Big changes in personal liability of directors

Under new health and safety legislation coming into effect on 4 April this year company directors may be jailed or face a personal liability of up to $3m for breaches of the law.

That’s got some directors thinking about whether they should continue in the role. Some think not, including Sir Peter Jackson who, along with another director, has resigned from Weta Workshop. 

Section 44 of the Health and Safety at Work Act 2015 details the duties of officers, where an officer is defined as any person occupying the position of a director of a company, any partner in a partnership, and “includes any other person occupying a position in relation to the business or undertaking that allows the person to exercise significant influence over the management of the business or undertaking (for example, a chief executive)”. As it happens, a specific exclusion applies to a Minister of the Crown!

The legislation goes on to say, “to avoid doubt, [an officer] does not include a person who merely advises or makes recommendations”.

The key clauses in Section 44 are:

  • An officer must exercise due diligence to ensure the business complies with the Act.
  • An officer must exercise the care, diligence, and skill that a reasonable officer would exercise in the same circumstances, taking into account the nature of the business and the position they hold. 

Due diligence includes taking reasonable steps to:

a)  Acquire, and keep up to date, knowledge of work health and safety matters; and

b)  Gain an understanding of the nature of the operations of the business or undertaking and generally of the hazards and risks associated with those operations; and

c)  Ensure the business uses appropriate resources and processes to eliminate or minimise risks to health and safety from work carried out as part of the conduct of the business or undertaking; and

d)  Ensure the business has appropriate processes for receiving and considering information regarding incidents, hazards, and risks and for responding in a timely way to that information; and

e)  Ensure the business has processes for complying with any duty or obligation of the Act; and

f)  Verify the safety measures are in place and resources are in place to put it into practice.

Importantly, the definition of a “worker” has been extended and now includes: employees, contractors, subcontractors, an employee of a labour hire company, outworker (including a homeworker),  an apprentice or a trainee, a person gaining work experience or undertaking a work trial, and volunteers.

These are very demanding requirements to meet, especially given the definition of a worker includes people employed by others and those working off-site. 

In practice it requires a director to be hands on, when directors typically (certainly external directors) take a more hands-off role.

All directors will now need to reflect on whether they are, or want to be, sufficiently involved in the management of the business as is now being demanded of them. 

Clearly Peter Jackson is of a view that he is not involved in the business at the level required to  meet the new responsibilities, hence his resignation from Weta. He remains a shareholder (shareholders are obviously not treated as officers) and it is very likely he will continue to have a say on important strategic matters regarding the company, so from an operational point of view nothing much is likely to change.  

I expect the directors of other companies will follow suit. The days of a directorship being a cushy number paying well with little time required, are numbered. Fewer external experts and passive shareholders are likely to take on the role as a director when the potential personal liability is so great. They are more likely to instead take on a more informal role (with the same level of remuneration) on an “Advisory Panel”, which in effect, would provide governance and strategic advice but without having the liability of a director.

It is also likely that managing directors will demand a better remuneration package to compensate for the personal liability risks that they will now face – and who could blame them.

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