Can your employees collect severance from your affiliated companies?

A recent decision from the Ontario Court of Appeal provides clarification on when the common employer doctrine will make a corporation liable for amounts owing to an individual employed by a related corporation.

The plaintiff, Mr. Reilly served as CEO for both ClearMRI Solutions Ltd. (“ClearMRI Canada”) and ClearMRI Solutions, Inc. (“ClearMRI US”). Mr. Reilly’s written employment agreement was with ClearMRI US, which was a wholly owned subsidiary of ClearMRI Canada. However, he reported to and had his performance goals set by ClearMRI Canada. Another company, Tornado Medical Systems Inc. (“Tornado”) was a majority shareholder in ClearMRI Canada. Tornado had specified rights in ClearMRI Canada but these rights did not extend to the management of ClearMRI Canada and its subsidiaries or overseeing employment agreements.

In 2013, Mr. Reilly agreed to loan $50,000 to ClearMRI Canada and defer part of his salary to help the company with cash flow issues that it was having at the time. In return, ClearMRI Canada promised that it would bring its product to market. The following year, it became clear to Mr. Reilly that ClearMRI Canada was no longer committed to bringing its product to market and he therefore took the position that he had been constructively dismissed. He demanded $281,385 in payment from ClearMRI Canada, ClearMRI US and Tornado for unpaid salary and the loans that he had made to ClearMRI Canada. He later brought a wrongful dismissal claim against all three companies, arguing that Tornado was also liable under the doctrine of common employer.

On a motion for summary judgment, the trial judge concluded that Tornado was a common employer and therefore jointly and severally liable with ClearMRI Canada and ClearMRI US. The trial judge found that Tornado exercised a sufficient amount of control over Mr. Reilly and that there was common control between the different legal entities because Tornado had incorporated ClearMRI to develop specific business.

Tornado appealed the trial judge’s decision. On appeal, the Ontario Court of Appeal noted that the trial judge failed to apply the correct test and overturned the lower court’s decision. The Court of Appeal decided Tornado was not liable under the common employer doctrine.

The Court of Appeal held that the doctrine of common employer is only triggered if, and to the extent that, the purported common employer can be objectively said to have entered into a contract with the employee, determined either through a written agreement or conduct between the individual and the corporation. The Court found that in order to establish that Tornado was a common employer, Mr. Reilly would have had to demonstrate that he and Tornado objectively intended to contract with each other regarding his employment on the terms alleged. Because Tornado’s name was absent from Mr. Reilly’s employment agreement and Tornado had limited involvement with and control over Mr. Reilly, the Court of Appeal found that it could not be linked to any intention to create an employment agreement with him.

The Court of Appeal found that it is not sufficient that the purported common employer be owned, controlled, or was affiliated with another corporation that had a direct employment relationship with the employee. In that regard, the Court also noted that a corporation is a distinct legal entity with its own rights and privileges, and as such should not be responsible for obligations it did not incur itself.

Implications for Employers

The Ontario Court of Appeal’s decision is noteworthy for employers as it makes it clear that in order for the doctrine of common employer to apply there must be good evidence that the corporation’s conduct (viewed objectively) shows an intention to enter into an employment contract with an individual.  Employees cannot simply rely on companies being affiliated with one another when arguing that an affiliated company should be liable for unpaid wages or other amounts stemming from their employment in a wrongful dismissal claim.

For more information on this and other similar topics, please contact Neal Parker at [email protected] or anyone else from our team listed on the Authors page.