A. THE PROBLEM
Many charities and associations have cash flow challenges, particularly in the current economic situation. They usually budget to break even financially. If some funding does not materialize as expected, they may be forced to close down. Their directors may be at financial risk as a result.
Generally, directors of a corporation cannot be held personally liable for the acts (or omissions) of that corporation, as corporations are considered separate legal entities, quite apart from the directors and officers who serve them. That being said, there are a few exceptions, both at common law and under various statutes, which continue to impose personal liability on directors. For instance, if a corporation becomes insolvent or bankrupt, there is some exposure to liability for employees’ claims.
B. LIABILITY UNDER THE EMPLOYMENT STANDARDS LEGISLATION
Provincial employment standards legislation applies to most charities and associations. For federally regulated employers, the Canada Labour Code applies.
Under most employment standards legislation, directors can be personally liable for up to six months of unpaid wages and 12 months’ accrued vacation pay owed to employees.
In Ontario, for instance, under the Employment Standards Act, 2000, (the “ESA”) directors are jointly and severally liable for debts for services performed for the corporation, and for accrued vacation pay that becomes payable while they were directors.
With respect to wages, directors are liable for monetary remuneration payable by an employer to an employee under the terms of an employment contract; any payment required to be made by an employer to an employee under the ESA; and any allowances for room or board under an employment contract or prescribed allowances.
Specifically excluded from “wages” under the relevant sections of the ESA are termination and severance pay and amounts deemed to be wages in other parts of the ESA. Also excluded from “wages” are expenses and travelling allowances and employer contributions to a benefit plan and any payments to which an employee is entitled from a benefit plan. Directors are also liable for any outstanding holiday pay and overtime pay accrued and owing to employees.
It should also be noted that directors would not be liable for unpaid wages unless the employee files a claim within two years of the wages becoming due.
As stated above, director’s liability under the ESA is limited to “all debts not exceeding six (6) months wages and not more than 12 months accrued vacation” that becomes payable while he/she was a director. A director is also liable to pay interest on outstanding wages for which the director is liable. A director who has satisfied a claim for wages is entitled to contributions in relations to the wages from other directors who are liable for the claims.
C. LIABILITY UNDER THE CORPORATIONS ACT
Directors’ liability under the Canada Corporations Act, the Ontario Corporations Act, and other similar provincial legislation, mirrors the liabilities under employment standards legislation. Directors of a not-forprofit corporation are jointly and serverally liable to the corporation’s employees for debts for services performed for the corporation. This liability is limited to six months’ wages and up to 12 months’ vacation pay. Directors are not liable for termination pay and severance pay which the corporation may owe an employee, as these payments do not relate to “services performed”.
D. THE EFFECT OF UNIONIZED STATUS
While being unionized may in some circumstances affect the forum in which a claim is pursued, and may cause employees to be more aware of their rights against directors, generally speaking there are no additional liabilities imposed on a director as a result of an employer being unionized.
E. LIABILITY UNDER COMMON LAW
Personal liability for wrongful dismissal will not attached to directors unless they engaged in tortious conduct that represented a separate identity or interest from their employer. Further, the Supreme Court of Canada in Barrette v. Crabtree Estate, also made it clear that damages for wrongful dismissal are not debts for which directors of corporations are personally liable because such amounts relate to a failure to give sufficient notice and are not a debt for services performed for the corporation.
F. PRACTICAL CONSIDERATION: MINIMIZING LIABILITY EXPOSURE
For persons who are currently directors of a not-for-profit corporation, or persons thinking of becoming directors, there are a number ways to minimize your exposure to liability.
Certainly informing and educating oneself about the legal duties of a director is the first step. It is also imperative that directors remain knowledgeable about the workings of the corporations they serve, including what activities the corporation is involved in, and the number of paid staff.
Taking a keen interest in the corporation’s finances and financial obligations cannot be overstated. That would include:
- reviewing and monitoring the corporation’s financial report and annual budget,
- ensuring that all contracts the corporation enters into are properly reviewed by a competent staff member, and where required, outside professionals; and
- ensuring that audits are performed by professional independent accountants;
It is also important to determine whether the corporation indemnifies its directors and carries directors’ and officers’ liability insurance. Not-for-profit corporations which are not charities are permitted to indemnify officers as well as directors for all costs incurred for legal proceeding related to the performance of their duties. However, protection of an indemnity is always subject to the financial health of the corporation. If the corporation has few assets, or becomes insolvent, an indemnity may not assist a director facing legal proceedings. Accordingly, it is important in many situations to confirm that the corporation has also purchased directors’ and officers’ liability insurance. Corporations which are charities and operate in Ontario are able to purchase directors’ and officers’ liability insurance if they meet the requirements of the Corporations Act as well as the Charities Accounting Act.
Of course, the most important way of minimizing liability is ensuring that the director conducts his/her own due diligence by ensuring that the corporation consistently meets its statutory obligations to its employees.