Common Employers — the ESA, the Common Law, and the Confusion

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After the Ontario Court of Appeal decision in O’Reilly v. ClearMRI Solutions Ltd. and the Ontario Divisional Court decision in Hawkes v. Max Aicher (North America) Limited, it is no surprise that there is some confusion as to whether corporations may be liable for the employment obligations of their related companies. After all, aren’t corporations their own entities under the law?

The Courts have found that in certain circumstances, related companies can collectively be found to be the employer (the “common employer”) of an employee seeking compensation for wrongful dismissal. The Court of Appeal found that those circumstances were not present in the O’Reilly case.  On the other hand, in the Hawkes case, the Divisional Court had no hesitation in concluding that the $2.5 million payroll threshold for paying severance under the Employment Standards Act, 2000 (“ESA”) in Ontario should take into account the aggregate payroll of the Canadian entity and its parent company in another jurisdiction.

To understand these different findings, it is important to understand the differences between the “benefit conferring” statutory scheme under the ESA and the common law, which we will explain in this article.  First, we will summarize the two cases.

 

O’Reilly v. ClearMRI Solutions Ltd. 

In O’Reilly, the Ontario Court of Appeal held that a corporation is not a common employer merely because it owns, controls, or is affiliated with another corporation that has a direct employment relationship with an employee.  In order for there to be a finding of a common employer, there must be evidence of an intention to create an employer/employee relationship between the individual and the related corporation.

The plaintiff in the O’Reilly case worked for the Canadian subsidiary of a Delaware corporation.  The Delaware corporation and the Canadian subsidiary were related to a third corporation.  The Canadian subsidiary and the Delaware corporation were attempting to establish an MRI upgrading and refurbishing business. The third corporation was not involved in the MRI endeavour.  When the MRI refurbishing business failed, the plaintiff was owed salary and repayment of a personal loan that he granted to the company.  As the Canadian subsidiary and Delaware corporation had no assets to satisfy the judgment for the amounts owed to the plaintiff, he sought to recover from the related company.

The Court of Appeal reaffirmed the concept of corporate separateness and reiterated that a corporation is a distinct legal entity with its own rights, powers, and privileges, and as such, should not be responsible for obligations it did not incur itself.

At common law, there will only be a finding of a common employer when there is a finding that the alleged common employers and the terminated employee had the intention of creating an employer/employee relationship.  As there was no evidence of any functional relationship between the third corporation and the plaintiff, his claim was dismissed.

 

Hawkes v. Max Aicher (North America) Ltd.

In the Hawkes case, the Divisional Court considered a different issue – a ruling of the Ontario Labour Relations Board (the “Board”) under section 64 of the ESA.  Section 64(1)(b) of the ESA requires an employer who severs an employment relationship with an employee to pay severance pay to the employee if the employee was employed by the employer for five years or more and the employer has a payroll of $2.5 million or more. The Board determined that although the company’s global payroll far exceeded $2.5 million, it was not obliged to pay severance pay to Mr. Hawkes because its payroll in Ontario was slightly less than $2.5 million. The Board concluded that the calculation of payroll to determine entitlement to severance pay is restricted to payroll in Ontario.

The Divisional Court disagreed.  In interpreting the statute, the Court referred to the finding of the Supreme Court of Canada in a prior case that employment standards legislation is a “benefits-conferring legislation” that should be interpreted in a “broad and generous manner” with any doubt arising from difficulties of language “resolved in favour of the claimant”.  The Divisional Court found that in the absence of express language limiting the calculation of an employer’s payroll to their payroll in Ontario, the payroll of the Canadian entity and the global parent company should be included.

 

Reconciling O’Reilly and Hawkes

The differing outcomes of the two cases can be explained by the different sources of law, common law versus statute law, that guided the decisions. In the O’Reilly case, the Court relied on common law principles, such as the “separate legal entity” status of corporations, to guide their reasoning. Whereas in the Hawkes case, the Court relied on the ESA, a statute intended to benefit employees, to guide their decision-making. The common law principle of “separate legal entity” was not considered in the Hawkes case; rather, the Court relied on key sections of the ESA, particularly section 4, which will be discussed next.

 

Section 4 – Related Employer

Section 4 of the ESA provides that separate persons are to be treated as “one employer for the purposes of [the] Act” if associated or related activities or businesses are or were carried on by or through an employer and one or more other persons. Where entities are found to be related, they are jointly and severally liable for any entitlements under the Act. Unlike under the common law, the definition of a common employer in section 4 of the ESA does not require that the alleged common employer and the terminated employee have the intention to create an employer/employee relationship.

Section 4 of the ESA was amended under Bill 148 in 2017.  Under the prior version, intention was a consideration. In order to find a related employer to be responsible for an employee’s entitlements under the ESA, there needed to be evidence that “the intent or effect of [separate entities] is or has been to directly or indirectly defeat the intent and purpose of this Act.”  In other words, for one corporation to be responsible for another corporation’s employment obligations, the second corporation was set up to avoid the ESA.  Under the new version of the Act, intention is irrelevant.  The only requirement for joint and several liability is that there be two related companies operating the business.

 

Applying the ESA and the Common Law Related Employer Principles

The O’Reilly case did not consider the ESA-related employer provisions because the case was not about minimum ESA entitlements.  The common law test was applied, which requires an intention to create an employment relationship with more than one entity.  That intention is not required for there to be shared liability under the ESA.