Legal Updates

Employing of employees without adhering to the law does not, by itself, justify piercing the corporate veil

January 26, 2021

A foreign worker was employed by a company that did not pay him his full benefits, and sought, after the company has declared liquidation, to personally obligate one of the company's shareholders, who paid the employee's salaries and was responsible for the company's funds and wages, to personally pay him the amounts due.
The Court held that there is no justification to oblige the shareholder to personally pay the company’s debt to the employee. The principle of piercing the corporate veil which allows to oblige a shareholder for the company's debts is intended for extreme cases where the principle of the company's separate legal entity has been abused by the shareholder in order to evade an obligation taken on by a shareholder in improper conduct. Piercing the veil, therefore, is reserved for cases in which the shareholder makes conscious use of the company in order to defraud or deprive the company's creditors. In addition, it must be examined whether a shareholder has a holding in the company to such an extent that will allow him effective control or supervision over the company's activities, whether he has fulfilled his obligations to the company, and whether the company can repay its debts. Even when dealing with an employer-employee relationship, it is not enough for the company to employ workers in violation of the law to justify piercing the corporate veil per se and it must be shown that there is justification for piercing the veil due to the shareholder’s action in bad faith or intent to evade compliance with the employee employment law while taking an unreasonable risk regarding the company’s ability to pay its debts. Here, the shareholder was a minority shareholder in the company and was not the active dominant factor in the company in a manner that gave him effective oversight of the company’s operations. Similarly, the shareholder did not act in bad faith or with the intention of using the company's separate legal entity for the purpose of denying the employee's rights and therefore the shareholder cannot be personally liable for the company's obligation to the employee.