“Uncommon” employers – Corporate Structure vs Employment Obligations

When an employer terminates an employee without just cause in Ontario, it must either provide reasonable notice of the termination, or payment in lieu of notice. The length of the requisite notice period is based on several factors under common law, including age, character of his employment, and length of his service.

Under the Employment Standards Act (ESA), two companies may be treated as one where the intent or effect of their carrying on related business under common control has been to directly or indirectly defeat the intent and purpose of the ESA.

The common law has developed a more confined, “common employer doctrine” to deal with such situations.  But, unlike under the ESA, it matters not whether the intent or effect was to avoid severance obligations.  Instead, the courts endeavour to determine whether the alleged common employers could each be said to have been the employee’s employer.

Employees often assert that their service with prior and/or related employers should be combined for purposes of calculating their entitlements on termination.

The common employer doctrine recognizes the fact that businesses can be complex organizations, with varied corporate structures. Depending on the circumstances, the doctrine can operate to impose liability on entities that do not have a direct contractual relationship with an employee.

In a recent decision, the Ontario Divisional Court overturned a trial judge’s ruling that the first corporation’s obligations to employees “flowed” to the second.

In Paul Amaral v Verona Floors Inc, the corporations at issue were family businesses. The employee had worked for Legnotech since October 2008. After a family dispute, one of the Legnotech shareholders set up his own company, Verona. Both businesses continued to operate on the same premises, and many Legnotech employees left to work for Verona.

The employee in this case started working for Verona in January 2012. He continued to work on the same premises, and his employment duties were nearly identical to those he had been performing for Legnotech. Verona terminated his employment in August 2013.

The Divisional Court found that Legnotech and Verona were not common employers. The employees who went to work for Verona were made aware that they were moving from one company to a separate, new company.

Verona took over the lease of the premises from Legnotech, but did not purchase any of its assets. Although they had common shareholders and officers, they were separately controlled entities.

Further, the plaintiff had signed a new employment contract when he joined Verona, which made no reference to Legnotech.  He also ceased taking instructions from and performing work for Legnotech, which remained in operation after he left. As such, the Divisional Court found that the employee had resigned from Legnotech in January 2012, even though he did not formally submit his resignation.

As a result of this finding, the Divisional Court reduced the trial judge’s award for wrongful dismissal damages by over $10,000, from $13,333.33 to $3,076.92, based upon a much shorter notice period.

This case underscores the importance of seeking advice from an employment lawyer regarding the corporate structure of your business(es), or when considering an acquisition.  A corporate shell game will not prevent employees from asserting their rights, but neither can they go after the “deep pockets” just because two companies are tangentially related.

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