By George Waggott, founder, George Waggott Law

Canadian law draws an important distinction between the so-called “controlling mind” of a corporation, and individuals who are employed by the corporation. And while one person may simultaneously have both roles, not all acts by any such person will be made in each capacity.
In the recent Ontario court decision in 2551965 Ontario Ltd. v. Warkentin, 2024 ONSC 4876, the Court provided guidance on the distinction between being an employee and a controlling mind. The ruling also reinforces the importance that companies obtain individual releases in the context of a business sale.
The Warkentin decision involved a dispute between two companies which sued an individual defendant, Harold Warkentin, who had founded one of the companies. Indeed, Warkentin was the sole owner, officer and director of one of the companies until he sold it to the second company in a 2016 transaction. Throughout his time working for the first company, Warkentin never had a written employment agreement, and did not receive any salary, electing instead to receive profit payments determined in his own discretion.
When the second company purchased the first in 2016, Warkentin signed a release with the first company and resigned as a director. In 2017, the second company terminated Warkentin’s employment for cause, and sued him for his alleged interference with contractual relations. He countersued, claiming wrongful dismissal.
A focus of the decision was how to characterize Warkentin’s status during his tenure with the first company. This was important because of his more than 25 years of service with the first company, which he claimed included being employed, despite not receiving a salary or having any documents which expressly stated this.
The Court held that Warkentin was the controlling mind of the first company before the purchase by the second company, and thus not an employee before the sale transaction. The following factors were deemed to be significant in distinguishing the role of controlling mind from that of an employee:
1. Autonomous Control: The Court noted that Warkentin has sole discretion in hiring, firing and key operational decisions, without being constrained by any reporting relationships.
2. Absence of Employment Agreement: The fact that there was no employment agreement helped reinforce the finding that Warkentin was in complete control of the corporation. This confirmed he was not subject to the usual constraints which bind employees, such as company polices, office procedures, vacation rules or employer plans or programs.
3. No Stipulated Start Date or Service: There was no documentation which outlined the start date for Warkentin’s service with the first company. There was thus no mutual agreement on a key term of all employment relationships. There was also no documentation agreed to in the context of the transaction which referred back to a start date of employment with the first company.
4. Discretionary Income: The arrangement which Warkentin had in place gave him full discretion to determining the timing and amount of payments he would receive from the first company. This differed from other employees of that company, who received fixed amounts at set intervals.
Based on the above factors, the Court determined that Warkentin was not an employee of the first company. Further, the Court also found that the Release which he signed in the context of accepting employment with the second company included a release of all claims which he might have been able to pursue on account of any alleged service as an employee with the first company. The ruling reinforces the virtues of obtaining a clear release from key seller shareholders, particularly if they are involving in managing and operating the business prior to closing.
Takeaways for Employers
This decision highlights the important of having clear documentation which outlines the roles of individuals who provide service to a company. Not every person who works for or in a business will be an employee, and there may be cases where an individual who claims to be an employee is limited to being considered as a “controlling mind”. Any such determination will have a dramatic impact on the nature and value of any terminations claims which may later arise. Within the context of transactions, this ruling also reminds companies of the importance of obtaining an appropriate release from selling shareholders with respect to pre-closing claims.
For more information about George Waggott Law, please see: www.georgewaggott.com, or contact: george@georgewaggott.com
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