Liability of Related Companies for Wages – Court of Appeal Narrows Scope,
an article by Earl Altman

With the downturn in the economy, and the resulting increase in corporate insolvencies, claims by employees attempting to collect wages owing from insolvent employers have come before the Courts with increasing frequency. In particular, the liability of companies related to the employer for these wages has received increased judicial consideration. In the most recent pronouncement on the issue, the Ontario Court of Appeal, in a decision released on June 18, 2009, set limits on when such liabilities will be imposed on related companies. Employers will be relieved to hear that the Court of Appeal, in reviewing the submissions of the employees and the director of Employment Standards, recognized that, while the well established principles protect employees in such circumstances, “…these over arching general principles, important as they may be, do not efface the basic canons of statutory interpretation. Nor do they dictate that every dispute concerning employment standards legislation automatically be resolved in favour of the employees.”

In the decision of Ministry of Labour v. Catelectric Inc., the employees of Catelectric had been terminated shortly before the company filed for bankruptcy.

While the facts are somewhat complicated, the employer was part of a corporate group of four companies with inter related share holdings. In particular, there was one holding company that held the shares of the others.

In September 2003, Bank of Montreal, the banker for the group, advised the holding company that its credit facilities were “out of margin”. The bank required a further injection of capital in order to bring the loan back on side. The group did not have the funds to do so, and in November 2003 the bank appointed a monitor for the group. The group eventually made a proposal under the Bankruptcy and Insolvency Act, which proposal was rejected, resulting in a deemed bankruptcy of the group. Approximately 100 employees were laid off, many of whom had been working for the company for as long as twenty years. This triggered the termination and severance pay provisions of the Employment Standards Act, resulting in entitlement of the employees to termination pay of five to eight weeks, and severance pay of one week’s wages for every year of service.

Following the deemed assignment in bankruptcy, the principals of the bankrupt company incorporated a new company and purchased the assets from the trustee.

The Employment Standards Officer made an order that the holding company and the new company were jointly and severally liable to the employees under the related employer provisions of Section 4 of the Employment Standards Act. That section provides that the employer and one or more other entities can be treated as one employer for the purposes of the Act, where the manner in which they carried on business “had the intent or effect to…directly or indirectly defeat the intent and purpose of this Act”. While the Labour Relations Board found that the companies were related for the purposes of the Act, it rejected the Employment Standards Officer’s finding that there was an intent to defeat the purpose of the Employment Standards Act. The Board therefore held that the companies should not be treated as one employer under the Employment Standards Act.

The employees appealed that decision to the Divisional Court which held that the decision could only be set aside if it was found to be unreasonable. The Divisional Court refused to do so finding that the Board’s decision was, in fact, reasonable on the facts before it. The employees appealed to the Ontario Court of Appeal.

The Court of Appeal first considered the employees’ argument that it was the role of the Divisional Court to provide its own interpretation of the statute rather than to assess the correctness of the interpretation of the Labour Relations Board. The Court of Appeal rejected this submission. It held that the judicial review of administrative decisions must recognize that there is no single outcome that must be regarded as the correct one. Rather, there is “…a range of outcomes that are acceptable and the function of judicial review, on a standard of reasonableness, is merely to determine whether the decision falls within that range.” The Court of Appeal referred to a number of decisions of the Supreme Court of Canada which highlighted the deference which courts must give to factual findings made by specialized administrative tribunals. The court, for example, cited a previous Supreme Court of Canada decision which held that “…applying the standard of reasonableness gives effect to the legislative intention that a specialized body will have the primary responsibility of deciding the issue according to its own process and for its own reasons.” The Court of Appeal found that the judicial deference which must be given to administrative decisions dictates that, in the absence of a clear error of law, the decision of the specialized tribunal should be upheld. The court in this case found that the Ontario Labour Relations Board had been given the primary responsibility of interpreting the Employment Standards Act, and therefore the Labour Relations Board decision should not be overturned unless it could be said to be unreasonable. The court held that the decision in this case was not unreasonable.

In particular, employers should take comfort from the analysis of the court that the mere fact that harm will result to the employees if a claim that two companies are related is rejected is not determinative of the issue. The Board must also consider the provisions of the second part of the section which requires that there be intent on the part of the employer to avoid payment. If no such intent is found, liability should not be imposed.

The Court of Appeal therefore rejected the submissions of both the employees and the Director of Employment Standards. The Court of Appeal held that the Board’s decision ignored the legislative purpose contained in the Employment Standards Act which, while creating minimum standards, did not provide for a guarantee that the standards would be met in the event of insolvency. Rather, the purpose was to compel companies to pay their employees if the funds were available to do so.

The court also rejected the finding of liability on the directors of the insolvent company. The court considered Section 81(1) of the Act which provides that the directors of companies be jointly and severally liable for employees’ wages in certain circumstances. However, the court had regard to Section 81(3) which specifically exempts directors from liability for termination and severance pay provided for by employment contracts or the Employment Standards Act. Therefore, the directors were found not to be liable in this case.
The Court of Appeal held that there was no basis to conclude that the actions taken by the new company had in any way affected the likelihood that the former employees would receive their severance and termination pay. There was therefore no reason to impose liability on the new company.

The Court of Appeal therefore upheld the Divisional Court’s refusal to set aside the Board’s decision. While obviously a comfort for corporate directors and companies in similar circumstances, the employees themselves were left without recourse.
Directors should be cognizant of their potential liabilities for debts of the company in a variety of areas, including withholding taxes, arrears of wages, and GST and EHT remittances. If you would like to discuss the matter, please contact Earl Altman of Garfinkle, Biderman at 416-869-7614 or ealtman@garfinkle.com.

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