In a recent decision, the Divisional Court considered whether a director, officer or shareholder of a business may be a “common employer” along with the business itself. The implication of this decision is significant, particularly for individuals running closely-held corporations: if he or she is deemed to be a “common employer”, then he or she may be held personally liable for any damages claimed by employees.

The De Kever v. Nemato Corp. Decisions

A former employee, Ms. De Kever, brought an action for wrongful dismissal against a number of related corporations and their shared president, director and shareholder, Mr. Lozinski as her “common employers.”

Mr. Lozinski and all but one of the corporations brought a motion to dismiss the claim against them.  They argued that the remaining corporation (which was insolvent) was Ms. De Kever’s only employer and thus there was no valid claim against them.

In the original decision, the motion judge applied the “common employer” doctrine (described below) and found that there were sufficient “material facts and a narrative [in the Statement of Claim] that shows an interconnection and a commonality of operations and commercial purposes upon which evidence…may substantiate a common employment plea.”  The motion judge permitted the claim to continue against all of the corporations as well as Mr. Lozinski, and left it to a trial judge to determine whether any or all of the defendants are “common employers.”

Mr. Lozinski sought leave from the Divisional Court to appeal that decision in his personal capacity only and not on behalf of the related corporations.  He argued that the motion judge had applied the “common employer” doctrine to him without regard to the protection of the “corporate veil.”

Limited liability corporations/the corporate veil and common employers

Below is a summary of the two main legal concepts at play in this decision:

  1. Limited liability corporations/the “corporate veil”

Most employers are incorporated, meaning that, in the absence of certain enumerated circumstances[1], directors, officers and shareholders are shielded from personal liability for the corporation’s wrongdoing (i.e. employees cannot “pierce the corporate veil” and bring a claim against the individuals who run the corporationin addition to or instead of the corporation itself).

  1. Common employers

Two or more related businesses may be found to be “common employers” of a single employee, particularly if any of those businesses is insolvent.  The Ontario Court of Appeal in the Downtown Eatery decision (citing an earlier BC decision) referred to the concept of “common employers” as follows:

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…

In most “common employer cases” the courts will impose joint liability on related businesses but not theindividuals operating those businesses.  Mr. Lozinski argued that the motion judge failed to consider the concept of the “corporate veil” when it found that he was a “common employer.”  The Divisional Court ruled that “[if] the [original] decision is correct, it suggests that all operators and directors may be subject to such a lawsuit simply as a result of their position of control and without any allegations of action taken specific to the case at hand.”

The Divisional Court granted Mr. Lozinski leave to appeal.  He may now bring an appeal to the Ontario Court of Appeal on the issue of whether he, as an officer and shareholder, is a “common employer”.  If he is successful, the claim against him will be struck.  If he is not successful, he will continue to be a defendant and his liability as a “common employer” will be determined by the trial judge.

Implications for Directors, Officers and Shareholders

This case will be an important one to watch for directors, officers and shareholders, particularly of small and closely-held corporations.  The decision could signal that, in the right circumstances, owners and operators are “on the hook” for claims by employees and former employees.  Where the business has the funds to pay a damage award, the issue will likely be moot, but where the business is failing, employees may be more likely to bring claims against the individuals behind the business.  In light of the original decision in De Kever, the courts may be open to granting such claims.