Changes to personal liability for Directors and Officers

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The media coverage of Kirsty Fraser-Kirk’s claim against David Jones’ former Chief Executive Officer, Mark McInnes, and other directors, further highlighted the reputational risk to business and impact of potential personal liability of claims made by employees against directors.

A recent Australian Institute of Company Directors survey has also highlighted that directors and officers concern for their personal liability is adversely impacting Boardroom appointments and retention. The survey particularly focused on new responsibilities under the Model Work Health and Safety Act (Act).

The Act consolidates existing responsibilities for directors and officers and, importantly, introduces new obligations that must be complied with from 1 January 2012. It is critical to ensure that directors and officers are aware of their current and imminent obligations to ensure good corporate governance and avoid personal liability.

Current obligations – until 1 January 2012

With the exception of South Australia, Australian jurisdictions do not impose a positive duty on an employer’s officers. Instead, the following approaches are currently adopted:

1. In New South Wales, Queensland and Tasmania, directors and officers are considered to be liable for contraventions of Occupational Health & Safety (OHS) laws unless they are able to establish one of the following defences:

• they were not in a position to influence the conduct of the company in relation to the offence and, in Tasmania only, that they had no knowledge of the offence; or
• they exercised all due diligence to prevent the contravention.

1. In Victoria, the Northern Territory and the ACT, directors and officers are liable if the offence was caused by their failure to take reasonable care.
2. In Western Australia, directors and officers are only personally liable if the offence was due to their neglect or was committed with consent.

New obligations – from 1 January 2012

In addition to the primary duties owed by employers, the Act imposes the following duty on officers:

“If a body has a duty or obligation under this Act, an officer of that body must exercise due diligence to ensure that the body complies with that duty of obligation” [emphasis added].

Due diligence for the purposes of the Act requires an “officer” of a company to:

• acquire and keep up to date knowledge of work, health and safety matters;
• gain an understanding of the nature of the operations of the business or undertaking of the company and of the hazards and risks associated with those operations;
• ensure that the company has available for use, and uses, appropriate resources and processes to enable hazards associated with the operations of the business or undertaking of the company to be identified and risks associated with those hazards to be eliminated or minimised;
• ensure that the company has appropriate processes for receiving and considering information regarding incidents, hazards and risks and responding in a timely way to that information;
• ensure that the company has, and implements, processes for complying with any duty or obligation of the company under the Act; and
• verify the provision and use of the resources and processes referred to above.

The positive obligation emphasises corporate compliance through sound corporate governance and encourages safety leadership.

How to discharge due diligence?

There are a number of ways fulfilling due diligence, such as:

1. Understanding the hazards of the business by:

• learning about the nature of operations and generally the hazards and risks associated with those operations
• making site visits
• meeting regularly with OH&S leaders
• reviewing the businesses’ safety systems and best practice to ensure appropriate checks and balances are in place

2. Gaining knowledge of safety performance:

• undertaking a legal compliance audit of the business, such as ensuring consultation processes have been developed and implemented
• ensuring that risks and hazards are being appropriately controlled
• reviewing appropriate resources and processes to enable identification, elimination or control of OHS hazards and risks and compliance with specific obligations

3. Providing safety leadership by:

• leading by example
• being aware of legislative changes and compliance requirements
• educating and explaining to others, for example through training, policies and procedures
• holding workers accountable for safety performance

4. Ensuring good corporate governance:

• requiring and reviewing regular OH&S board reports that contain a sufficient level of detail (at least quarterly)
• have a process for receiving, considering and timely response to information on incidents, hazards and risks
• ensuring that directors respond to issue and have a proactive attitude to safety
• be actively engaged in safety and lead from the top

What are the sanctions?

If officers breach the above obligations, the personal liability can be severe depending on the degree of culpability and risk or degree of harm. Category 1 penalties are the highest and involve death or serious injury with an element of recklessness as to whether the incident would happen. Penalties include fines up to $600,000 fine and/or 5 years imprisonment. Category 2 and 3 penalties carry fines up to $300,000 and $100,000 respectively.

Implications for directors and officers

There are a number of steps that can be taken prior to 1 January 2012, to ensure readiness for the changes, namely:

• Determine who are “officers” in your organisation
• Ensure all officers are aware of their obligations and have received appropriate training
• Reviewing and revising the businesses’ corporate governance approach to safety to ensure an effective system existing so management can meet its ‘due diligence’ responsibilities
• Understanding the regulations and resolve any strategic, structural and consultation issues within the business to address the new requirements
• Undertaking a legal risk and gap analysis for contracts to limit exposure areas
• Reviewing current policies and procedures and revise in light of the changes. These should to be implemented on or before commencement of the Act
• Developing effective consultation and issue resolution processes or reviewing current processes