Court of Appeal Clarifies the Doctrine of Common Employer Liability, Holds Director Personally Liable

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Bennett Jones LLPThe Ontario Court of Appeal recently clarified that common employer liability on an interrelated corporation requires objective evidence of an intention to create an employer/employee relationship between the employee and the alleged common employer.

The Court also confirmed that former employees need not exhaust execution efforts against a corporation before personally obtaining judgment against the corporation’s directors for unpaid wages and vacation pay under section 131 of the Ontario Business Corporations Act (OBCA).

The Court’s decision in O’Reilly v ClearMRI Solutions Ltd. is a welcome clarification of the important interplay between the doctrines of corporate separateness and common employer liability. The decision also serves as a warning to directors of their potential personal exposure to employees for unpaid wages and vacation pay under the OBCA.

Background

William O’Reilly served as the Chief Executive Officer and a director of ClearMRI Solutions Ltd. (ClearMRI Canada) as well as its wholly owned subsidiary, ClearMRI Solutions, Inc. (ClearMRI US). Tornado Medical Systems, Inc. is the majority shareholder of ClearMRI Canada.

O’Reilly had a written employment agreement with only ClearMRI US, but he reported to and his performance goals were set by, the board of directors of ClearMRI Canada, and he served as the CEO of both companies. O’Reilly did not hold a formal position with Tornado.

When his employment ended, O’Reilly was owed about US$400,000 in unpaid wages, vacation pay and on an outstanding loan he had made to ClearMRI Canada. O’Reilly started an action seeking recovery of all outstanding amounts from both ClearMRI companies and Tornado, alleging that they all were his common employers. He also sued the directors of Tornado and ClearMRI Canada for unpaid wages and vacation pay under section 131 of the OBCA. O’Reilly obtained default judgment against the ClearMRI companies, and then successfully moved for summary judgment against Tornado and the individual directors.

The motion judge granted O’Reilly’s motion on the basis that Tornado was O’Reilly’s common employer and the OBCA made the directors of Tornado and ClearMRI jointly and severally liable for O’Reilly’s unpaid wages and vacation pay.

Tornado and one of its directors appealed the motion judge’s decision.

The Ontario Court of Appeal Decision

The Ontario Court of Appeal set aside the summary judgment against Tornado and substituted an order dismissing the motion against it. In so doing, the Court found that the motion judge failed to articulate and apply the correct test to determine a common employer, and erred in her analysis of the employment agreement, effective control and inter-corporate relationships as factors in favour of a finding that Tornado was a common employer.

The Court clarified that the test to determine whether corporations are common employers requires evidence of an intention to create an employer/employee contractual relationship between the individual and respective corporations within the group. The parties’ subjective thoughts and intentions are irrelevant to the analysis. The onus of proving the existence of a common employer lies with the party making the assertion, typically the employee.

Conduct that is relevant to the question whether an employment relationship exists between an individual and an alleged common employer includes: (a) conduct that reveals where effective control over the employee resides (i.e., is the parent corporation in fact responsible for the selection of employees, payment of wages, or the ability to terminate the employee of a subsidiary)—this is a distinct concept from corporate control over a subsidiary company, such as the ability to vote on the election of directors; and (b) the existence of a written employment agreement specifying a single employer other than the alleged common employer, which normally argues against a finding of more than one employer.

The Employment Agreement

While a written employment agreement with the alleged common employer is not required to find liability, it is necessary for the court to find that a contractual employment relationship, written or unwritten, between the individual and the alleged common employer exists. When there is a written employment agreement but it names a corporation other than the alleged common employer, the court must assess how such an agreement bears on whether there is an intention to create an employment agreement with the alleged common employer. Such a written agreement with only one entity is not determinative against finding a common employer, but it can be at least indicative that the only employer is the one named in the written agreement. Notably, in this case the written employment agreement with ClearMRI US did not preclude a finding that O'Reilly was also an employee of ClearMRI Canada where the evidence was overwhelming in this respect (indeed, no one contested this conclusion), but it did bear on whether he was an employee of the ultimate parent Tornado.

In O’Reilly, the Court found that the motion judge failed to determine whether there was a contractual relationship between Tornado and O’Reilly and failed to undertake the requisite analysis of the effect the written employment agreement in place had on that determination.

Effective Control

The Court found that none of the factors on which the motion judge relied were enough to find that Tornado exercised control over O’Reilly as an employee and, regardless, that the motion judge failed to relate the evidence concerning effective control to the ultimate test of whether that evidence established an intention to create an employment agreement.

Intercorporate Relationships

In rejecting the motion judge’s reliance on the existence of intercorporate relationships between Tornado and the ClearMRI companies as a factor underlying the common employer analysis, the Court noted that while a necessary factor, intercorporate relationships are not, on their own, sufficient to justify the application of common employer liability.

The Court reiterated the principle of corporate separateness, under which a corporation is a distinct legal entity with the power to carry on its own business and is responsible only for the obligations it has itself incurred. The corporation that owns the shares of or is affiliated with another does not mean it has common responsibility for that corporation’s debts, nor common ownership of its business or assets.

Shared ownership and its incidents (including the power to elect directors and the alignment of financial objectives between parent and subsidiary corporations) cannot establish common employer liability on the parent corporation. There must be more, including control by the alleged common employer over the individual employee.

The Court in O'Reilly helpfully interpreted and explained its earlier, well-known decision in Downtown Eatery, which had found the existence of common employers. In the Downtown Eatery, the individual functioned as if he were an employee of several closely-related corporations which collectively operated a nightclub, and the written employment agreement identified the employer as the business name of the nightclub, which was not in fact a legal entity.

The Court in O'Reilly also found that the motion judge failed to explain why the existence of the corporate relationship between Tornado and the ClearMRI companies evidenced an intention that Tornado was a party to the employment agreement with O’Reilly.

Directors’ Liability

Section 131 of the OBCA provides that directors of a corporation are jointly and severally liable to the employees for up to 6 months’ wages and up to 12 months’ accrued vacation pay. That said, a director will only be liable under section 131 where: (a) the corporation is sued in the action and the execution against it is returned unsatisfied; or (b) the corporation goes into liquidation, or is otherwise ordered or make an assignment under the federal Bankruptcy and Insolvency Act.

On appeal, one of ClearMRI Canada’s directors argued that there was no evidence before the motion judge that either of the preconditions under section 131 of the OBCA had been fulfilled and, as such, he could not be liable for any judgment.

The Court rejected that argument, finding that the OBCA does not place a time limit on when the preconditions under section 131 must be fulfilled. When liability of both the corporation and a director is found, judgment against a director may be conditional on the occurrence of one of the preconditions under section 131, but that does not mean that judgment cannot be rendered against a director at the same time as the corporation. In O’Reilly, the Court amended the judgment against the individual director, making it conditional on one of the preconditions under section 131 being fulfilled before O’Reilly could look to the director for recovery.

Takeaways

O’Reilly makes clear that courts will strictly construe the application of common employer liability to guard against conflating the existence of intercorporate relationships as evidence of a common employer relationship.

For directors, O’Reilly serves as another reminder that courts will hold directors liable under the OBCA for unsatisfied claims for wages and vacation pay where the statutory conditions are met. Former employees need not exhaust execution efforts against the corporation before obtaining a judgment against the directors personally.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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