In O’Reilly v. ClearMRI Solutions Ltd., 2021 ONCA 385 (ClearMRI Solutions), the Ontario Court of Appeal (OCA) decided that the motion judge erred in concluding that a majority shareholder of an employee’s contractual employer was its common employer. In making this finding, the motion judge effectively found that when employment ended, the majority shareholder was liable to the employee for salary and other entitlements.  In setting aside the summary judgment against the majority shareholder, the OCA provided clarification regarding the common employer doctrine and its application, as well as its relationship to the concept of corporate separateness. 

Background

Tornado Medical Systems Inc. (Tornado), was the majority shareholder of ClearMRI Solutions Ltd. (ClearMRI Canada), a wholly owned subsidiary of ClearMRI Solutions, Inc. (ClearMRI US).  The employee was the Chief Executive Officer of ClearMRI Canada and ClearMRI US.  Although the employee’s written employment agreement named ClearMRI US as his employer, the employee reported to the board of directors of ClearMRI Canada, which set his performance goals.  The employee did not hold a position with Tornado; however, Tornado had the right to consent to certain matters relating to ClearMRI Canada under a Unanimous Shareholder Agreement, which did not include the right to consent to changes in ClearMRI Canada’s management, employment agreements, or loans.  There was some overlap in the boards of directors of Tornado and ClearMRI Canada.   

To provide funding for the successful launch of ClearMRI Canada, the employee agreed to temporarily defer his full salary and made a $50,000 loan to ClearMRI Canada. In addition, the employee earned an $80,000 performance bonus.

When it became apparent that ClearMRI Canada was no longer committed to bringing its product to market, the employee brought a constructive dismissal action against ClearMRI Canada, ClearMRI US, and Tornado as common employers for all unpaid wages and employment entitlements. 

The employee’s action also claimed six months’ wages and 12 months’ vacation pay against the individual directors of ClearMRI Canada and Tornado under s. 131 of Ontario’s Business Corporations Act (OBCA).  Section 131 provides that a corporation’s directors are jointly and severally liable to the employees for up to six months’ wages and up to 12 months’ vacation pay; however, a director will only be liable when the corporation is sued in the action and execution against it is unsatisfied, or when the corporation goes into liquidation, or is ordered to make an assignment under the federal Bankruptcy and Insolvency Act (collectively, Section 131 Preconditions).    

Default Judgment & Decision of Motion Judge

The employee received a default judgment against the ClearMRI companies for his deferred salary, vacation pay, performance bonus, and the unpaid loan.  When the default judgment was not satisfied, the employee moved for summary judgment against Tornado.

The motion judge’s findings included that:

• ClearMRI Canada was a common employer of the employee;

• The directors of ClearMRI Canada were jointly and severally liable under OBCA s. 131 for six months’ wages and 12 months’ vacation pay, and the employee shared in that liability because he was also a director of the company;  

• Tornado was a common employer and jointly and severally liable for the employment-related amounts of the default judgment, i.e., everything except the unpaid loan and interest;

• If Tornado did not satisfy the judgment against it, its directors individually named in the action would share in the liability of the ClearMRI companies’ directors for the six months’ wages and 12 months’ vacation pay. 

Decision of the OCA

Tornado and one of the directors appealed the decision of the motion judge.

The OCA concluded that the motion judge did not ask or answer the correct question, i.e., whether there was evidence of an intention to create an employment agreement between Tornado and the employee under which Tornado would owe the employee the same obligations as ClearMRI US.  Accordingly, the OCA set aside the summary judgment against Tornado and ordered that that motion for summary judgment be dismissed.

In arriving at that decision, the OCA considered the relationship between the concept of corporate separateness and the common employer doctrine, and the role of the employment agreement in that analysis. 

The Concept of Corporate Separateness

The OCA made the following observations about corporate separateness:

• A corporation is a distinct legal entity with the powers and privileges of a natural person, including the power and privilege to own assets in its own right, carry on its own business, and be responsible only for obligations it has itself incurred;

• The fact that one corporation owns the shares of or is affiliated with another does not mean they have common responsibility for their debts, nor common ownership of their businesses or assets. A corporation’s business and assets are not, in law, the business or assets of its parent corporation, and a parent (shareholder) corporation is not liable for the debts and obligations of a subsidiary;

• This is not changed by the fact that corporations are related, coordinate their activities, or appear as a single unit from an economic standpoint;   

• However, the court may ignore the corporate separateness principle, pierce the corporate veil, and hold a parent corporation liable for obligations nominally incurred by a subsidiary corporation that is a mere façade.  To do so, the court must be satisfied that: (i) there is complete control of the subsidiary, such that the subsidiary is the “mere puppet” of the parent corporation; and (ii) the subsidiary was incorporated for a fraudulent or improper purpose or used by the parent as a shell for improper activity.

The Common Employer Doctrine

Next, the OCA explained the nature of the common employer doctrine:

• The common employer doctrine imposes liability on companies within a corporate group only if each can be said to have entered into a contract of employment with the employee;

• Consistent with the doctrine of corporate separateness, a corporation is not held to be a common employer simply because it owned, controlled, or was affiliated with another corporation that had a direct relationship with the employee; 

• A corporation related to the nominal employer will be found to be a common employer only where the evidence shows that there was an intention to create an employer/employee relationship between the individual and the related corporation;

• The question is one of contract formation:  Did the employee and the corporation alleged to be a common employer intend to contract about employment with each other on the terms alleged? If such an intention is found to exist, the corporation is held liable for obligations it has undertaken and the concept of corporate separateness is not breached;

• To determine whether there was intention to contract:
  
  • The parties’ subjective thoughts are irrelevant;
  • The intention need not be reflected in a written agreement;
  • The common law approach to contractual formation is objective.  Intention to contract is derived from conduct, i.e., what is relevant is how each party’s conduct would appear to a reasonable person in the other party’s position.

• Two types of conduct are important:
  
  • Conduct that reveals where effective control over the employee resided, e.g., selection of employees, payment of wages or other remuneration, method of work, and ability to dismiss; and
  • The existence of an agreement specifying an employer other than the alleged common employer(s).

The OCA noted that in its own leading decision on common employer liability, Downtown Eatery (1993) Ltd. v. Her Majesty the Queen in Right of Ontario, 2001 CanLII 8538 (ON CA), a written contract of employment indicated that the business was the employer; it did not identify any of the corporations directly involved in the operation of the business as the employer.  Nonetheless, the court inferred that there was an intention that the alleged common employers were parties to the employment agreement because they were each integrally and directly involved in owning and operating the business and exercised control over the employee. 

The OCA also noted that in other cases, a common employer allegation failed because an employment agreement identified only one company within the corporate group as the employer and contained an express release of claims against affiliated corporations.  This did not permit the conclusion that there was an intention to create an employer/employee relationship with anyone other than the employer specified in the written agreement. 

The OCA provided the following summary of the common employer doctrine and why it can coexist with the principle of corporate separateness:

…the doctrine of common employer liability exists consistently with the principle of corporate separateness because it holds related corporations liable for obligations they actually undertook to perform in favour of the employee. It does not hold them liable simply because they have a corporate relationship with the nominal employer. Whether the related corporations actually undertook to perform those obligations is a question of contractual formation – did the parties objectively act in a way that shows they intended to be parties to an employment contract with each other, on the terms alleged? Of central relevance to that question is where effective control over the employee resided. The existence of a written agreement specifying an employer other than the alleged common employer(s) will also be relevant; the extent of the relevance will depend on the terms and the factual context. (para. 65)

Finally, the OCA stated that the common employer doctrine applies to any claims that can be made against the common employer because of an employment agreement with the employee, including claims for unpaid salary, bonus, other entitlements, and wrongful dismissal.   

Directors’ Liability Pursuant to s. 131 of the OBCA

As noted above, a director of Clear MRI Canada appealed the motion judge’s finding that, pursuant to OBCA s. 131, he was liable for six months’ wages and 12 months’ vacation pay subject to the Section 131 Preconditions.

The director appealed the motion judge’s decision arguing that he should not have been found liable because the employee did not include evidence in his summary judgment motion that either of the Section 131 Preconditions had been met.  The director’s argument raised the issue of how s. 131 should be interpreted when the liability of the director and the corporation are being considered simultaneously in the same action, but the director’s liability is conditional on steps that would occur after judgment. 

The OCA rejected this argument on the basis that, “Nothing in s. 131 of the OBCA puts a time limit on when the conditions in s. 131(2) can be fulfilled.” (para. 98).  The court noted that when the liability of the corporation and the directors are being considered simultaneously, “any judgment against the director may have to be conditional on the occurrence of a subsequent event” (para. 96). The OCA rejected the director’s argument that no judgment should have been granted against the director and directed that the judgment be amended to provide that the director’s liability is conditional on the Section 131 Preconditions being met.      

Bottom Line for Employers

Common Employer Liability

ClearMRI Solutions provides clear guidance from the OCA regarding the circumstances in which the common employer doctrine will be applied, and explains why this approach is consistent with the doctrine of corporate separateness.

The OCA indicated that the common employer doctrine imposes liability on companies within a corporate group only if each can be said to have entered into a contract of employment with the employee.  As the OCA stated, this approach is consistent with the doctrine of corporate separateness, because a corporation is not held to be a common employer simply because it owned, controlled, or was affiliated with another corporation that had a direct relationship with the employee, but because it entered into a contract of employment with the employee.

ClearMRI Solutions suggests that if an employer would like to limit the risk that its affiliate will have liability to its employees as a common employer, efforts should be made to ensure that that there is no evidence that the affiliate intended to create an employment agreement with the employee.  To demonstrate this, an affiliate should avoid conduct that would suggest that they have effective control over the employee, e.g., hiring, payment, training, supervision, dismissal. 

Another factor that will be considered is whether there is an agreement that specifies an employer other than the alleged common employer.  Even when such an agreement exists, however, a court may infer that the alleged common employer intended to be a party to the employment agreement if they are integrally and directly involved in owning and operating the relevant business and exercise control over the employee.  Accordingly, to avoid the risk of common employer liability, such conduct should be avoided by the named employer’s affiliate. 

Finally, even if an employment agreement identifies one corporation within a corporate group as employer, to avoid the risk of common employer liability, the identified employer is encouraged to: (a) expressly state in the agreement that affiliated corporations are not the employer, and have no intention now or in the future of creating an employer/employee relationship with the employee; and (b) insert in the agreement an express release of claims against its corporate affiliates. 

Director’s Liability

ClearMRI Solutions also reminds employers that their directors may be held jointly and severally liable under OBCA s. 131 for up to six months’ wages and up to 12 months’ vacation pay even if the Section 131 Preconditions are not met until after any judgment is rendered.