New Liability for Directors of For-Profit Corporations
Directors of corporations could find themselves on the hook for unpaid employee wages, vacation benefits, and administrative penalties issued against the corporation, in light of upcoming changes to the New Brunswick Employment Standards Act (the “ESA”).
BACKGROUND TO ESA
The ESA sets minimum rights and responsibilities for all provincially regulated employers and employees in the province, governing such things as wages, vacation pay, public holiday pay, various leaves, and more.
Where employers violate employee rights under the ESA, they may face orders issued against them by Employment Standards, ordering compliance with specific provisions of the ESA or that amounts be paid to an employee representing unpaid wages, vacation, public holiday pay, benefits, severance, etc.
The amendments to the ESA set out new liabilities for directors of for-profit corporations with respect to unpaid wages, vacation pay, and administrative penalties.
Pursuant to the amendments:
- If Employment Standards has issued an order against the corporation for unpaid wages, vacation pay, or administrative penalties, it may also issue an order against any corporate director, requiring payment of the amount set out in the order or any portion of the amount(s) owing;
- Corporate directors may be liable for:
- Up to six (6) months of wages owing to an employee or former employee that were earned or became due while the person was a director;
- 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 while the person was a director; and
- Administrative penalties ranging from $150 – $900;
- Corporate directors may be liable for up to two years after they cease to be a director;
- Director liability is limited to unpaid wages, vacation pay, and administrative penalties. It does not apply to other categories of remuneration such as public holiday pay, other benefits, payment in lieu of notice of termination (i.e. severance pay), and compensation for economic loss;
- A corporate director that complies with an order may bring an action against the corporation or any one or more of the directors for contribution or indemnification for the amounts paid;
- Anyone faced with an order, whether corporation or corporate director, may request a hearing before the Labour and Employment Board within 14 days after the order is served. The person requesting the hearing must deposit the amount stipulated in the order with Employment Standards, up to a maximum of $2,000. The deposit is applied first to the amounts owing to the employee, if any, secondly to administrative penalties, if any, and the surplus is returned to the person who made the deposit. The purpose is to encourage corporate directors and corporations to pay claims that are less than $2,000; and
- The amendments on director liability do not apply to directors of not-for-profit organizations.
The intention of these amendments is to allow government to impose personal liability against corporate directors along with their corporations in order to prevent employers from hiding assets that could be used to pay employees.
Employment Standards legislation in other jurisdictions, as well as the Canada Business Corporations Act, have provisions imposing liability on corporate directors for wages and vacation pay. While the particulars of the legislation vary from jurisdiction to jurisdiction, the framework sets out various limitations on director liability, including:
- Employees must first seek a remedy against the corporation;
- Employees can only recover against corporate directors where the corporation is insolvent; and
- Directors will not be liable where they have exercised due diligence and acted in good faith.
The ESA does not place similar limitations on director liability.
In many jurisdictions, corporations manage the risks of director liability through director liability insurance. Currently in New Brunswick, standard directors’ liability insurance policies do not provide coverage for claims advanced by employees for nonpayment of wages and vacation pay.
Under the current legislation, Employment Standards may issue employee liens against insolvent employers for unpaid wages. Wages have a diminishing value of 25% for every two weeks following the date of insolvency. The amendments repeal this section, so that employee liens will no longer diminish on a sliding scale. The intention is to protect employees’ full financial entitlements. This is a change that does not apply to directors, as employee liens are issued and registered against employers.
Where an employer is not in compliance with any section of the ESA or its regulations, Employment Standards may issue a notice of non-compliance to the employer. The employer has 30 days to comply with the legislation, failing which an administrative penalty may be issued against it. This means that employers may be faced with orders for unpaid wages etc., as well as administrative penalties, in relation to the same offence.
The amendments will come into effect on a date to be determined by the Government.