Can the directors of a limited company be personally liable for the company's breaches of an employment contract?
It has already been decided by the courts that directors of a company can be held responsible for the wrong doing or "torts" of their company if they actively directed them. This means they have to answer for an act or omission carried out in the name of the company but under the control of the director(s) which causes injury or harm to another and which can be actioned through the courts. Up until now the law has been unclear on the personal liability of directors when the unlawful act undertaken in the name of the company is a breach of contract rather than a negligent act.
However a recent case has confirmed that in certain circumstances directors will be personally liable for a breach of contract as well as negligent acts.
The case was brought by three employees who alleged they were ill-treated in their employment by DJ Houghton Catching Services Ltd. They were employed to travel around farms and catch chickens for slaughter. They stated their employer failed to pay them correctly for all hours worked, pay the national minimum wage or pay holiday pay. They worked unreasonably long hours and frequently had their pay withheld for a variety of unlawful reasons or for no reason at all. In short they alleged they were exploited on a grand scale.
The court accepted the evidence of the employees and the question to be considered was whether the director and company secretary of DJ Houghton Catching Services Ltd were personally liable for the numerous breaches of the employees' contracts of employment by the employing company. This question is of greater important when a company is insolvent or has few assets and an employee may wish to pursue the directors for compensation.
Do you need a written contract to breach?
The employees did not have written contracts of employment however this did not mean a contract did not exist between them and the company. Where there is no written contract the terms are usually made up of verbal agreements or promises made in other documents, such as an offer letter, together with implied terms which cover statutory rights such as national minimum wage, holiday pay, hours of work and notice pay. It will also include implied terms like the mutual duty of trust and confidence.
Liability for breach of contract
After hearing of the evidence the judge concluded the director and company secretary were jointly and severally liable for inducing a breach of contract. He found they knew exactly what they were doing when they operated their business on a model which relied upon exploiting its workers to obtain an economic advantage for themselves. He was unimpressed with the directors' version of events and concluded there was "no iota of credible evidence that either director possessed an honest belief that what they were doing would not involve a breach of contractual obligations towards the employees". In his view they clearly realised that the way they operated the business would cause the company to breach its contractual obligations towards its employees and that was enough to make them liable for the losses stemming from the breaches such as wages and holiday pay owed.
Liability will not always be present
Not all directors will be liable for a breach of contract perpetrated by the employing company. As a general principle, a director will not be personally liable for inducing a breach of contract by their company if they act in good faith and within the scope of their authority. To determine whether a director’s actions are in good faith the focus is on the directors' conduct and intention in relation to their duties towards the company - not towards a third party (in this case the employees). However the case does suggest that a breach of contract with a statutory element (such as failing to pay national minimum wage) may indicate a failure of the director to comply with its duties towards a company. Company law also imposes certain duties on directors, among them a duty to promote the success of the company and to exercise reasonable care, skill and diligence in their role which was clearly lacking in this case.