Monday, March 31, 2014

The Corporate Veil: Which Company is the Employer

Interesting case out of the Ontario Superior Court of Justice - King v. 1416088 Ontario Ltd.

Jack King worked in basically the same job for 38 years, doing accounting and bookkeeping for the liquidation/auction business generally known as "Danbury".

What makes this a tricky case is that the business has not been the same legal entity through all that time.  The trade name "Danbury" was owned and/or used by about 8 different corporations over time.  In the past, the business was owned and operated by Bernie Weinstein, though it has passed to Bernie's son-in-law (David Ordon).

In other words, while there have been a number of corporate shells carrying on Danbury's businesses, it has been a family business that whole time, and Mr. King's job was related to all of them.  It isn't unusual for someone in Mr. King's position to work for a parent company.  In this case, however, there was no parent company, and so he was nominally employed by, from time to time, five of the eight corporations.

In 2011, the corporations carrying on business under the Danbury name wound up, apparently due to financial difficulties, and all employees - including Mr. King - were dismissed.

Now here's where it gets tricky.  In 1992, David Ordon had incorporated a company named 986866 Ontario Ltd. (let's call it "866").  In 1995, with the hope that his grandchildren might one day take over the family business, Bernie Weinstein's company granted 866 a 75-year license to use the Danbury name.  It doesn't appear that 866 did anything other than hold the license until 2011, by which time David had conveyed all the shares of the company to his son Jonathan.  Then, after the Danbury businesses wound up, Jonathan started 866 into the auction and liquidation business, using the Danbury name.

King had done a bit of work related to 866, including setting up its payroll account (etc.) shortly before being dismissed, but 866 had never been his nominal employer.

Within a few months, 866 had hired back most of Danbury's employees, but not Mr. King.

The Action

King had two significant claims:  Wrongful dismissal, and retirement compensation.  His wrongful dismissal claim was clearly going to be at the high end of the spectrum, and there was no dispute that he was entitled to 24 months' compensation, worth just under $150,000.  As well, in 1981, King and his employer at the time had entered into a "Retirement Compensation Agreement", that if he worked for them until he was 65, then he would be entitled to a monthly pension until he died (and for a minimum of ten years, with survivor benefits) of $736.60.  Not a huge value, but minimum benefits over ten years of over $88,000, and potentially much higher.

The pension hadn't been discussed after 1981.  David Ordon had forgotten about it.  Jonathan Ordon never even knew about it.  Nobody remembered what led to it being signed in the first place.

The Court found no reason not to uphold the Retirement Compensation Agreement, so King was entitled to that as well.  Furthermore, in light of the Supreme Court's decision in Waterman, the pension was effective as of the termination date, overlapping with his pay in lieu of notice.

But the major issue is this:  Who owes King the money?  None of King's nominal employers were carrying on business anymore, and most were long-defunct, so the probability of collecting a six-digit compensation award and ongoing pension from any of them was...pretty slim.  The only company carrying on business at this point in time was 866.

So this case raises the question of what makes a 'related employer':  There's a doctrine allowing employees to claim around the corporate veil, to prevent companies from escaping employment liabilities by doing their hiring through impecunious shell corporations, or doing other nasty tricks to hide behind the corporate veil.

Where there is "a sufficient degree of relationship between the different legal entities who apparently compete for the role of employer, there is no reason in law or equity why they ought not all to be regarded as one for the purpose of determining liability for obligations owed to those employees who, in effect, have served all without regard for any precise notion of to whom they were bound in contract."  The courts look fundamentally at whether or not there is "common control" of the different corporations, with an admonition from the Court of Appeal that complex corporate structures should not be used to work an injustice in the realm of employment law.

In this case, the Ordons argued that 866 was not a "phoenix" company.  It's a very unique feature of this case that 866 had not only existed prior to the winding up of the other businesses, but had actually owned the naming rights necessary to begin carrying on business.  Most of the time, as OldCo winds up its business, it has to convey something, if only goodwill and trade names, to NewCo.  In this case, OldCo simply wound up its business, and NewCo simply started up a new one without requiring any conveyance or transfer from OldCo.

However, as unique as that is, the judge still considered 866 to have "too many attributes in common with other companies who have traded under the Danbury name".

Using the same name, same offices, same chairs, same desks, etc., may or may not have been sufficient to find that the employers were 'related'.  However, what appears to have been fatal to the defence was the fact that - to the extent that they didn't keep everything the same (using new computers, new credit card terminals, and of course new corporate accounts) - there was a rolling transition.  The fact that Mr. King himself actually did work setting up the accounting framework for NewCo probably hurt their case a lot, but the fact that they were setting up the accounting framework there already before OldCo stopped carrying on business is, on my read of the judge's reasons, the lynchpin in the case.

The Lesson for Employers

What makes this result so inherently palatable is this:  While it might make things more difficult for companies (and their lawyers!) trying to set up a new corporate entity in such a way as to insulate it from employment claims of the old company, I don't really think it changes anything for arms-length sales of businesses.  If you're buying the assets of another company in such a way that your business will be indistinguishable to the public from the old one, in general you have to deal with responsibility for employment obligations in the agreement of purchase and sale itself.

(Note this well, small business owners.  I can't tell you how many times I've had professionals or other small business owners say "I bought this business, and hired this employee who has worked here for decades, but now I'm finding I don't really get along with the employee."  Depending on the specifics, you can be on the hook for a very significant amount of money.  That's why you need to pay attention to employment issues at the front end, in the agreement itself, rather than waiting until it becomes an issue to start thinking about it.)

I have very seldom come across cases where there was what I will call 'succession of convenience', where there's no transaction between OldCo and NewCo, but NewCo just happens to be in the right place at the right time to pick up OldCo's dropped business (and leases, and employees, etc.).  (In those cases, it would still be nearly unheard of for OldCo to use the same name.)  It might be worth paying attention to the King case for NewCo in such a situation, but I don't anticipate that they will generally be dealt with similarly.  Without the rolling transition, or the relationship of the owner of NewCo to OldCo, King may well have been decided differently.

Nonetheless, people buying businesses need to be alive to these issues, and get good legal advice on the point, because of the scale of liabilities that can come with them.


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.

The author is a lawyer practicing in Newmarket, primarily in the areas of labour and employment law and civil litigation.  If you need legal assistance, please contact him for information on available services and billing.

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