Earlier this year, OSHA did something very significant. But its actions attracted little publicity. So you might not have heard about them. What did OSHA do? It cited two New Jersey corporations for willful violations. One citation carried a $96,300 fine; the other a $196,000 fine.

Although these are fairly steep fines, this isn't what made the cases significant. The important part is that OSHA also cited the father-and-son team that owned the corporations. The father was the president and the only officer and director of both corporations. The son, a lawyer whose only clients were the corporations, ran the corporate offices out of his basement.

These cases show how OSHA is using a legal doctrine called "piercing of the corporate veil" to hold corporate officers and directors personally responsible for the OSHA violations committed by their companies. This article will analyze the cases and what they might portend for future OSHA enforcement.

What Is Piercing the Corporate Veil?

Corporate officers, directors and shareholders (which, for simplicity sake, we'll refer to collectively as "officers") normally aren't personally liable for OSHA violations committed by their companies. That's because the corporation is considered an independent legal entity that's responsible for its own debts and liabilities. The money needed to satisfy those debts and liabilities thus must come from corporate coffers, not officers' pockets.

But the protection against liability enjoyed by corporate officers is subject to limits. If a court thinks that officers are using the corporation to cover what are essentially their individual decisions and actions, the court will disregard the corporate form and hold the officers personally responsible for the corporation's liabilities. This is called piercing the corporate veil.

The New Jersey Cases

This is what OSHA is trying to do in the two New Jersey cases. OSHA is arguing that because the corporations had no "distinct personalities," the father and son were the real authors of the corporations' actions and thus should pay the fines out of their own pockets.

The Administrative Law Judge (ALJ) in the $96,300 case agreed; but the ALJ in the other case didn't. The Occupational Safety and Health Review Commission is considering both cases [Sec. of Labor v. Avcon, Inc.; Sec. of Labor v. Altor, Inc.].

Conclusion

Piercing the corporate veil is relatively unusual. But it would be a mistake to dismiss the Avcon and Altor cases as an aberration. The Secretary of Labor is advancing a theory that would make it much easier for OSHA and courts to pierce the veil in future cases. If she succeeds, individual officers may find themselves writing checks for hefty fines, and maybe even spending time in prison.

LEGAL CITATIONS

Sec. of Labor v. Altor, Inc.: OSHRC Docket No. 99-0958.

Sec. of Labor v. Avcon, Inc.: OSHRC Docket Nos. 98-0755 and 98-1168.

Next week, in Part 2, we'll discuss how officers can avoid the piercing of the corporate veil.

The Canadian Perspective

Piercing the Corporate Veil in Canada

Canadians also organize businesses as corporations to limit the personal liability of officers. The notion that Canadian corporations have a "veil", that is, are legal entities responsible for their own obligations, goes back to a venerable 1897 case from the House of Lords called Salomon v. Salomon.

But, as in the U.S., courts in Canada can pierce the corporate veil and hold officers personally responsible for a corporation's obligations (including OHS liabilities) in the interest of fairness and justice. Some Canadian courts have been assertive about using this discretion.

For example, in 1999, the Ontario Court of Appeal held officers personally liable for trying to recruit valued employees already under contract to competing firms. The officers claimed that it was inappropriate to pierce the veil because they were just doing their job. In the past, courts wouldn't hold individual officers liable when they were "acting within the scope of their duties" and advancing the interests of the corporation. But the Ontario court pooh-poohed this restriction and pierced the veil [ADGA Systems International Ltd. v. Valcom Limited].

But, despite the Valcom case, Canadian courts tend to be more reluctant than their U.S. counterparts to pierce the corporate veil and do so only in limited situations:

• When officers form or use the corporation to avoid a legal responsibility (like paying taxes) or commit fraud; and/or
• When the corporation isn't a real entity but a creature or puppet of the officers.

LAWYER-TO-ENGLISH DICTIONARY

Subrogation

sub-ro-GAY-shun

How It Comes Up: Many insurance policies give the insurance company the right of subrogation in case the insurer has to pay the policyholder for a loss caused by a third party.

What It Means: Subrogation lets the insurance company take over the policyholder's right to sue the third party for the loss.

Example: A factory owner submits a claim to its property insurer after a fire. The insurer pays the claim. The fire was started by the factory owner's contractor. So the owner has a legal claim against the contractor. If the insurance policy includes a subrogation clause, the insurer would have the right to step into the factory owner's shoes and sue the contractor.

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