Issues in Employment Law: Collecting From Bankrupt or Shell Company Employers

Typically, in employment law, the difficult aspect of collecting severance or other compensation related to dismissal is establishing an entitlement to those items, that is, establishing that the termination was without cause and that the employee wasn’t prevented, via contract or other legal mechanism, from collecting those items.

However, sometimes collecting from your prior employer, even with a court order, is next to impossible due to changing corporate structures or bankruptcy.

Collecting from “Shell” Company Employers

Employers who are eager to avoid liabilities associated with terminations may operate under numbered companies, or multiple corporations, making it difficult for employees to collect their severance and other amounts.

In such cases, the courts will attempt to find an answer to the question, “Who is the employer?”

The common employer doctrine, which is the applicable legal test, is outlined in multiple cases.

One of the more well-known decisions involving determining liability wherein multiple companies are involved, Downtown Eatery (1993) Ltd. v. Ontario [2001] O.J. No. 1879, involved a series of companies which each shared a stake in a nightclub business. The nightclub employees were paid by one company, but also interacted with the other two companies. When one nightclub employee sued the payroll company for wrongful dismissal and was successful, but was unsuccessful in collecting from that company, he went after the other employers for the damages awarded. While he was unsuccessful at the initial trial, he was successful on appeal in establishing that all three companies were jointly and severally liable for the damages awarded at the initial trial. In reaching its decision, the court noted that focusing on the employment relationship on a “face value” basis- i.e, simply looking at the employment contract- was insufficient to reach a determination on who the employer was, noting that, “The definition of “employer” in this simple and common scenario should be one that recognizes the complexity of modern corporate structures, but does not permit that complexity to defeat the legitimate entitlements of wrongfully dismissed employees.”

The case of Sinclair v. Dover Engineering Services Ltd. [1987] B.C.J. No. 60, involved an employee who was paid by a “shell” company employer while performing all his services for the benefit of another company. The employee was terminated due to a “lack of business”, provided with two months’ pay, despite being employed for twelve years, and subsequently sued for wrongful dismissal. When the matter proceeded to trial, the court found that the employee was jointly employed by both companies, citing factors such as the employer’s awareness of his duties and whereabouts and their common control over him as persuasive in reaching such a determination. The court recognized that the prerogative of companies is to do what they consider to be commercially convenient, however, it held that the arrangement was created and implemented in order to benefit the corporations and that both companies exercised control over the plaintiff employee and his affairs. As such, the plaintiff was found to be under contract for services with both entities and was entitled to 12 months’ notice (both defendants- Dover and the parent company, Cyril Management Ltd. were found jointly and severally liable for this amount.

Collecting from Bankrupt Employers

Collecting from a bankrupt employer can be even more difficult, given that employees of a bankrupt company will become an unsecured creditor, and will have no grounds for a legal claim as per section 69.3 (1) of the Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3. The employee is thus at a disadvantage, forced to participate in the bankruptcy process, wherein many creditors, likely very few secured, are in line to get the debt owed to them.

However, not all employees meet this fate. In Bagby & Gustavson [1980] A.J. No. 743 the fact that the employee was dismissed by a bankrupt company that was part of a greater corporate conglomerate proved to be a benefit, rather than a hindrance when it came to collecting his severance pay. In Bagby, the plaintiff, who was employed as president of Gustavson International, was terminated due to the sale of Gustavson and Associated Companies’ assets. The plaintiff sued Gustavson and its related companies and was awarded 15 months’ notice. The decision was then appealed, but the appeal with regard to the rulings on the notice period, mitigation, bonus and other aspects was dismissed. The interest on the damages awarded, conversely, was reduced, but the impact was very little to the quantum as a whole. The plaintiff was able to collect given that Raymond International Inc., another company within the conglomerate in which Gustavson was an intermediary, was solvent. In reaching its determination regarding the plaintiff’s entitlements, the court noted the difficulties similarly placed employees faced, stating that, “The law must, in my opinion, recognize the reality that though he may have worked only a few months for the bankrupt subsidiary, he has served the group as a whole for a lifetime.”

Other Cases- Dependent Contractors Employed By Multiple Corporations

Another case which involved the question “who is the employer?”, except this time with the additional question, “is the employer liable for severance” was Tetra Consulting v. Continental Bank of Canada [2015] O.J. No. 3814, a matter decided on a summary judgment motion (a motion wherein a party (or parties) feel as though the issues before the court are simplistic enough to avoid a trial). Tetra involved two corporations, one of which held 49% ownership (interest) in the Plaintiffs’ employer, a bank. The bank submitted that its staff were employed by the 49% owner, a currency exchange corporation, but the evidence led by the Plaintiffs was that the bank had been more of an employer with regards to its relationship with them. The court found that the individual Plaintiff on the motion, Cassar, had been a dependent contractor, and not an independent contractor, of the Bank considering factors such as how he held himself out (as an employee of the bank), his economic dependency to the bank, and the fact that his formal employment contract with the bank was in the drafting stages. Cassar had previously been paid through his organization, tetra consulting, and had only been considered an “official employee” of the bank for six weeks at the time of termination. Prior to being considered an employee Cassar, like the bank’s other staff, was paid through the exchange corporation, and was considered a “consultant”. The court, on the motion, ordered the bank, and not the exchange corporation, to pay Cassar 8 months’ pay in lieu of notice, as it found the bank to be his true employer and Cassar its dependent contractor, within the meaning of the common law.

When faced with difficulties proceeding against, or collecting a judgment against a company with multiple subsidiaries, or a company which becomes insolvent, it is important to be cautious and to take the correct legal steps in order to increase your chances of collecting. If you are in a situation similar to those discussed above, contact Monkhouse Law today to see if a legal remedy may be available to you.

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