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"Common Employer": Just Saying So Not Legally Sufficient

Updated: Jun 7

By: George Waggott, founder, and Roberto Fonseca-Velazquez, summer law student,

George Waggott Law


Often many issues tend to coincide when an action makes its way to court. The common employer doctrine, corporate separateness, and a director’s liability to employees all came

together in a decision from a few years ago made by the Ontario Court of Appeal. In its decision in O’Reilly v ClearMRI Solutions Ltd., 2021 ONCA 385, the Court overturned an earlier trial decision, and held that Tornado Medical Systems was not liable as a common employer with respect to employees of a subsidiary.


Background Facts


Tornado is an Ontario corporation, and the majority shareholder of Clear Canada, another Ontario corporation whose business model was the upgrading and refurbishing of MRI machines in Canada. ClearMRI US (“Clear US”) was a company with headquarters in Delaware that was entirely owned by ClearMRI Canada (“Clear Canada”) and was formed to develop the business in the United States.


William O’Reilly was the Chief Executive Officer of Clear Canada as well as one of the directors of the company. He was also the CEO and sole director of Clear US. He did not hold any official title with Tornado.


O’Reilly signed an employment contract with Clear US which outlined his salary and bonus structure, vacation pay and benefits, as well as his payout in the event he was terminated. O’Reilly’s employment contract was only with Clear US, and he also answered to the board of Clear Canada.


Clear Canada was having some cash flow problems and was slow getting their business started, so O’Reilly agreed to defer his salary for a while. He also loaned Clear Canada $50,000 USD, and resigned as CEO and director of both Clear Canada and Clear US, with the stated reason being to avoid any conflict of interest.


By the spring of 2014, Clear Canada was no longer planning to bring its product to market, so O’Reilly demanded that he be paid the amounts he was owed for unpaid salary, bonus and repayment of his loan. The employing company (Clear Canada) did not pay, so O’Reilly began a legal action against Clear Canada, Clear US, Tornado, and a number of directors of Clear Canada and Tornado, including Dr. Kim who was a director of both companies.


Lawsuit Against Many “Non-Employers”


O’Reilly sued the three corporations as common employers and he made claims against the directors for six months’ wages and twelve months’ vacation pay consistent with section 131 of the Ontario Business Corporations Act (“OBCA”). He succeeded in obtaining a default judgement against Clear Canada and Clear US for damages totaling over $380,000 USD. However, the companies did not pay, so O’Reilly moved for summary judgment against all the defendants.


Initial Success


The motion judge recognized that an employee may be employed by a number of different companies at the same time and said that sometimes the court has to look past the contract between the parties so that a number of employers will all be liable to the employee. This approach is consistent with applicable law, which does contemplate the possibility of having more than one employer simultaneously. The motion judge identified three factors to be considered: (1) the employment agreement; (2) where the actual control over the employee rests; and (3) whether each of the employers had any common control over the employee.


The motion judge ruled that O’Reilly was an employee of both Clear Canada and Clear US, and found them both liable for the amounts claimed. Additionally, the motion judge found Tornado was liable mainly because there was evidence that Tornado had sufficient control over Clear Canada, and so the common employer doctrine should be applied.

The judge then proceeded to review the issue of director liability. Section 131 of the OBCA states that directors of a corporation will be liable to their employees for up to six months’ salary and 12 months’ vacation pay, for all debts the corporation had while they acted in the director’s role. However, directors will only be required to pay if the corporation fails to pay the judgment, or if the corporation goes out of business. For this reason, the motion judge found the directors of both Clear Canada and Tornado liable for damages. Tornado, and Mr. Kim appealed the decision to the Ontario Court of Appeal.


Appeal Dismissed: No Common Employer


The Court of Appeal found that the motion judge was wrong in finding Tornado liable. While the Court said that the correct test had been considered in first instance, that test was found to have been improperly applied based on the facts of the case.


The Court stated that just because a corporation owns shares in another corporation, that does not mean they have a common responsibility for their debts or any other liabilities. The parent company will be free of liability unless the subsidiary company is only a “sham” or a puppet of the parent company, or if there is evidence of fraud.


The Court emphasized how important the existence of an employment contract between the employee and the parent company is to find that the common employer doctrine applies.


The motion judge ruled that because Tornado was in control of Clear Canada, they should be held liable under common employer doctrine, but if that doctrine could be demonstrated to apply. The Court relied upon the leading case on common employer doctrine, Downtown Eatery (1993) Ltd. v Ontario 2001 Carswell 1680, which states that control is not enough. Rather, the common employer doctrine should not be applied unless there is an intention to create an employment contract between the corporation and the individual.


To have succeeded, O’Reilly would have had to have shown that he had a reasonable expectation that Tornado was part of or party to his employment contract. This onus to prove this rests with the employee, and O’Reilly was unable to satisfy this obligation.


The Court noted that the motion judge was incorrect to suggest that there was no need for a contractual relationship between Tornado and O’Reilly to find Tornado a common employer. The Court emphasized how important an employment agreement is to make a finding of common employer liability against Tornado (or between parties more generally). Even if the agreement was not in writing there had to be some sort of contractual relationship between O’Reilly and Tornado. The Court also found that the motion judge was incorrect in finding that Tornado exercised a “sufficient amount of control” over O’Reilly.


The Court of Appeal found that the motion judge incorrectly held that there was a strong enough relationship between Tornado and the ClearMRI companies to apply the common employer doctrine. There was nothing in the relationship that suggested O’Reilly had contracted with Tornado. Share ownership, the power to elect directors and the consistent financial objectives between a parent company and its subsidiary are not enough to establish common employer liability which extends to a parent company. As a result of the above, the Court overturned the lower court’s ruling and found in favour of Tornado.


The Court did agree with the lower court decision that Kim was liable to O’Reilly, as a director in the corporation. However, the Court added that a director’s liability will only apply if the corporation fails to fulfil the judgment against them. Therefore, the Court varied the judgment against Kim so that he would only be liable for payment if Clear Canada fails to pay.


Key Takeaways


This decision provides important insights into the scope of the common employer doctrine, together with the limitations to its applicability. The case highlights the importance of the employment contract as well as the importance in the interaction between a parent company and the employees of a subsidiary corporation. There must be a clear intention to contract with an employee, and if an employee decides to bring an action against one or more defendants who are alleged to be the employer or a common employer, they should be aware that they will have the burden to prove the case against the defendant.


For more information about George Waggott Law, please see: www.georgewaggott.com, or contact: george@georgewaggott.com

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