Susan Hornsby-Geluk: Liftin Pumpkin Patch's corporate veil will be difficult
OPINION: It is one thing to have a strong legal claim as an employee, but it can be quite another trying to get what is due to you.
Especially so when the legal entity that is or was the employer shuts up shop and leaves nothing but an empty shell.
Kiwi retailer, Pumpkin Patch, has recently gone into receivership having amassed millions of dollars of debt.
Already a number of jobs have been axed from its New Zealand head office, while all of its 130 stores are likely to close around the end of December.
* Pumpkin Patch staff stressed, shocked and in disbelief as company liquidated
* Some Pumpkin Patch workers' insurance premiums not paid - First Union
* Pumpkin Patch deducts employee pay for shares it admits may have no value
* Pumpkin Patch in trading halt - too much debt, not enough capital
* Pumpkin Patch sale possible but store closures likely in coming weeks
Pumpkin Patch's receivers have confirmed that employees will continue to receive salary and that they will honour any outstanding holiday pay that is owed.
However, the receivers have also said that while employees who work in the stores will receive their redundancy entitlements, those who work in head office, and are employed by a separate legal entity, will not.
There may be little the head office employees can do to recover redundancy compensation owed given the company may not exist for much longer, and there is no doubt a long line of creditors queueing up to extract their pound of flesh.
They also face another difficulty in that the company they are employed by apparently has no assets.
First Union which represents many of the affected employees has said it will start legal proceedings seeking to ensure all redundancy entitlements are paid out to all affected staff including those in the head office.
Businesses like Pumpkin Patch operate through what are known as limited liability companies. In simple terms, this means the company or companies exist as legal entities in their own right and are separate from the actual owners.
Consequently, it is the company that will be responsible for any liabilities that the business incurs, rather than the owners.
If the company fails, the owners are generally protected from the financial fall out. This separation between a company and its owners is known as the 'corporate veil'.
There are situations where the corporate veil may be lifted, or in other words, where the owner of a company may be made personally liable for moneys owed by the business. However, these situations are rare in employment law.
Ordinarily, the corporate veil tends to remain in place even when an employee has successfully pursued a claim in the Employment Relations Authority or Employment Court, and established that they are owed money by their employer.
Regardless of whether the employer is in the wrong, if the company does not have the money or any assets it can use to pay, then the employee will usually be plain out of luck.
The most obvious scenario where the corporate veil might be lifted is where the owner of an employer company that is faced with a legal claim deliberately withdraws the company's money and assets. Sometimes these assets are transferred to a new legal entity through which the owner intends to trade going forward.
The intention is to make the employer 'judgment proof' so that if it is ordered by a court to pay anything, it will be unable to do so with its former assets being kept out of reach.
Where the authority or court is satisfied that this has occurred, and that the intention is to sidestep liability arising from the legal claim, the owner may be ordered to pay the employee any amounts owing. Alternatively the new legal entity could be ordered to pay the employee.
But the situations where the authority or court have even considered making such orders have historically been few and far between.
The recently enacted Employment Standards legislation provides a more straightforward pathway for employees to recover what they are owed when the employer pleads poverty.
This applies specifically in cases where an employer has breached an obligation to pay an employee wages or other minimum entitlements such as holiday pay.
If the employee can establish that the owner or some other person was involved in the employer's breach, the courts are now empowered to make that person liable for any amount owing – even in the absence of a conscious attempt to sidestep liability.
The new legislation signals an intent to hold business owners accountable for debts owed to employees.
This will not help the employees of Pumpkin Patch on this occasion because it does not extend to contractual entitlements such as redundancy compensation.
But it is a step in the right direction. It does not seem right that employers should be able to use company structures in order to avoid their obligations to employees.
Susan Hornsby-Geluk is partner at Dundas Street Employment Lawyers.