Finding common ground

The Ontario Court of Appeal’s recent decision in O’Reilly v. ClearMRI Solutions Ltd. provides important clarification as to the scope and application of the common employer doctrine in connection with claims for employment entitlements. In particular, O’Reilly confirms that the concept will only apply where there is evidence of an intention to create an employer-employee relationship between an individual and the related corporation in question.

Common employer doctrine

The common employer doctrine provides that an individual may be employed by a number of different companies at the same time. Where an individual has an employment-related claim and invokes the common employer doctrine, they may pursue those claims as against both their primary employer and the applicable related company. At a high level, an employee’s ability to recover damages from the related company will depend on the nature of the relationship and the extent of common control between the related company and the primary employer of the individual. This assessment will take into account the substance, as opposed to the form, of the relationship between companies.

In pursuing claims against a common employer, an individual can bring an application to have multiple entities declared as a common employer at common law (as addressed in O’Reilly), pursuant to employment standards legislation — such as the Ontario Employment Standards Act, 2000 (ESA) or the the Ontario Labour Relations Act (LRA) in Ontario, for example.

O’Reilly: Facts and background

William O’Reilly served as the Chief Executive Officer and a director of ClearMRI Solutions Ltd. (ClearMRI Canada) and its wholly-owned subsidiary, ClearMRI Solutions Inc. (ClearMRI US). Tornado Medical Systems is the majority shareholder of ClearMRI Canada. O’Reilly was employed pursuant to a written employment agreement with ClearMRI US, but he reported to, and had his performance goals set by, the board of directors at ClearMRI Canada.

When O’Reilly’s employment ended, he brought an action against both ClearMRI companies and Tornado seeking recovery of all outstanding amounts owed for salary, vacation pay, and an outstanding loan he had made to ClearMRI Canada. O’Reilly initially obtained default judgment against the ClearMRI companies, but when that judgment was not satisfied, O’Reilly moved for summary judgment against the remaining defendants. The motion judge found that ClearMRI Canada, CLearMRI US and Tornado were all common employers. This decision was overturned by the Ontario Court of Appeal.

The main issue before the Court of Appeal was whether there was a sufficient relationship between Tornado and the ClearMRI companies to apply the common employer doctrine. The Court of Appeal unanimously held that Tornado was not liable under the doctrine because there was no objective intent between O’Reilly and Tornado to enter into an employment contract on the terms for which O'Reilly sought damages — salary, vacation pay, and a loan — nor did Tornado exercise sufficient control over O’Reilly as an employee.

Liability will not arise solely because a corporation has a corporate relationship with an employee’s primary employer.

In reaching this conclusion, the Court of Appeal emphasized that it is not enough that a shareholder’s objectives may be aligned with those of the corporation, or that the corporation’s success may accrue to the benefit of the shareholder. A shareholder corporation does not effectively control an employee simply because they stand to benefit from the success of the corporation and the employee is working towards that success.

Impact on employers

The Court of Appeal’s decision clarifies that common employer liability applies to wrongful dismissal actions (as argued in this case by Tornado) as well as any claims that could be brought by reason of a breach of the employment agreement. This includes claims relating to the failure to pay salary, bonus, or other entitlements, in addition to claims about dismissals without notice or cause.

O’Reilly also provides helpful parameters as to the application of the common employer doctrine in common law claims — the Court of Appeal’s findings do not necessarily apply to claims under the ESA or LRA. In particular, the decision confirms that common employer liability exists in a manner that is consistent with the principle of corporate separateness, and liability will not arise solely because a corporation has a corporate relationship with an employee’s primary employer. Rather, liability arises under the common employer doctrine where related corporations have objectively demonstrated that they intended to be parties to an employment contract with the employee, with respect to the terms the employee is seeking to enforce. The Court of Appeal in O’Reilly found that this question of contractual formation was not addressed, articulated, or applied by the motion judge.

While a variety of conduct may be relevant to whether there was an intention to enter into a contract, O’Reilly establishes that the following two factors are key: the employer in question exercises effective control over the employee, and an employment agreement explicitly specifies that the corporation is the employer of the individual. With respect to the first, and most germane, factor, control over matters such as the selection of employees, payment of wages or other remuneration, method of work, and ability to dismiss are all important indicators of an employer-employee relationship. With respect to the second factor, a written employment agreement does not need to exist for a finding of a contractual relationship between an employee and employer. Rather, such a relationship will be found based on an objective assessment of all the evidence and factual context.

O’Reilly further confirms that while corporate interrelationships warrant consideration when making a common employer assessment, they do not on their own justify application of the doctrine.

Legal view

O’Reilly will provide some comfort to businesses operating through interrelated entities in underscoring that the courts will only “pierce the corporate veil” where warranted by the individual circumstances, taking into account the objective intentions of the parties as evidenced by their conduct. At the same time, interrelated entities should continue to be cautious in situations where there may be overlap in the provision of services by employees between such entities or the exercise of direction or control over employees by such entities, as this type of conduct can be indicative of a common employer relationship regardless of the written terms between the parties.

For more information, see:

• O’Reilly v. ClearMRI Solutions Ltd., 2021 ONCA 385 (Ont. C.A.).

Lucy Carruthers is an associate practising in the Employment and Labour Group with Stikeman Elliott in Toronto. She can be reached at 416-869-5527 or [email protected].