Could a director be personally liable for unpaid wages?
Imagine that you receive a demand letter threatening to sue the company for wrongful dismissal and hold the directors personally liable for the company’s debts to a former employee. Is that possible? When could it happen?
As a general rule, individuals are usually not held personally liable for the debts of a corporation. Ontario employment law provides for several exceptions to this general rule, including situations in which a director or the controlling mind of an employer can be held personally liable for unpaid wages and other debts owing to an employee.
Section 4 of the Employment Standards Act: For the purposes of proceedings under the Employment Standards Act, 2000 (ESA), section 4 of the ESA provides an expansive definition of “employer” to include individuals who carry on associated or related activities or businesses with the direct employer. In such cases, the individual and the direct employer can be treated as one employer. Both the individual and the direct employer can be jointly and severally liable for any contravention of the ESA and for any wages owing to employees.
If an employee files an Employment Standards claim with the Ministry of Labour, in certain situations an individual who is an operating mind of the employer can be found jointly and severally liable (along with the company that is the direct employer) in a resulting order to pay wages.
Director’s Liability under section 81 of the Employment Standards Act: Section 81 of the ESA provides for certain situations in which the directors of an employer are personally liable for wages owing to an employee.
For instance, the directors will be joint and severally liable if the employer is insolvent, the employee files a claim for unpaid wages with a court-appointed receiver, and the claim has not been paid in full.
Another common situation in which the directors of an employer will be held personally liable under section 81 of the ESA is if there is an unpaid Ministry of Labour order requiring the employer to pay wages to an employee. Importantly, this section does not apply to court judgments against the employer - only orders under the ESA issued by a Ministry of Labour employment standards officer.
Section 81 of the ESA contains a monetary limit for a director’s personal liability. A director can be held liable for up to six months’ wages, and up to 12 months of vacation pay, which are accrued while they are directors of the employer.
The Business Corporations Act
The Ontario Business Corporations Act (OBCA) contains a further statutory scheme providing for personal liability of an employer’s directors.
Pursuant to section 131 of the OBCA, a director is personally liable if “the corporation is sued in the action against the director and execution against the corporation is returned unsatisfied in whole or in part”. This means that where the employer and a director are both named as defendants in a lawsuit brought by the employee, and a judgment is made against the employer for unpaid wages or overtime, the director will become personally liable if the judgment remains unpaid.
It should be noted that this section applies to court judgments made against the employer, whereas section 81 of the ESA applies only to Ministry of Labour Orders and not court judgments.
Section 131 of the OBCA contains a similar monetary limit to section 81 of the ESA: a director can be held liable for up to six months’ wages, and up to 12 months of vacation pay, which are accrued while they are directors of the employer.
The term “wages” is defined in the ESA to include all monetary remuneration payable by an employer to an employee, and any payment required to be made by an employer to an employee under the ESA. This is a broad definition which includes overtime pay and other compensation beyond an employee’s base salary.
Section 131 of the OBCA was considered by the Ontario Court of Appeal in the case of Abbasbayli v. Fiera Foods Company, 2021 ONCA 95. The Ontario Court of Appeal found that an employee was entitled to assert claims against the employer's directors personally. Furthermore, although there was not yet a judgment against the employer, the court ruled that it was not premature to bring a claim against the directors:
"It is not premature to assert the claim in this action: s. 131(2)(a) contemplates that the corporate employer will be sued in the same action as the director, although the director will not become liable [...] until execution against the corporation is returned unsatisfied."
Ontario employment law provides multiple bases for individual liability of directors or the controlling mind of an employer corporation. When considering an employer’s response to a potential claim by an employee, it may be necessary to consider not only the corporation’s exposure, but the potential liability of certain individuals as well.
It is important to contact a lawyer to assess your individual circumstances if you have any doubts or concerns about your potential exposure.
Alex Minkin is an associate lawyer at Rudner Law in Toronto.