When employers hide behind the corporate veil

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Many employers try to evade the law by closing down one business, and opening another. However, this ploy has become less and less likely to succeed. Especially where the employer opens the same business, under a different name and/or in a different place, the new business could be found liable for the compensation payment award made against the old business. 

The new business might be registered as a separate company, or close corporation to the old one, which would normally, in terms of the Companies Act, protect it from  liability for any legal obligations of any other entity. However, arbitrators at the CCMA and bargaining councils - as well as judges in the Labour Court - may be willing to ignore this corporate protection, where they deem it appropriate. This practice of ignoring the Companies Act protection is known as ‘piercing the corporate veil’ because it breaks through the protective shield behind which, the employer is hiding.

This the courts and arbitrators consider, where: 

  • They believe that the employer is purposely switching businesses in order to evade labour law compliance, 
  • There is a clear and close connection between the old and new business, or
  • The employee could lose out if the corporate veil is not pierced. 

 

For example, in the case of Marllier vs G7 Technologies cc & Another (2004, 4 BALR 480), the employer retrenched its production manager while the owners of the employer were still running other similar profitable businesses. The CCMA found that: 

  • The first cc had not been closed down for genuine operational reasons but rather for the convenience of the owners, 
  • The employer had failed to consult with the employee before retrenching him, 
  • The business of the second cc was so intertwined with that of the first one that they could be regarded as a partnership, 
  • The owner’s reliance on the juristic personality of the second cc as a means of avoiding liability for the employee’s retrenchment justified the piercing of the corporate veil, 
  • The dismissal was unfair, and 
  • The employer had to pay the employee six months’ remuneration as compensation for the unfairness.

 

In the case of Domingo vs Ad-Bag Advertising CC (2008, 7 BALR 646), the arbitrator found that the dismissal was unfair, and awarded the employee nine months’ remuneration in compensation. However, the arbitrator pierced the corporate veil, and found the two owners of the business personally liable for the payment of this compensation, despite the fact that officially the employer was a close corporation. This was because the owners lied during the hearing, and because there was a danger that the business might not pay the compensation amount, due to its impending closure.

 

In the light of these decisions it is most important for employers to: 

  • Act cautiously before moving their business operations from one company or cc to another,
  • Ensure that any such move is carried out for legitimate reasons, 
  • Ensure that the rights of employees will not be unduly prejudiced by the transfer of the business operations, and
  • Avoid misusing the ownership of other companies in order to get rid of employees.

 

Employers must also ensure that when considering retrenchments: 

  • There are truly no alternatives to the loss of jobs, 
  • Potential retrenches are properly consulted, and 
  • The whole process is managed under the guidance of a labour law expert.

 

 BY   Ivan Israelstam, Chief Executive of Labour Law Management Consulting. He may be contacted on (011) 888-7944 or 0828522973 or on e-mail address: ivan@labourlawadvice.co.za. Go to: www.labourlawadvice.co.za. Edited by the skills portal.

To book for our 18 October course on COMBATTING WORKPLACE ABSENTEEISM please contact Ronni on ronni@labourlawadvice.co.za or 0845217492

 

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