Common Employer Doctrine and Corporate Separateness, The Lawyer’s Daily (July 21 and 22, 2021)

(this article originally appeared in – a two-part series – in the Lawyer’s Daily on July 21 and 22, 2021)

By Nikolay Y. Chsherbinin

The common law doctrine of “common employer” recognizes that two or more separate corporate entities may, but not always, be considered a single employer in relation to one employee. If an employer is a member of an interrelated corporate group, one or more other corporations in the group may also have liability for the employment obligations.

In a very recent employment case, O’Reilly v. ClearMRI Solutions Ltd., 2021 ONCA 385, the Court of Appeal for Ontario clarified that a corporation related to the nominal employer will be found to be a common employer only where it is shown, on the evidence assessed objectively, that there was an intention to create an employer/employee relationship between the employee and the related corporation. It reaffirmed that the corporate interrelationships do not, on their own, justify applying the common employer doctrine. It confirmed that the common employer doctrine is not limited to wrongful dismissal claims and includes claims for not paying salary, bonus or other entitlements, as much as it includes claims for dismissing the employee without notice or cause.

In O’Reilly, an employee, William O’Reilly, served as the chief executive officer of both Canadian and U.S. corporations, ClearMRI Solutions Ltd. (ClearMRI-CA) and ClearMRI Solutions Inc. (ClearMRI-US) respectively. His written employment agreement was with the latter, but he reported to, and his performance goals were set by, the board of directors of the former. When his employment ended, O’Reilly was owed substantial sums for salary and other entitlements. He brought a wrongful dismissal action seeking recovery of all outstanding amounts from the two corporations, as well as Tornado Medical Systems Inc. (Tornado).

Tornado is an Ontario corporation and is the majority shareholder of ClearMRI-CA that, in turn, wholly owns its U.S. subsidiary, ClearMRI-US. While O’Reilly did not have a formal position or written agreement with Tornado, he alleged that it, along with ClearMRI-CA and ClearMRI-US, were his common employers. The action also sought recovery from the individual directors personally for 6 months’ unpaid wages and 12 months’ vacation pay under s. 131 of the Ontario Business Corporation Act (OBCA).

O’Reilly obtained default judgment against ClearMRI-CA and ClearMRI-US, and successfully moved for summary judgment against the remaining defendants. Tornado appealed the judgment against it on the basis that the motion judge misconstrued the common employer doctrine, effectively finding it liable only because of its corporate affiliation to O’Reilly’s contractual employer (ie ClearMRI-US). The individual director, Jae Kim, also appealed from the judgment against him, contending that the motion judge improperly applied s. 131 of the OBCA to hold him liable without evidence that a prerequisite condition to that liability — namely that the execution against ClearMRI-US having been returned unsatisfied — had been met. The Court of Appeal allowed Tornado’s appeal, but dismissed Kim’s appeal, subject to one variation making the judgment against him conditional upon an execution against ClearMRI-CA being returned unsatisfied, or one of the events referred to in s. 131(2)(b) occurring in relation to ClearMRI-CA.

To better understand the function of the common employer doctrine, one needs to reflect on the concept of corporate separateness. A corporation is a distinct legal entity with the powers and privileges of a natural person. The fact that one corporation owns the share of or is affiliated with another does not mean they have common responsibility of their debts, nor common ownership of their business or assets. In law, a corporation’s business and assets are not the business or assets of its parent corporation.

The fact that corporations are related and co-ordinate their activities does not, in and of itself, change this paradigm. Ontario law rejects a “group enterprise theory” under which related corporations that operate closely would, by that very fact, be considered to jointly own their business or be liable for each other’s obligations. However, a court may ignore the corporate separateness and pierce the corporate veil if, inter alia, a fraudulent or improper purpose is present in the relationship between the controlling and controlled corporations.

In light of the workings of the concept of corporate separateness, the basis upon which the common employer doctrine operates to hold related corporations liable is important. This doctrine does not involve piercing the corporate veil or ignoring the separate legal personality of each corporation, rather it imposes liability on companies within a corporate group only if, and to the extent that, each can be said to have entered into a contract of employment with the employee. The legal test to determine whether corporations are common employers requires a trier of the fact to answer the “key question” of whether there is evidence of an intention to create an employer/employee relationship between the employee and the respective corporation within the group.

Thus, the common employer question is one of contractual formation, namely: did the employee and the corporations alleged to be a common employer intend to contract about employment with each other on the terms alleged? To determine whether the intention to contract was present, the parties’ subjective thoughts are irrelevant. Nor need the intention necessarily have been reflected in a written agreement. This is because the common law’s approach to contractual formation is objective, whereby intention to contract can be derived from conduct.

A variety of conduct may be relevant to whether there was an intention to contract between the employee and the alleged common employers. The conduct most germane to showing an intention between interrelated corporations is conduct that reveals that “effective control” over the employee resided with those corporations. The question of effective control should not be confused or conflated with the question of “corporate control,” which refers to a shareholder’s ability to elect the majority of a corporation’s board of directors. This is consistent with how the law distinguishes employment from other types of relationships. Effective control over such matters as the selection of employees, payment of wages or other remuneration, method of work and ability to dismiss, can be important indicators of an employer/employee relationship.

A written agreement that specifies an employer other than the corporations alleged to be the common employers will also be relevant, but it will not always preclude a finding of common employer. The extent of its relevance depends on how the existence and terms of the written agreement informs the question of whether there was an intention that other corporations were also employers.

On appeal, Tornado argued that the motion judge gave no real consideration to the presence of a written employment agreement that specified O’Reilly’s employer, and to the absence of an employment agreement with Tornado. The Court of Appeal agreed. It found that the motion judge did not advert to the question of whether Tornado was a party to the employment agreement with O’Reilly imposing the obligations that he sought to enforce. The court explained that this did not require a written agreement with Tornado, but it did require a determination that a contractual relationship with Tornado on the terms alleged had been formed.

Relying on the Court of Appeal’s previous decision in Downtown Eatery (1993) Ltd. v. Ontario, [2001] O.J. No. 1879, the motion judge determined that a contractual relationship is not a decisive factor. The Court of Appeal did not agree with this proposition, noting that in Downtown Eatery it was not suggesting that a corporation can be a common employer “without a finding that it and the employee intended to be parties to an employment agreement with each other.” The court added 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 objective between parent and subsidiary corporation are insufficient to establish common employer status on the party. The appellate court also brushed aside the motion judge’s finding that there was an overlap in directors stating that there was “no suggestion of confusion about the capacity in which directors were acting” when they interacted with O’Reilly concerning employment.

Ultimately, the court set aside the summary judgment against Tornado and substituted an order dismissing the motion for summary judgment against it because the motion judge’s conclusion about control over O’Reilly as an employee did not address the correct test and was, thus, legally insufficient to support summary judgment.

O’Reilly is a welcome refresher that adds some necessary updates about the workings of the common employer doctrine and its intersection with the concept of corporate separateness.