The Ontario Court of Appeal’s recent decision in O’Reilly v ClearMRI Solutions Ltd., 2021 ONCA 385 (“O’Reilly”) provides important clarification as to the scope and application of the common employer doctrine in connection with claims for employment entitlements. In particular, O’Reilly confirms that the common employer doctrine will only apply where there is evidence of an intention to create an employer/employee relationship between an individual and the related corporation in question.

O’Reilly also provides clarity as to the application of section 131 of the Ontario Business Corporations Act, which imposes liability on corporate directors for up to six months’ unpaid wages and up to twelve months’ vacation pay, subject to certain conditions.

This blog focuses on the Court of Appeal’s findings with respect to the common employer doctrine.

Common Employer Doctrine

The common employer doctrine provides that an individual may be employed by a number of different companies at the same time. Where an individual has an employment-related claim and invokes the common employer doctrine, they may pursue those claims as against both their primary employer and the applicable related company. At a high level, an employee’s ability to recover from the related company will depend on the nature of the relationship, and extent of common control, between the related company and the primary employer of the individual. This assessment will take into account the substance, as opposed to the form, of the relationship between companies.

In pursuing claims against a common employer, an individual can bring an application to have multiple entities declared as a common employer at common law (as addressed in O’Reilly), pursuant to the Employment Standards Act, 2000 (“ESA”), or, for unionized employees, under to the Ontario Labour Relations Act (“LRA”).

O’Reilly: Facts and Procedural Background

Mr. O’Reilly served as the Chief Executive Officer and a director of ClearMRI Solutions Ltd. (“ClearMRI Canada”) and its wholly owned subsidiary, ClearMRI Solutions Inc. (“ClearMRI US”) (together, the “ClearMRI Companies”). Tornado Medical Systems Inc. (“Tornado”) is the majority shareholder of ClearMRI Canada. Mr. O’Reilly was employed pursuant to a written employment agreement with ClearMRI US, but he reported to, and had his performance goals set by, the board of directors at ClearMRI Canada.

When Mr. O’Reilly’s employment ended, he brought an action against the ClearMRI Companies and Tornado seeking recovery of all outstanding owed amounts for salary, vacation pay, and an outstanding loan he had made to ClearMRI Canada. Mr. O’Reilly initially obtained default judgment against the ClearMRI Companies. When that judgment was not satisfied, Mr. O’Reilly moved for summary judgment against the remaining defendants. The motion judge found that ClearMRI Canada, CLearMRI US and Tornado were all common employers. This decision was overturned by the Court of Appeal.

The Court of Appeal Decision

The main issue before the Court of Appeal was whether there was a sufficient relationship between Tornado and the ClearMRI companies to apply the common employer doctrine. The Court of Appeal unanimously held that Tornado was not liable under the common employer doctrine because there was no objective intent between Mr. O’Reilly and Tornado to enter into an employment contract on the terms for which Mr. O'Reilly sought damages (salary, vacation pay, and a loan), nor did Tornado exercise sufficient control over Mr. O’Reilly as an employee.

In reaching this conclusion, the Court of Appeal emphasized that it is not enough that a shareholder’s objectives may be aligned with those of the corporation, or that the corporation’s success may accrue to the benefit of the shareholder. A shareholder corporation does not effectively control an employee simply because they stand to benefit from the success of the corporation and the employee is working for the success of the corporation.

Impact

The Court of Appeal’s decision clarifies that common employer liability applies to wrongful dismissal actions (as argued in this case by Tornado) as well as any claims that could be brought by reason of a breach of the employment agreement. This includes claims relating to the failure to pay salary, bonus, or other entitlements, in addition to claims about dismissals without notice or cause.

O’Reilly also provides helpful parameters as to the application of the common employer doctrine in common law claims (the Court of Appeal’s findings do not necessarily apply to claims under the ESA or LRA). In particular, the decision confirms that common employer liability exists in a manner that is consistent with the principle of corporate separateness, and liability will not arise solely because a corporation has a corporate relationship with an employee’s primary employer. Rather, liability arises under the common employer doctrine where related corporations have objectively demonstrated that they intended to be parties to an employment contract with the employee, with respect to the terms the employee in question is seeking to enforce. The Court of Appeal found that this question of contractual formation was not addressed, articulated, or applied by the motion judge in O’Reilly.

While a variety of conduct may be relevant to whether there was an intention to contract, O’Reilly establishes that the following two factors are key: 1) the employer in question exercises effective control over the employee and 2) an employment agreement explicitly specifies that the corporation is the employer of the individual. With respect to the first, and most germane, factor, control over matters such as the selection of employees, payment of wages or other remuneration, method of work, and ability to dismiss are all important indicators of an employer/employee relationship. With respect to the second factor, a physical written employment agreement does not need to exist for a finding of a contractual relationship between an employee and employer. Rather, such a relationship will be found based on an objective assessment of all the evidence and factual context.

O’Reilly further confirms that while corporate interrelationships warrant consideration when making a common employer assessment, they do not, on their own, justify application of the doctrine.

Our Views

O’Reilly will provide some comfort to businesses operating through interrelated entities in underscoring that the courts will only “pierce the corporate veil” where warranted by the individual circumstances, taking into account the objective intentions of the parties (as evidenced by their conduct). At the same time, interrelated entities should continue to be cautious in situations where there may be overlap in the provision of services by employees between such entities, or the exercise of direction/control over employees by such entities, as this type of conduct can be indicative of a common employer relationship regardless of the written terms between the parties.