]–[20]).

The Authority found that he had been constructively dismissed, and described the company’s conduct, the threat included, as “fundamentally repudiatory” of the employment relationship ([32]). It awarded $35,000 for the dismissal and a further $5,000 for the disadvantage, taking into account the added vulnerability of a migrant employee and the company’s awareness of it ([53]–[55]). His unpaid wages and holiday pay came to a little over $5,000.

In neither case did the company attend the Authority’s investigation meeting.

The case where it worked

The third case involved a medicinal cannabis start-up that ran out of investor money. Its chief technology officer agreed to defer some of his salary while funding was found, and then kept working for two years without being paid. The company went into liquidation. By the time the matter reached the Employment Court, he was owed more than $220,000 in wages (López v Kāriki Pharma at [183]).

The Court held that two of the directors were persons “involved in” the company’s breach of employment standards, and confirmed that he could recover the arrears from them personally to the extent the company could not pay ([163], [177]). The test it applied is knowledge: actual knowledge of all the essential facts giving rise to the breach, or wilful blindness to them ([160], citing Labour Inspector v Southern Taxis Ltd). The directors knew he was not being paid at all. One was a qualified lawyer and the others were experienced, and none of them checked the terms of the deferral arrangement they were relying on ([136], [162]).

The directors argued that they had relied on the company’s accountant, who had told the board the company was solvent. The Court rejected that for two reasons. The accountant’s advice was about solvency, not about what the employee was owed, and he was the company secretary and in effect its agent, so he was not independent of the company ([171]–[173]).

These were not directors who swore at anyone. They hoped the money would come in, and they let the debt grow while they waited. That was enough.

What the law reaches

The provisions doing the work are in Part 9A of the Employment Relations Act 2000, which came into force on 1 April 2016. Under s 142W, a person is “involved in” a breach of employment standards if they aided, abetted, counselled, or procured it, induced it, were knowingly concerned in it, or conspired to bring it about. Where the employer is a company, only an officer can be treated as involved. Under s 142Y, an employee can recover wage arrears and other money payable from a person involved in the breach, but only with the prior leave of the Authority or the Court, and only to the extent the employer is unable to pay.

That is a real remedy, and it is not a narrow one. A director who knows the wages are not being paid and lets it continue is exposed, whether the failure comes from hostility or from hope. On the facts recorded in the first two cases, the director of the tattoo company did more than know. She personally declined to pay sick leave, and in writing told the second worker that the company did not owe him holiday pay (Gonzales at [41], [50]). The Authority in the first case said she may have been a person involved in a breach, but did not need to decide it (Whitham at [87]).

But the remedy has a ceiling. “Employment standards” means the minimum entitlements, such as the minimum wage, holiday pay, and the rules on how wages are paid. In the Kāriki case even the employer’s KiwiSaver contributions fell outside it, because they are not employment standards under the Act ([177]). Compensation for hurt and humiliation in a personal grievance is further outside still. It is a remedy against the employer, and where the employer is a company, the company is the only party that owes it.

It is natural to ask whether the court can simply look through the company. It can, but rarely. New Zealand courts will set aside a company’s separate personality only in narrow circumstances, and the established ground is a sham or deliberate fraud. In Bennett v Michaels the Employment Court did exactly that, but only because the director had deliberately created and used the companies to hide behind. A real business that ran for years and then ran out of money is not that, however badly it was run.

Other consequences can follow a director personally, though. A Labour Inspector can seek penalties against a person involved in a breach, and can apply for a banning order against someone who has persistently breached employment standards. Exploiting a temporary migrant worker can be a criminal offence under s 351 of the Immigration Act 2009. Those are serious consequences, and none of them puts the compensation in the worker’s hands.

Why it went differently each time

The first worker asked for leave to recover her arrears from the director, and the Authority declined. The reason was not her evidence about what the director did. It was that she had not proved the company was unable to pay. She told the Authority the company was due to be removed from the Companies Register, but she had nothing to prove it, and the register showed no evidence either (Whitham at [87]).

The second worker did not ask at all, because the director was not a party. Yet his case contains, in the director’s own words, the evidence the first worker was missing.

In Kāriki, leave was granted on terms: the employee may recover from the directors to the extent the company is unable to pay ([184]). The inability to pay limits what can be recovered. In Whitham it was treated as something that had to be proved before leave was given at all. The section can be read either way, and the difference matters a great deal to an employee whose employer has stopped answering its email.

The Kāriki case also shows how unforgiving the procedure is. The employee there sought penalties against the directors, but under the wrong section, and by the time the mistake was corrected the 12-month limitation period for penalties had passed. The Court held that a defendant facing a punitive claim must be put on clear notice of it within time ([86]–[88]).

What employees and their advisers can take from this

If the employer is a company and there is any doubt about its ability to pay, name the director as a party from the start and seek leave under s 142Y in the same proceeding. Gather what evidence you can that the company cannot pay: a liquidation, a removal from the register, or the director’s own statements. If you want a penalty against the director for aiding the company’s breach of the employment agreement, plead it under s 134(2), and within 12 months. And be candid with the client that even complete success may recover only the arrears, not the compensation.

What directors can take from this

A company does not protect a director from a claim for unpaid wages. Knowing the wages are not being paid is the risk, and good intentions about future funding do not reduce it. If the company cannot pay its people, the time to take independent advice is before the arrears build, not after.

Our view

The law draws its line in a defensible place. Separate legal personality is what allows people to start businesses without staking their homes on them, and most directors whose companies fail have done nothing worse than misjudge the market. Part 9A answers the most basic injustice, the worker who did the work and was not paid for it, and it reaches directors who knew.

But these cases show where the line leaves people. The threats, the abuse, and the use of a man’s visa against him produced the largest awards in both determinations. Those are exactly the parts of the claim that cannot follow the director once the company is empty. The director of a company that fails honestly walks away from its debts. So does the director of a company that behaved very badly before it closed. For the worker holding the determination, the difference is invisible.

Lex Praxis advises New Zealand employers on employment law and AI governance. This article is general commentary and does not constitute legal advice. For advice specific to your circumstances, contact us directly.