Because employment relationships are often a matter of personal service, the level of emotion in labor law claims can be matched only by that of family law cases.
Many employees have come to our office with genuine causes of action against the employing company, but have asked to file the claim not only against the employing company (which is an independent legal personality), but also against the direct manager or the company’s owners — arguing that they are the ones who caused the distress, the personal harm and the damage, that they are the “guiding spirit” behind the company and its decisions, and so on.
On this matter, two questions must be asked:
First, is it even possible to file the claim against the company’s managers or owners?
Second, assuming it is possible, is it advisable?
Generally, a claim in an employment relationship is supposed to be filed against the employer, who alone is responsible for paying wages and for the rights arising under labor law. In most cases the employer is the company at which the employee is employed. The identity of the employer can be easily determined: its name should appear in the employment agreement / notice to employee that the employee received at the outset of the employment relationship, as well as on the pay slips.
Between the employee and the owners of the employing company (including where the owner is a parent company) there is no employment relationship, since a different legal personality is involved. The same is true of the relationship between the employee and the company’s various officers (CEO, deputy CEO), and likewise the direct manager.
Therefore, as a rule, a claim for rights arising under labor law cannot be filed against parties who are not the employer, and accordingly the company’s owners or its officers — including direct managers — cannot be sued in respect of these rights.
There is an exception to this: rare cases in which the “veil of incorporation” between the company and its owners is pierced. Piercing the corporate veil is a legal act in which a company’s debts are attributed to its owners.
However, under the legal doctrine (a binding ruling of the National Labor Court and the Supreme Court), in labor law matters the corporate veil will be pierced only in rare cases, and only to the extent the Labor Court is persuaded that there is activity marked by a lack of good faith, intended to harm the rights of the company’s employees, where improper use is made of the company’s separate legal personality (acts of fraud, commingling of assets, asset stripping and so on) or where the identity of the corporation changes while its operator remains the same employer.
It should be noted that a general allegation to this effect is not enough; evidence must be presented.
To illustrate the matter, I will quote the words of the Honourable Judge Ilan Itach (currently serving as Deputy President of the National Labor Court), in a judgment he gave while a judge at the Tel Aviv Regional Labor Court (LC 10106/07 Anat Aharoni v. Sahar Signage Industries (1986) Ltd., 11.10.2011):
“The plaintiff argues that the defendant is the ‘guiding spirit’ behind the acts and omissions of the defendant company, that he acted in bad faith towards the plaintiff, and that he should therefore be held personally liable for the company’s debts.
In order for the plaintiff’s claim to hold Defendant No. 2 personally liable for the company’s debts to be accepted, the plaintiff must prove that the grounds for piercing the corporate veil have been met.
As is well known, the clearest ground for piercing the veil is that ‘category of cases indicating an improper use made by shareholders of the company and of its separate legal personality. The concept of “improper use” includes several situations, chief among them acts of fraud, commingling of the assets of interested parties with the company’s assets, inadequate financing of the company’s operations, stripping assets from the company to its shareholders without adequate consideration, and so on’.
In our case the plaintiff did not prove that circumstances justifying piercing the veil exist — she did not prove that the defendant made improper use of the company’s legal personality; established the company for an improper purpose; commingled his personal assets with the company’s assets; stripped assets from the company without adequate consideration; or carried out acts amounting to fraud. The fact that we found the defendant’s conduct to be improper when he unlawfully dismissed the plaintiff on account of fertility treatments does not prove circumstances justifying the piercing of the corporate veil and holding him personally liable for the company’s debts.
Accordingly, the claim against Defendant No. 2 is dismissed”.
It should be noted that, under an amendment to the Companies Law, it was established that piercing the veil is possible only against a shareholder and not against a company officer.
In the case of an officer (such as a CEO, for example), personal liability may be imposed in exceptional and rare cases, but this is not the ordinary course, for orderly commercial life cannot be conducted without a clear separation between the company and its owners and managers. In order to impose personal liability on a company officer, it must be proved that the officer bears “subjective personal fault” with respect to the company’s conduct, involving indications of deception, fraud or malice. This too must, of course, be supported by evidence.
It is not enough that the party “at fault” for the tort against the employee is a manager at the company. Thus, according to the National Labor Court in LAA (National) 59941-11-14 Atura Industries Ltd. v. Yoram Shitrit (19.10.2015):
“According to the statement of claim, throughout, Boscolo acted together with Atura both in the dismissal process and in breaching the undertakings, and the statement of claim raised no allegations of acts or omissions by Boscolo establishing his personal liability […]. General allegations that Boscolo and Atura, jointly and severally, breached undertakings towards Shitrit or his rights as an employee are not enough to establish personal liability on Boscolo’s part, since Boscolo’s very status as a manager and organ of Atura does not, in itself, impose on him personal liability for Atura’s actions. […]. In sum: we are of the view that the applicants’ argument should be accepted, that the statement of claim in its current form does not disclose a cause of action against Boscolo, whether on the ground of a joint employer or on the ground of Boscolo’s personal liability or the piercing of the corporate veil.”
It should be borne in mind that where a defendant who ought not to have been joined to the claim is joined (for example, a company owner or an officer), and the claim against them is dismissed, the plaintiff will pay that defendant legal costs, even if the plaintiff succeeds in the claim against the company.
Therefore, unless there is conclusive evidence of improper use of the separate legal personality (i.e. that one of the cases detailed above exists) or of “subjective personal fault,” it is advisable to refrain from filing a claim directly against the company’s owners or against a manager at the company, even if that person was the reason the employee did not receive their rights.
Before concluding, it is important to clarify that the above is relevant to claims concerning rights arising under labor law. Company owners, officers and other employees at the company may of course also be sued on the basis of special causes of action, such as defamation, sexual harassment, invasion of privacy and so on.
In sum, the role of a labor lawyer is to defuse the emotions from the process and to give the client the correct advice regarding the identity of the defendants in a claim for rights.
Even if the client insists and asks to sue the company’s managers/owners personally, the lawyer must clearly explain to the client the prospects of the claim, the way the Labor Court views the filing of such frivolous claims aimed at pressuring the company’s owners/managers, and the risk of being ordered to pay costs if and when such a claim is dismissed.
