OSHA enforcement under the Bush Administration has been criticized as soft on corporations. Last week, in Part 1 of this series, we looked at two New Jersey cases that suggest otherwise. The Secretary of Labor is asking the courts to disregard the corporate form--to pierce the corporate veil - and hold corporate officers and directors personally responsible for OSHA violations committed by their corporations. How can other corporate officers and directors avoid a similar fate?

Guarding Against Personal Liability

As we discussed last week, courts pierce the veil when they think that corporate officers, directors or shareholders (collectively "officers") are using the corporate form to disguise what are essentially individual actions. Officers can avoid the piercing of the veil then by keeping the corporation's legal identity separate from their own.

On an operational level, officers must engage in an ongoing analysis of the way the corporation conducts its business, and the way officers interact with the company. If you're an officer, there are three questions you should ask to determine if you're doing enough to protect against individual liability:

• Are you and the other officers observing all corporate formalities?
• Are you keeping your personal assets separate from the company's business assets?
• Are you avoiding conduct that could suggest that the corporation is your alter ego?

Let's look at each of these things more closely.

1. Corporate Formalities

Corporations are organized under state corporation laws. The people who create and run a corporation must observe certain formalities including:

• Filing all incorporation papers;
• Filing all annual reports;
• Holding shareholder meetings at least once a year;
• Holding director meetings at least once a year;
• Keeping minutes of all shareholder and director meetings;
• Properly documenting all issuances of corporate stock;
• Issuing consents in lieu of meetings for actions taken without a formal meeting; and
• Keeping other records.

2. Keeping Corporate and Personal Assets Separate

The corporation is supposed to be a distinct "person" under the law, one that's separate from its owners. For a corporation to be treated as a separate person, its assets must be truly its own and not the personal assets of its officers. The corporation's assets must be kept separate from and not "commingled" with the officers' assets. Accordingly, officers should make sure the corporation:

• Has its own bank accounts;
• Maintains separate offices;
• Owns or leases its own equipment;
• Documents any loans to or from officers; and
• Refrains from paying the officers' personal obligations.

3. Treating the Corporation as the Officers' Alter Ego

Officers need to understand that if they act like the corporation is there to serve their personal interests, OSHA and the courts may consider the corporation their alter ego and pierce the veil.

When officers act in the corporation's name, those actions should be for legitimate business purposes, not for the officer's personal gain. And, as a general matter, one person shouldn't be the sole officer, director and shareholder of the corporation. Otherwise, OSHA and the courts may find that the corporation was in fact that individual's "alter ego."

Conclusion

Keep in mind that piercing the corporate veil can be used to hold officers responsible not just for OSHA violations but any liabilities incurred by the corporation, including violations of other statutes and regulations and contractual obligations. But also keep in mind that it's a measure used only when there has been pronounced abuse. Officers who respect the corporate form and maintain a separate identity have little to fear.

The Canadian Perspective

Piercing the Corporate Veil in Canada

As we saw last week, Canadian courts can also pierce the corporate veil and hold officers personally liable. But they tend to be somewhat more reluctant about this than their American counterparts. Nevertheless, the case law shows that courts will do it in clear cut cases of abuse.

The way to avoid veil piercing in Canada is the same as it is in the U.S. In other words, the advice above applies equally to officers of Canadian corporations.

LAW QUIZ

U.S. or Canada?

U.S. and Canadian occupational health and safety laws are similar but not exactly the same. Here's a little quiz to illustrate some of the basic differences and similarities between the laws of the two countries.

Instructions: We'll list a statement that describes the law. If you think the statement is about Canadian law, list "C"; if you think it's about American law, list "A"; and if you think it's about both countries' law, list "B".

1. Workplace safety law is primarily enforced by the federal government:
2. States/provinces may set their own health and safety standards:
3. Supervisors can be held liable for safety violations:
4. Workers' compensation prohibits workers from suing their companies for injuries:
5. Workplace health and safety laws may incorporate standards adopted by non-governmental standards agencies such as ANSI:
6. Workers can be held liable for safety violations:
7. Egregious violations of the workplace safety laws can lead to criminal liability:
8. Most companies are required to establish health and safety committees or appoint a health and safety representative:
9. Seven-figure fines happen with some frequency:
10. Employers can eliminate surprise inspections by voluntarily submitting to higher standards:

ANSWERS:

1. A
2. B
3. C
4. B
5. B
6. C
7. B
8. C
9. A
10. A

Rate Yourself:

• 2 wrong or less: Legal scholar
• 3-5 wrong: Better than average
• 5-7 wrong: Nice try
• 8 wrong or more: Call a lawyer

THIS DATE IN HISTORY

December 12, 1917

During WWI a military train derails at the entrance to the Frejus Rail Tunnel at the foot of Mt. Cenis in what is today Modane, France. 543 French troops are killed.

CORRECTION

This Date in History: December 7

Thanks to SafetyXChange member Richard Hills for pointing out that Wednesday was the 64^th anniversary of the attack on Pearl Harbor, not the 61^st . My math skills will live in infamy.

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