Legal Updates

Circumventing labor laws and even issuing fictitious pay slips are not by themselves grounds for piercing the corporate veil

October 11, 2020

An employee was employed by a company for over 17 year. After his demise, his heirs discovered that during the entire term of his employment, no deposits were made to a pension fund and demanded payment form the company and its shareholder.
The Labor Court held that the employee has a responsibility to ensure his pension deposits, therefore the compensation to the heir is limited to a period of 7 years back and, in any case, the shareholder is not personally liable. As a rule, a civil suit reaches its statute of limitation after 7 years. However, if the employee was unaware of the facts, due to reasons beyond his control, and could not reasonably have discovered such, the statute of limitation commences to run only when the employee became aware of the facts. While the employee was not aware of the fact that the employer was not making deposits, an employee need exercise reasonable caution and ensures his rights are being upheld. The fact that the employee paystubs did not include a breakdown of the salary components, in addition to the fact that for years the employee did not receive annual reports from the pension fund with details of the deposits, should have alerted him that something was amiss, and drive him to make an inquiry with the employer. Even the best of employers can make mistakes and when such occur, the employee is expected to alert the employer. due to the fact that the employee did not hold up to his responsibility to use reasonable caution and make sure the employer acts pursuant to the law, there is no justification to extend the statute of limitation and the heirs’ claim is limited to a term of 7 years prior to the date of the claim being made. A company is a separate legal entity from its shareholder, but under labor law it is easier to pierce the corporate veil, for example when an employer continues to employ its employees under difficult financial circumstances, while taking an unreasonable risk in continuing their employment, emptying the company of content and transferring its activities to another company, scam/fraud or the formation of rotating companies. It is not enough to just circumvent the various labor laws and even issuance of fictitious pay slips (as contended by the heirs) in order to constitute a ground for piercing the corporate veil and therefore the shareholder is not personally liable for the company's debts.