It’s a fundamental building block of Canadian law that a corporation is a separate legal entity from its directors, officers and shareholders. Generally, the individuals behind what is referred to as the “corporate veil” will not be held liable for the debts of the company.
However, the positions of director and officer carry with them weighty responsibility on many fronts. This blog discusses one of those fronts – the potential for personal liability for employee wages. During times of economic uncertainty, there is frequently more focus on recovery of such amounts from individuals, as well as corporations.
Liability under the BC Employment Standards Act
For employers falling under provincial jurisdiction, section 96 of the British Columbia Employment Standards Act (the “ESA”) makes each corporate director or officer personally liable for up to two months’ wages for any employee covered by the ESA. Directors and officers of a society registered under the BC Societies Act are also liable under section 96. (Note: The ESA does not cover certain categories of employees including doctors, lawyers, architect and others in professions governed by specific legislation.)
When personal liability arises
Under the ESA, individual liability of a director or officer arises when the following conditions are met:
The director or officer must have been in the role at the time the wages were earned or due to be paid.
Liability does not attach to directors and officers of charities who do not receive remuneration for their role (reimbursement for expenses excluded).
Directors and officers are not responsible for length of service, termination pay, or money payable in respect of either an individual or group termination if the corporation is in receivership or subject to a proceeding under the Insolvency Act (Canada) or section 427 of the Bank Act (Canada).
It is notable that if one corporate director or officer pays two months' wages, this does not release other officers from wage liability where further unpaid wages remain owing to an employee. The liability of each individual director or officer is separate from the liability of other directors and officers; liability is not divided between them, pro-rated or shared.
Recovery of director’s or officer’s own wages
In some cases, a director or officer may also claim their own wages from the company. In this circumstance, the issue may arise as to whether a director or officer is entitled to recovery of their own wages as against other directors or officers.
The view of the Director of Employment Standards in BC is that the definition of “employee” for the purposes of section 96, when read with the purposes of the ESA, is not intended to encompass the ‘controlling mind’ of a corporation. As such, the Director will not normally pursue claims for unpaid wages made by directors or officers of a corporation. This is especially so where the claim would lessen recovery on claims made by other employees.
The exception to this general principle against directors and officers recovering their own wages is that they may be permitted recovery where they have an employment relationship independent of their duties as a director or officer.
Liability in Federally Regulated Workplaces
Like directors and officers in provincially regulated corporations, those in federally-regulated workplaces may also be found personally liable for unpaid wages. In particular, under the Canada Labour Code, directors and officers may be liable for the equivalent of six months’ wages and, in that case, severance and termination pay may form part of what is owing.
In order for a finding of personal liability in the federal sector:
the entitlement must have arisen during the incumbency of the director or officer; and
there must be a finding that recovery from the corporation is unlikely.
Federally-regulated employers include Canadian crown corporations and those in the following industries: banks, airlines and airports, shipping, canals and ports, railways, telecommunications, broadcasting, pipelines, grain elevators, feed mills and seed mills.
Managing the Risks
Personal financial exposure can be significant for directors and officers of corporations, especially those who represent corporations with multiple employees. The dollar-value of the potential exposure increases when multiple employees are terminated at once for financial or other reasons.
It is important for a person considering a role as an officer or director to be informed of the potential liabilities as this allows for inquiries and risk assessment. As well, “error and omissions” insurance may sufficiently protect from liability, and some employers offer this to their potential directors and officers as an incentive to join them. We encourage you to contact us to discuss any particular concerns