Liability of directors following labour actions Contributed by Marval O'Farrell & Mairal December 21 2011 Introduction Legislative position Comment Introduction Directors, partners, shareholders or controlling persons of a corporation can face potential liability as a result of labour actions pursued against the corporation. In the case of an action claiming that an employment relationship was not registered (or was registered incorrectly), the corporation's liability may be jointly and severally extended to its directors, partners, shareholders or controlling persons, affecting their individual estate (under Sections 54,(1) 59(2) and 274(3) of the Companies Law). Legislative position The legislature has taken one of two positions regarding the responsibility of directors, partners and controlling persons for labour issues - the restrictive or the comprehensive position. In March 2003, in Palomeque v Benemeth,(4) the Supreme Court applied the restrictive position. It ruled that directors were not to be held jointly and severally liable with the corporation for unregistered labour relationships merely due to their capacity as directors. However, in a 2007 decision the court upheld a ruling by the National Labour Court of Appeals, imposing liability on directors or shareholders, that contradicted the criteria set forth in Palomeque v Benemeth.(5) Thus, the definitive ruling on the matter at present is that of the National Labour Court of Appeals. The National Labour Court of Appeals applied the comprehensive approach, thus extending the responsibility of directors to include the following circumstances: l hiring personnel and failing to register them in the labour records;(6) l registering a lower salary than that actually earned by an employee;(7) l registering an employment date that is later than the real date; l non-payment of social security contributions; l corporate infra-capitalisation;(8) or l in general terms, any situation that might be interpreted as abuse of the corporate veil, to the detriment of employees or the social security agencies. Of the circumstances above, the most common cause of directors' liability has been deficient labour registration, which is currently upheld by most panels of the National Labour Court of Appeals.(9) This position could be construed as a form of directors' objective liability derived from membership of the board of directors. In line with the increasing tendency of courts to take the comprehensive position, in a recent case(10) the National Labour Court of Appeals extended responsibility to directors, taking the view that they were, or should have been, aware of a discriminatory act by the corporation and should have prevented it. The case concerned the termination of an employee within the term of special protection for maternity (sevenand- a-half months) following the date on which the plaintiff had adopted four children. However, there is a tendency among legal authors to require caution when applying such penalties. Comment As the comprehensive position has been commonly upheld and its scope is still expanding, when taking up a directorial role (or acting in that capacity), directors should Employment & Labour - Argentina Authors Javier E Patrón Enrique M Stile ensure that systems are in place to monitor the enforcement of corporate discrimination policies and verify the enforcement of labour and social security laws should be implemented. In the event of a breach of a legal obligation, the regulations provide that leaving a written record of the breach in the corporation's minutes book and requiring the regularisation of such situation should help to exempt such persons from liability. In addition, the use of a directors' and officers' insurance policy is an option in today's litigious environment and it is common for corporations to grant letters of indemnity to their directors. For further information on this topic please contact Javier E Patrón or Enrique M Stile at Marval O'Farrell & Mairal by telephone (+54 11 4310 0100), fax (+54 11 4310 0200) or email (jep@marval.com.ar or ems@marval.com.ar). The Marval O'Farrell & Mairal website can be accessed at www.marval.com.ar. Endnotes (1) Section 54 states that: "Damages caused to the corporation due to willful or negligent behavior of its partners or those who, despite not being partners, control it result in the wrongdoers being jointly and severally liable for damages, without being able to claim that such damages were offset by profits obtained from other businesses as a result of their performance. Partners or controlling persons who use the corporate funds or assets for their individual purposes or businesses or those of third parties are required to hand over to the corporation any resulting profits, being individually liable for any related losses. Piercing of corporate veil. Any corporate activities performed as disguise for the fulfillment of non-corporate purposes and which constitute a means for breaching the law, public policy or good faith or frustrating third-party rights will be directly attributable to the partners or controlling persons who made it possible, who shall be jointly and severally liable for the damages caused." (2) Section 59 states that "directors who default on their obligations are unlimitedly, jointly and severally liable for the damages resulting from their acts or omissions". (3) Section 274 states that: "Directors are jointly and severally liable vis-à-vis the company, its shareholders and third parties for misperformance of duties, according to the criterion set forth in Section 59, and for breach of the laws, bylaws or regulations and any other damages caused by willful misconduct, abuse of authority or gross negligence." (4) Supreme Court of Justice, April 3 2003. (5) Davedere v Mediconex SA, Supreme Court of Justice, May 29 2007. (6) Oller Amilcar v Caled Vía Pública SRL, dismissal, National Court of Appeals in Labour Matters, Panel I, February 20 2008. (7) Doldan v Ted Bodin SA, dismissal, National Court of Appeals in Labour Matters, Panel IV, March 31 2006. (8) Arancibia v Rodríguez, National Court of Appeals in Labour Matters, Panel III, September 22 2008. (9) Canción v Fernández García SA, National Court of Appeals in Labour Matters, Panel III, July 23 2008; Ventura v Inverge SA, National Court of Appeals in Labour Matters, Panel II, April 23 2008; Oller v Caled Vía Pública, dismissal, National Court of Appeals in Labour Matters, Panel I, February 20 2008; and Caminata v Clínica Priovada Alcorta SA, National Court of Appeals in Labour Matters, Panel V, June 12 2007. (10) Solano v Liderar Compañía General de Seguros SA, dismissal, National Court of Appeals in Labour Matters, Panel VII, September 21 2011. 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