Alberta case a reminder to implement enforceable employment agreements that accurately reflect true nature of relationship
The recent decision of the Court of Queen's Bench of Alberta in Wisser v CEM International Management Consultants Ltd is an important reminder for employers that attempts to avoid liability to an employee are rarely successful.
In Wisser, the employee had provided services to both CEM International Management Consultants Ltd (CEM) and its successor, Forefront Performance, alternatively as an employee and an independent contractor, for roughly seven-and-a-half years. His employment was terminated on a without cause basis in March 2015, following which he brought a claim for wrongful dismissal against CEM.
Shortly after the claim was commenced, CEM ceased operating and its two principals incorporated a new company, 1994992 Alberta Ltd., which acquired all the assets of CEM.
The employee sought to recover damages jointly and severally against the new company and the directors personally under the oppression sections of the Alberta Business Corporations Act (ABCA). He argued that the individual directors of CEM had taken the assets out of CEM shortly after his claim was filed and created the new company solely in an attempt to avoid liability to him. The defendants disputed this, claiming they incorporated the new business to re-enter the marketplace as "a new service provider with a new product".
The court had to determine two issues: a) the notice period that the employee was entitled to, given that he had provided services both as an employee and as an independent contractor, and b) who was ultimately responsible at law for these damages.
Appropriate notice period
In assessing the appropriate notice period, the court first had to determine the employee's length of service. The employee argued that his entire tenure with CEM ought to be used to determine his length of service. CEM argued that the employee had been dismissed in 2009 and that he provided services as an independent contractor until 2011, when he was rehired as an employee. As a result, they argued that he only had three-and-a-half rather than seven-and-a-half years of service.
The court found that the employee was properly characterized as a dependent contractor between 2009 and 2011 and, therefore, there had been no break in his service during this time. In the alternative, the court would have concluded that he remained an employee throughout this entire period. The court noted that no severance package was provided to the employee when his employment was terminated in 2009.
Further, although some aspects of the continuing relationship reflected an independent contractor arrangement, the court found the following factors to be determinative on this issue:
- There was no change in the employee's job description nor reporting structure.
- There was no change in the level of supervision over the employee or to his title within the company.
- The employee provided services to no other clients or customers and thus remained completely dependent on CEM for his income, a fact known to CEM.
Finally, at no time did CEM ever advise the employee that conversion from an employee to an independent contractor could adversely impact his rights on a future termination.
Based on his length of service, age (63 at the time of dismissal), position (not a management nor key employee of the business), and the status of the consulting market at the time of his termination, the court found that he should have received 10 months’ notice of termination.
Who is on the hook for damages?
The court then turned to the issue of who was responsible for the 10 months of pay in lieu of notice owing to the employee.
In assessing whether an oppression remedy was available, the court had to determine:
- whether the employee was a “claimant” within s.239 ABCA and thus eligible to claim relief under the oppression sections of the ABCA
- whether he had "reasonable expectations" of the defendants which were not met
- whether the defendants’ failure to meet those expectations constituted conduct that was oppressive or unfairly prejudicial or which unfairly disregarded his interests.
The court found that the employee was a claimant as contemplated under the ABCA — he was a long-service employee to a small company with the only outstanding claim against CEM at the time it ceased operations. The court also found that he had a reasonable expectation that the corporation would not be unfairly restructured to benefit management at his expense.
Finally, the court concluded that the decision to restructure CEM, although not done in bad faith, was still prejudicial and disregarded the employee's interests entirely, rendering the actions oppressive.
The court also had no issue finding that the two individual directors should be jointly and severally liable along with the new company, noting that the directors "were clearly acting in their capacity as the only two directors and shareholders of CEM" when they ceased the operations of CEM, transferred its assets to themselves, started up the same operations under a new name and appointed themselves directors and majority shareholders again. They continued to enjoy the profitability of the new company "without regard to the interests of their former employee who had advanced his meritorious claim in a timely way."
Employers will sometimes attempt to avoid liability to former employees in creative ways, as seen in this case. However, employers and employees alike should appreciate that there are legal tools available to allow employees to recover damages, whether against new entities or against individual directors personally, or both.
Rather than attempting to avoid liability after the fact, employers can best protect themselves from liability by implementing enforceable employment agreements that accurately reflect the true nature of the relationship.