Employee obligations and the limits of corporate form

 
Understanding the circumstances where employee obligations can be imposed beyond the corporation reinforces rather than weakens two fundamental principles of corporate law: (i) that the corporation has a separate legal personality and is distinct from its shareholders and other corporations; and (ii) that while corporations must act through individuals, including directors, merely acting as a directing mind does not make a director responsible for corporate obligations.

Two recent decisions of the Court of Appeal for Ontario help to establish the limits of corporate form in the circumstances of employee obligations.

O’Reilly v. ClearMRI Solutions Ltd.

When his employment ended, the plaintiff employee in O’Reilly sought recovery from ClearMRI and also from the corporation at the top of its corporate group¹. O’Reilly had performed services in respect of the business of ClearMRI, but when it was unable to meet its obligations to him, O’Reilly also sought recovery from the ultimate parent on the theory that they were “common employers”. A motion judge granted summary judgment against both ClearMRI and its parent, a decision reversed by the Court of Appeal because the motion judge misconstrued the common employer doctrine in a way that confused the limits of corporate form.

Finding that two related corporations may be liable for employee obligations may suggest a weakening of the principle of corporate separateness, but the Court of Appeal clarified the common employer doctrine in a manner that reinforced it. O’Reilly’s contract was with ClearMRI, and not with its ultimate parent. The principle of corporate separateness means the obligations (including employee obligations) of a corporation are not imposed on its shareholder or another corporation, including a parent. There is no group enterprise theory of liability in Ontario, nor on the facts of this case was it possible to look through a corporation and impose its obligations on its shareholder—i.e., “pierce the corporate veil”—because there was no fraudulent or improper purpose being pursued in the employer’s corporate structure. The common employer doctrine arises if, as a matter of fact, separate corporations each contract with a person for their employment rather than as an exception to the corporate separateness principle. In this situation, both corporations may be liable for employee obligations. That will usually but not always occur within a corporate group, but it isn’t a doctrine that creates group enterprise liability or pierces the corporate veil.

The common law common employer doctrine can be contrasted with related entity liability under the Employment Standards Act (ESA). The Ontario legislature has opted to include a different set of situations where related entities can be held jointly and severally liable for claims made by employees under the ESA².

Abbasbayli v. Fiera Foods Company

When his employment ended and payment obligations remained outstanding, the plaintiff in Abbasbayli sued his employer and its directors, relying on statutory protections for unpaid wages and on the oppression remedy under the Business Corporations Act (Ontario) (OBCA)³. Aspects of his claim were struck by the motion judge and Abbasbayli appealed. Two aspects of his claim are germane to the question of corporate form and its limits: the statutory claim for unpaid wages and the liability of directors under the oppression remedy for employee obligations.

Employment legislation and the OBCA create certain statutory liabilities for directors, exceptionally imposing on directors the obligations of the corporation. An issue that Abbasbayli faced in making his claim for unpaid wages is when the directors may become liable. The statutory liability of directors for employee obligations arises only after a judgment against the corporation is returned unsatisfied—although as the Court of Appeal found, that does not preclude an employee from suing both the employer and the directors in the same action. The policy basis for exceptionally making directors statutorily liable to employees is clear: in performing their responsibilities, employees as a class of corporate stakeholders merit the particular attention of directors to ensure they are protected, but with primary responsibility for employee obligations always falling to the corporation.

The OBCA oppression remedy may, in even more exceptional cases, find another mechanism for imposing employee obligations on directors. The oppression remedy is available when a reasonable expectation is violated. Typically, those claims are made by shareholders and other financial stakeholders. In most cases, the Court of Appeal found, the termination of employment does not support an oppression claim—one expects the employee’s claim to be dealt with through the employment contract and supplementary legislation. But directors may face liability for employee obligations where their conduct prevented the corporation from meeting those obligations, including in cases where the directors favoured their own interests over employees. But those cases are exceedingly rare: to find the directors liable for the corporation’s employee obligations, “there must be oppressive conduct that is properly attributable to the director’s implication in the oppression and the imposition of personal liability must be fit in all the circumstances”⁴. Abbasbayli had not pleaded the facts necessary to expand the corporation’s obligations to him as an employee to its directors.

What do O’Reilly and Abbasbayli tell us about the limits of corporate form?

The cases of common employer liability and director liability for employee obligations help to establish the limits of corporate form. The issue is not merely one of legal doctrine, however. Corporate employers can look to the exceptional cases to guide their practices, ensuring through contracting that there is clarity as to the identity of the corporate employer and ensuring through responsible payment to employees that directors do not take on the corporation’s employee obligations.