Thursday, October 13, 2011

The Corporate Veil and the Identity of the Employer

Corporate Law 101:  A corporation is a legal person, and can enter into contracts, and (subject to personal guarantees, etc.) is the only one responsible for its own contractual obligations...unless one of about a hundred exceptions applies.

But that's what the 'corporate veil' is all about.  If I own a corporation, and the corporation incurs liabilities, then unless the plaintiff can convince a Court to ignore the corporate veil, the plaintiff can only enforce a judgment against the corporation's assets, and not against my personal assets.

When you get into employment law, this principle occasionally triggers the question of "who is the employer?"

The Superior Court recently decided the Asselin v. Gazarek et al. case, which dealt with a complex scenario involving interrelated corporations with common owners.

Let's set up the cast of characters.  There are three corporations, being Sheridan Chevrolet Cadillac Ltd. ("Sheridan"), the Pickering Auto Mall Ltd. (a "Saturn" dealership), and Gazarek Realty Holdings Ltd.

Gazarek Realty Holdings Ltd. is a real estate holding corporation and was, in essence, the landlord for Sheridan and Saturn.  But it was a little bit more than that:  Gazarek Realty Holdings Ltd. is solely owned by Gerald Gazarek, who also owned Sheridan, and whose daughter Leslie owned Saturn.  So it's all a family affair.  Operationally, there was also an unusual connection:  For tax reasons, the holding corporation paid the salaries of managers at the dealerships, and was reimbursed for these payments by the dealerships.

Mr. Asselin started working for Saturn in 2006, and was 'transferred' to Sheridan (terminated and rehired?) in 2008, but was terminated in 2009.  Both dealerships closed in 2009 and have no assets.  The holding corporation continues to have assets, however.  So the main question became whether or not the holding corporation was a common employer.  (The length of the notice period and applicability of punitive damages were also in question, but they were all secondary to the question of whether or not the holding corporation was liable.)  The Court concluded that the holding company was not liable.

In 2001, the Ontario Court of Appeal considered the question of 'what makes a common employer' in the Downtown Eatery (1993) Ltd. v. Ontario case, in which there was a "highly integrated or seamless group of companies" operating a nightclub together.  The Court of Appeal succinctly drew the test of a common employer as "where effective control of the employee resides".

In this case, the Court raised three problems with Asselin's position:

Firstly, Asselin was not a manager, so his salary was paid by the dealerships, not the holding company.  The Court acknowledges that the result might have been different otherwise, but the fact that he was paid by the dealerships distinguished it from case law (such as Sinclair v. Dover Engineering Ltd.) in which the employee worked for one company but was paid by another.

Secondly, the holding company didn't assert any control over Asselin's employment.  One could easily imagine a scenario where payment of the managers would give the holding company effective control, but the fact that it was a purely technical arrangement for which the corporation was fully reimbursed suggested that there was not effective control.

Thirdly, the evidence did not support a contention of interrelation as in the Downtown Eatery case; rather, the dealerships carried on their own business with minimal interaction with the holding company.

Accordingly, the holding company is not liable, and the judgment for reasonable notice was only against the dealerships...which have no assets.  Does that mean that Asselin is completely out of luck?  Maybe.  It might depend on what assets were in the corporation previously and what happened to them; there are "oppression" remedies that could be available.

As an interesting side note, the employer had initially alleged cause and only paid the statutory minimums, so Asselin tried to rely on the Brito v. Canac Kitchens case (which I discussed in this post, which is arguably inconsistent with established case law) seeking punitive damages, but the judge dismissed this claim fairly summarily.

My Thoughts

I have concerns about this decision.

On the point that the holding company was paying his managers but not him, I understand the distinction and I'm less inclined to question it, but from a policy perspective I wonder it Justice Conway's disposition of it is too summary.  In a footnote, he notes that the nature of the tax advantage sought wasn't discussed at trial.  The fact that it wasn't Asselin's salary is important, yet the holding company was still managing a portion of the dealerships' payroll expenses in an arrangement which clearly was not arms-length.  Part of the reason (from the plaintiff's perspective, the entire reason) for the common employer doctrine is to prevent employers from structuring their affairs so as to protect their assets from claims by employees, and a non-arms-length delegation of payroll to a third-party corporation should definitely raise alarm bells that the Court should at least peek behind the corporate veil to see what's going on there.

On the second point, the test is "effective control", and the Court points out that the holding company exercised no control over the managers.  However, that would seem to gloss over the fact that the holding company and one of the dealerships had the same directing mind, which was also non-arms-length with the directing mind of the other dealership.  To suggest that the holding company had no "effective control" is basically saying that "When Gerald told the managers what to do, he wasn't acting in relation to his role in the holding company."  Did he put on a different hat?

It has to be more nuanced than that, and it is very difficult to draw a meaningful distinction of 'effective control' when both corporations are controlled by the same person.

On the third point, the finding that there was not sufficient integration between the companies glosses over a number of facts.  Firstly:  They use common professionals to assist them.  I wouldn't suggest that we should use the fact that they retained only one lawyer in this proceeding against them (though one would expect a conflict of interest for a lawyer representing all three parties if they were at arms length), but they clearly got the same accounting advice as well.  The fact that they both engaged the same non-arms-length management payroll structure tends to work against an allegation that they were all independently run.

Secondly:  The dynamics of the 'transfer' to Sheridan are also quite unlike anything you might see in companies that are not related.  The Court did not explore the dynamics in much detail, because the defence conceded that nothing turned on whether or not Sheridan and Saturn were both liable (a brilliant concession, perhaps?).  Leslie's evidence was that he was terminated because they were having problems with him, but she 'inquired' to see if there was a place for him at Sheridan.  ("Hey Dad, I've got this problem employee I want to get rid of; want to take him off my hands?")

Thirdly:  When Sheridan terminated him after three months, he received ROEs from parts of his statutory notice from Sheridan and from Saturn.  While Leslie testified that the failure to provide the same upon his termination from Saturn was an oversight, which was corrected when she was told he was fired from Sheridan, the fact alone that she was so promptly told of his termination from Sheridan is also indicative of operational integration.  (And, if they weren't related, arguably a breach of Sheridan's duty of good faith and fair dealing.)

Most of those facts I'm pointing to deal with integration between the dealerships (and not necessarily the holding company).  Ultimately, the defence didn't fight much about whether or not the dealerships were integrated, and so they are jointly and severally liable.  But the fact of integration between the dealerships suggests against these being autonomous and independent operations, as the Court found, and - with the involvement of the holding company in their affairs - it is difficult to see how, if the two dealerships were common employers, the holding company would not be a part of that integrated group.


This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.

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