Companies’ administrators: Extension of liability arising from the non-compliance of labor obligations

Argentine labor law contains no express provision regulating the personal liability of directors, administrators, managers or partners of corporate entities in the event the corporate entities do not comply with their labor or social security obligations.

In order to extend liability to directors, labor law judges have applied the general principles of the Companies Law (Sections 274 and 59 of Companies Law, “CL”). However, this is a recent phenomenon, started by the National Labor Appeal Court in 1997.

In this manner, labor law courts have extended liability to directors and administrators in cases of unregistered or improperly registered labor relationships.This has created a heated debate among legal commentators.

Pursuant to Sections 54, 59 and 274 of the CL, partners or administrators are considered liable when their personal conduct has been reprehensible and illegal, causing harm to the company, its shareholders or third parties.

Currently there are two open questions on the extension of liability:

(i) The first question relates to jurisdiction.One view is that it is a matter for the commercial courts; another is that these matters are of labor nature and can be addressed by the labor courts.In the 2001 case “Vera, Beatriz v. Ameduri” the Supreme Court for the Province of Buenos Aires decided that when an employee wants a labor sentence to be applied to partners, controllers or administrators, the courts with jurisdiction are commercial courts.Within the city of Buenos Aires, labor courts have jurisdiction to hear these commercial matters.

(ii)The second question relates to the time in which administrators or partners should be served with a complaint.There is general agreement that the extension of liability must be addressed from the beginning of the proceeding, otherwise the principles of justiciabilityand the right to due process, granted in Section 18 of the Argentine Constitution, might be affected.Among others, Division I of the Labor Court in the case “Villaroel v. Textil Corea” and Division X in the case “Moschitta v. Echarson” have come to this conclusion.However, there is a second view which states that the extension of liability may be addressed at the execution stage (under Section 6 of Civil and Commercial Procedure Code).Division III of the Labor Court in the case “Ibel Emilio v. Dam SRL” has supported this view.

Two case-law positions

Within the labor courts two different positions regarding the extension of liability may be pointed out.

A broad interpretation considers that the extension of liability occurs upon the mere evidence of irregular registration, regardless of the regulations relating to liability as stated by the law.This position proposes a sort of administrators’ objective liability derived from being a member of the management of a corporate entity.The decisions of Division III of the Labor Court in the 1997 case “Delgadillo v. Shatel SA” and the 1998 case “Duquelsy v. Fuar” support this view where personal, unlimited and joint liability was extended to those responsible for the administration of corporate entities arising out of illegal labor acts.

During the last few years in several different opinions, Divisions I, III, IV, VII, IX (which changed its position after the decision rendered by the Argentine Supreme Court in the case “Palomeque”) and Division X have adopted this position, with some differences, including the incorrect reference to Section 54 of the CL.

On the other hand, most of legal commentators agree that the liability of the directors is not presumptive, but requires evidence depending on the specifics of the case, and finding the lack of registration or improper registration within the labor relationship insufficient to create liability.Some judges agree with this opinion, along with Division II, V, VIII and IX of the labor court.

The position of the Supreme Court

Until now, the Argentine Supreme Court, in its former composition, rendered decisions on this matter in two judgments.In December 2002, in the case “Carballo Atiliano v. Kanmar S.A.”, and in March 2003, in the case “Palomeque v. Benemeth.” In both cases the Court reasoned that the administrators of a corporate entity should not be held jointly and severally liable with the corporate entity due to the fact of an unregistered labor relationship.The Court’s opinion was based on the following reasons:

(i) extending the liability violates both property rights and due process because the requirements for the burden of proof are inverted, and the exceptional nature of the grounds for liability set forth in Section 59 of the CL have not been taken into account;

(ii) the manner in which labor law judges have applied the CL is not a reasoned interpretation of the law in force;

(iii) judges have not considered that companies are entities different from their administrators; and

(iv) in these cases, it was not proven that the corporate entity was fictitiously or fraudulently set up in an illegal manner with the purpose of violating the law and affecting public policy under the shield of its corporate entity.

It is important to highlight that the composition of the Argentine Supreme Court has changed and the current justices could change the Court’s opinion from the judgments mentioned above by adhering to broader interpretations and extending liability to the directors of corporate entities.

Legal advice to minimize risks

Considering the previously mentioned cases and the different legal positions regarding the extension of liability to directors, it is difficult to establish a legal strategy to minimize the risks of being held jointly and severally liable.

In addition, it is extremely difficult to minimize the risk that the directors of corporate entities will be compelled to appear in court on the basis of labor irregularities of the company they direct.

Taking this into account, it seems that the best legal advice for directors is to apply the provisions of Section 274 of the CL.According to Section 274, any director who took part in or had knowledge of a decision or resolution will be exempted from liability if he submits a written statement of objection and gives notice to the statutory auditor before his liability is notified to the board of directors, the statutory auditor, the members of the meeting or the competent authority, or before a legal action is commenced.

In practice, compliance with this provision may be almost impossible.Most of the cases where the extension of liability should apply are related to people who allege an improper registration made by the company, but the classification of employee or self-employed person depends on the specifics of each case and it is not clearly evident, even to experts in this area.

In conclusion, there is no accurate legal remedy to prevent directors or administrators from being sued or held liable by the labor courts for the non-compliance of the labor provisions.In our opinion, as long as the Argentine Supreme Court maintains this approach, it seems that the risks are limited to labor law suits and judgments of the lower courts until the legal opinion of the Argentine Supreme Court is consolidated within the labor courts, although this seems unlikely to occur.