Courts will examine parties’ conduct, not subjective thoughts, in assessing intent to create employment relationship
In the modern workplace, it is not unusual for there to be multiple parties who are, or could be considered to be, stepping into the shoes of the employer. An employee may be hired by one company but provide services to both the company and another business, or be paid by one entity while providing services solely to another.
In cases like this, a court may consider multiple parties to be joint or “common” employers, in which case all parties can be held liable for any entitlements owed to the employee. This prevents an employer from attempting to avoid its legal responsibilities owed to employees by hiding behind another entity.
In a welcome decision for employers, the Ontario Court of Appeal has recently confirmed that an organization cannot be found to be a common employer unless there is a clear intention to create an employer-employee relationship. In other words, a court cannot hold a corporation liable as an employer simply because it is affiliated with an organization that has a direct employment relationship with the employee.
Background
In O'Reilly v. ClearMRI Solutions Ltd., William O’Reilly had been employed as the CEO of both h and ClearMRI Solutions (a U.S.-based company and a wholly owned subsidiary of ClearMRI Solutions). The terms of his employment were set out in a written employment agreement with the U.S. entity, but he reported to, and his performance goals were set by, the board of directors of the Canadian parent company.
O’Reilly was owed substantial damages for salary and other entitlements arising out of the end of the employment relationship. He brought a claim against both ClearMRI entities, as well as Tornado Medical Systems, which was the majority shareholder of ClearMRI’s Canadian entity, alleging that they were common employers. He also sought recovery from the directors of both Tornado and the ClearMRI entities.
O’Reilly obtained default judgment against the ClearMRI entities and successfully pursued a motion for summary judgment against Tornado. Tornado appealed that decision, arguing that the motion judge had misconstrued the common employer doctrine and found it liable purely as a result of its corporate affiliation to the ClearMRI entities.
The Appeal
The Ontario Court of Appeal agreed with Tornado that the motion judge had failed to apply the correct test with respect to the common employer doctrine.
The motion judge had identified three factors to be considered when identifying concurrent employers: 1) the employment agreement itself 2) where the effective control over the employee resides and 3) whether there was common control between the different legal entities. In applying this test, the motion judge determined that Tornado had “a sufficient amount of control” over O’Reilly, as, among other things, it shared the same business objectives as the ClearMRI entities and there was an overlap in directors.
On appeal, the court found that the proper test is whether it can be shown, on the evidence, that there was an intention to create an employee-employer relationship between the individual and the related corporation. The court noted that corporations are distinct and legally separate entities. There are exceptions to the principle of corporate separateness ─ such as where the court pierces the corporate veil in order to hold a parent corporation liable for the obligations of a subsidiary ─ but only where there is some fraudulent or improper purpose present.
The court held that the common employer doctrine should not be interpreted to ignore the principle of corporate separateness. As a result, an entity cannot be found to be a common employer “simply because it owned, controlled or was affiliated with another corporation that had a direct employment relationship with the employee”.
Applying the proper test
The court noted that the parties’ subjective thoughts are irrelevant to determining whether there was an intention to create an employee-employer relationship. Rather, this is an objective analysis, which means that an intention to contract can be derived from the conduct of the parties. There may be a variety of relevant factors to consider in making this determination, but important questions include determining where “effective control” over the employee resided, and whether there is a written employment agreement specifying an employer other than the alleged common employer(s).
As the motion judge failed to undertake the crucial analysis of whether or not there was an intention to create an employer-employee relationship between the plaintiff and Tornado, the court set aside the summary judgment award and instead dismissed the motion.
Key takeaways
While this is a helpful decision for employers, it is crucial to remember that courts will examine the parties’ conduct, not their subjective thoughts, when assessing whether there was an intention to create an employment relationship. While having a well-drafted employment agreement that unambiguously identifies the employer is helpful, it will not necessarily be determinative.
Employers should be cautious about having employees perform services for or take direction from other entities unless the intention is to create a common employer relationship.
Similarly, employees who provide services to or take direction from multiple entities should seek legal advice even in circumstances where their employment agreement identifies only one employer, as they may be able to seek recovery from multiple parties.
