Wednesday, 11 June 2014

Piercing the Corporate Veil - Many Related Companies Found to be Common Employer

It is not uncommon for multiple parent, subsidiary and affiliated companies to operate side by side, and often with only blurry lines separating their activities.  Where those companies have common share ownership and operate in the same or related fields of business, it can sometimes be hard for employees to discern who their actual employer is.  In a recent Ontario decision, the Superior Court of Justice had to grapple with the concept of the "common employer" in order to determine which, if any, of a group of closely related companies was the employer of an individual claiming wrongful dismissal.
 In King v. 1416088 Ontario Limited, the plaintiff was initially employed by Danbury Sales (1971) Ltd. starting in 1973.  The employee had a pension agreement with the company.  He continued to work for Danbury for 38 years, although the identity of his 'employer' changed from one member of the corporate family to another a number of times.  By 2011, he was employed by 1416088 Ontario Limited, a company owned by Danbury Sales' owner's former son-in-law and which carried on business as Danbury Industrial.  At that time, Danbury Industrial terminated all of its employees (with the exception of the President), and ceased doing business.  The plaintiff, who was then 73 years old, did not receive any of his entitlements, nor did he receive the pension that had been promised by Danbury Sales.  Subsequent to the closure of Danbury Industrial, another member of the corporate family, DSL Commercial, essentially took over and continued the business of Danbury Industrial.  It employed 5 of the 10 former Danbury Industrial employees (including the former President), was run by the grandson of Danbury Sales, and continued to use the "Danbury" name.

There was no dispute that the plaintiff was owed termination entitlements, but the Court was called upon to decide whether any entity other than Danbury Industrial was responsible for any outstanding payments and whether the plaintiff was entitled to a pension.  After laying out the history of the corporate group (which included 8 different companies operating over a period of over 40 years and carrying on the "Danbury" business), and the plaintiff's employment history (which included performing essentially the same duties for 5 or more of these companies), the Court observed that DSL Commercial had acquired the rights to use the Danbury name for 75 years (from the owner's grandfather's company), and owned the telephone line and website address for the Danbury business.  Moreover, the name chosen by the owner was influenced by the name of the original business ("Danbury Sales Ltd.").  DSL Commercial also owned and used the same offices, desks, chairs and telephone system that had belonged to Danbury Industrial before it was wound up.  An employee of Danbury Industrial had set up the credit card terminals for DSL while still employed by Danbury Industrial in anticipation of DSL's first auction, which took place less than 2 months after the closure of Danbury Industrial.  The Court also recounted the evidence on the "Retirement Compensation Agreement" offered to the plaintiff about 8 years after he started working.

 In deciding whether one or more of the corporations should be held responsible for compensating the plaintiff, the Court cited the decision in Sinclair v. Dover Engineering Services Ltd.:

 As long as there exists a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or in equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract.  What will constitute a sufficient degree of relationship will depend, in each case, on the details of such relationship, including such factors as individual shareholdings, corporate shareholdings, and interlocking directorships.  The essence of that relationship will be the element of common control.

 The underlying rationale for the analysis, the Court observed, is to ensure that complex corporate structures "do not work an injustice in the realm of employment law" (para. 42). 
The Court concluded on all of the evidence that such a "degree of relationship" existed among the various corporations carrying on the Danbury business that none of them should be permitted "to escape from liability to the plaintiff" (para. 50).  All of the members of the "Danbury Group" carried on the same or related businesses and DSL Commercial was simply "the current incarnation of the business that the plaintiff worked for over a period of 38 years" (para. 51).  Accordingly, all of the corporations were found to be a "common employer" for purposes of liability.  The parties had agreed on 24 months' pay in lieu of reasonable notice, and the group as a whole was jointly and severally liable to pay this amount.

The Court also found that the plaintiff was entitled to the benefit of the pension arrangement offered in 1981, despite the fact that his "employer" had subsequently changed.  The plaintiff's role and responsibilities for the group of companies had not changed significantly from that time, and Danbury Industrial was a successor to the corporation that offered the pension scheme.  Given the finding of "common employer", the corporate defendants were also found to be jointly and severally liable to the plaintiff for the pension payments that he should have received, commencing upon the date of termination.
While the facts of this case may be somewhat unusual, complex corporate structures (particularly in closely-held, family-run businesses) are relatively common.  This decision highlights the fact that an employer (or employers) will not be permitted to hide behind a web of companies and business names to avoid their responsibilities to employees.  Where appropriate, the courts are prepared to "pierce the corporate veil" and attach liability to whichever entity or entities have received the benefit of the employee's services.

Have questions about the “common employer” doctrine?  Contact Lance Ceaser for assistance.

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