Client Update: Directors will be liable for unpaid wages and vacation pay

Clients who sit on boards of corporate employers should take note of recent amendments made to New Brunswick’s Employment Standards Act (the “ESA”) which could increase their exposure to personal liability in connection with claims advanced by employees of the corporation.

The amendments, which have already been passed by the Legislature and will come into effect on a date to be determined by cabinet, will impose responsibility on directors for unpaid employee wages and vacation pay. The changes will not be applicable to directors of not-for-profit organizations.

As a result of the amendments, directors will be jointly and severally liable with the corporation for:

• Up to six months’ wages that were earned or became due and payable while a person was a director.
• Up to 12 months of vacation pay owing to an employee or former employee that accrued or became due and payable while a person was a director.

Directors may also be liable for payment of certain administrative penalties ranging from $150 to $900.

Given the definitions of “wages” and “pay” contained in the ESA, the potential exists that directors’ liability may extend to employee severance pay, subject to administrative and/or judicial interpretation.

Not only will employees be able to seek enforcement of these new rights against directors through an administrative process existing under the ESA, they may also be able to enforce their rights directly against directors by commencing an action, or even a class action, in court.

Pursuant to the amendments to the ESA, a director’s exposure does not end when he or she ceases to be a director of the corporation. An employee has one year to launch a complaint and an order against a former director can be made up to two years after he or she has ceased to be a director.

Director liability for employee wages has been imposed by business corporations and/or employment standards legislation in other provinces and territories including British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, the Northwest Territories, the Yukon and Nunavut, as well as federally under Part III of the Canada Labour Code. While the details of such legislation vary from jurisdiction to jurisdiction, the legislative framework (including employment standards and corporate statutes) often provides one or more of the following protections for directors:

• An employee must first seek a remedy against the corporation before he or she can pursue the directors personally.
• Directors will not be held liable where they have exercised due diligence and acted in good faith (similar to the defence available to directors under the Income Tax Act in connection with the non-remittance of source deductions).

The amendments to the ESA provide no similar protections. Employees will be able to bypass the corporation and seek payment for unpaid wages and vacation pay from directors in their personal capacities, notwithstanding that such directors may have exercised due diligence and acted in good faith. Effectively, the ESA imposes an absolute liability on directors with no express statutory defences.

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. Consequently, depending on the size of the corporation’s payroll, a director could face significant personal liability in the event of corporate insolvency.

The foregoing is intended for general information only and is not intended as legal advice. If you have any questions, visit our Labour and Employment Group. For more on our firm see www.stewartmckelvey.com.