The common employer doctrine allows the Court to treat separate legal entities as a single employer for liabilities such as outstanding wages, termination pay or severance pay, in appropriate cases. However, the fact that corporations are related and coordinate their activities does not, in and of itself, mean they have common liability.
The recent decision of O'Reilly v. ClearMRI Solutions Ltd. confirmed that a Court cannot hold a parent or shareholder corporation liable as a common employer unless there is a clear intention to create an employer-employee relationship.
The employee was owed a substantial amount of money when his employment ended. He brought an action seeking recovery of all outstanding amounts from his employer as well as his employer’s corporate majority shareholder (the “Parent Co.”). He claimed that although he did not have a position or written agreement with the majority shareholder, the Parent Co. and his employer were common employers and jointly liable to him for the outstanding money.
In addition to being the majority shareholder of the employer, the Parent Co. also had some common directors with the employer, and certain rights under a shareholder agreement. Those shareholder agreement rights did not extend to any changes in management of the employer, authority over employment agreements or other areas exclusively governed by the employer’s board of directors.
The employee obtained summary judgment against his employer and against the Parent Co. The Parent Co. appealed, arguing that it was not a common employer, and should have no common employer liability.
What Did the Court Decide?
The Court of Appeal for Ontario determined that the Parent Co. was not liable to the employee as a common employer. It reviewed several relevant factors to determine whether a common employer relationship exists between separate legal entities, namely:
- where the effective control over the employee resides (e.g., what level of control does an alleged related employer have over the employee);
- the language of any employment agreement (e.g., are their indications of one entity or multiple entities being the employer); and
- whether there was common control between the different legal entities.
However, the Court of Appeal also confirmed an overarching factor required to determine whether separate corporate entities are to be treated as a common employer, being an evaluation of whether “the employee and the corporation alleged to be a common employer intend[ed] to contract about employment with each other on the terms alleged”. The Court of Appeal found that there was no such intention between the employee and the Parent Co., whether at the time he was hired or at any time thereafter. Further, Court of Appeal noted that “In the absence of something that shows such an intention, share ownership and its incidents, including the power to elect directors and the alignment of financial objectives between parent and subsidiary corporations, are insufficient to establish common employer status on the parent.”
While this case was decided in Ontario, the common employer doctrine is relevant and persuasive for all Canadian employers.
This decision makes clear that Courts will strictly construe the application of common employer liability to ensure that intercorporate relationships are not conflated as evidence of a common employer relationship. The legal principle of corporate separateness – of legal entities being treated as distinct for liability purposes – is not undermined simply because of their relatedness.
It is also an important reminder for employers to be careful as to how they organize their corporate structure and to review their corporate structure on a regular basis in order to ensure clear lines of liability are maintained.
If you need advice on this subject, please contact the author or your regular Fasken lawyer.