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Wrongful Dismissal and Employment Law

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Wrongful Dismissal and Employment Law

Full Report and Decision

Can employee recover damages from “related employers”?

2001 / May/June

When an employer goes out of business, can a wrongfully dismissed employee recover damages from companies related to the employer? Can the employee, as a potential judgment creditor, use the “corporate oppression remedy” to overcome the impact of a corporate reorganization? In a precedent-setting decision, the Ontario Court of Appeal has ruled in favour of the employee on both of these questions.


THE FACTS

In December 1992, Joseph Alouche was hired as the manager of For Your Eyes Only , a Toronto adult entertainment nightclub. The only entity specifically mentioned in Alouche’s employment contract was For Your Eyes Only , but reference was made to the receipt of benefits available “in our sister organization.” Alouche’s paycheques were issued by Best Beaver Management Inc., a company controlled by Herman Grad and Ben Grosman. Grad and Grosman owned For Your Eyes Only and The Landing Strip , another adult entertainment nightclub in Toronto. The two nightclubs were operated through a sophisticated arrangement of companies which owned the real estate, leases, equipment, trademarks, and licences required to operate the businesses. All of the companies were owned and controlled by personal holding corporations owned by Grad and Grosman.

In June 1993, after six months of employment, Alouche was dismissed. He successfully sued Best Beaver for wrongful dismissal and was awarded $84,000 in damages, interest and costs. However, in the spring of 1996, a few months before the trial, Grad and Grosman reorganized their holdings and transferred the assets of Best Beaver to their other companies. Existing employment relationships were not affected by the reorganization, although Best Beaver ceased to do business. As a result, Alouche was unable to enforce his judgment.

In partial execution of the judgment, two sheriffs seized $1,855 in cash from the premises of For Your Eyes Only . Downtown Eatery (1993) Ltd., another Grad-Grosman company, then brought an action against Alouche, alleging that the seized cash belonged to it. Alouche counterclaimed against Grad and Grosman and each of their companies. Judge Colin Campbell of Ontario’s Superior Court dismissed Alouche’s counterclaims, ruling that Downtown Eatery was entitled to the funds.

Alouche appealed to the Ontario Court of Appeal, arguing that Grad, Grosman and their companies constituted a single employer. He also argued that the pre-trial corporate reorganization was oppressive and unfairly prejudicial to his interests as a potential judgment creditor of Best Beaver. In this regard, s.248 of the Ontario Business Corporations Act authorizes a court to rectify improper corporate acts or omissions which are prejudicial to or unfairly disregard the interests of creditors.

THE DECISION

The Ontario Court of Appeal allowed Alouche’s appeal on both grounds, ruling that the entire group of Grad- Grosman companies constituted a common employer and that Alouche was entitled to the benefits of the oppression remedy.

Common Employer Doctrine

At the outset, the Court of Appeal noted that it is now widely recognized, through the common employer doctrine, that an individual can have more than one employer for the purposes of determining obligations between employers and employees. According to this doctrine, it is possible for an employee to contract for employment with more than one employer, provided there is a sufficient degree of relationship between the different employers. It is recognized that an employee has, in effect, served all employers, even though there may be a contractual relationship with only one employer. What will constitute a sufficient degree of relationship will depend, in each case, on the details of the relationship, including such factors as individual shareholdings, corporate shareholdings, and interlocking directorships. The essence of the relationship is the element of common control:

The common employer doctrine, in its common law context, has been considered by several Canadian courts in recent years. The leading case is probably Sinclair v. Dover Engineering Services Ltd. (1987), 11 B.C.L.R. (2d) 176 (S.C.), aff’d (1988), 49 D.L.R. (4th) 297 (B.C.C.A.) ... In reasoning that we find particularly persuasive, [Judge Wood] said: “As long as there exists a sufficient degree of relationship between different legal entities who apparently compete for the role of employer, there is no reason in law or in 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 essence of that relationship will be the element of common control.”

Turning to the Grad-Grosman group of companies, the Court found that a highly integrated group of companies together operated all aspects of For Your Eyes Only nightclub. Controlling all of these companies were Grad and Grosman and their personal holding companies. The Court concluded that the corporate arrangements were perfectly normal and legitimate, but could not operate to deny Alouche his rightful damages for wrongful dismissal:

[A]lthough an employer is entitled to establish complex corporate structures and relationships, the law should be vigilant to ensure that permissible complexity in corporate arrangements does not work an injustice in the realm of employment law. At the end of the day, Alouche’s situation is a simple, common and important one — he is a man who had a job, with a salary, benefits and duties. He was fired — wrongfully. His employer must meet its legal responsibility to compensate him for its unlawful conduct. 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 fact that there was no employment contract between Alouche and the related employers was not determinative. If it were, commented the Court, it would be too easy for employers to evade their obligations to dismissed employees by imposing employment contracts with shell companies with no assets. In any event, For Your Eyes Only , the only body named in the employment contract, was a business name, not a legal entity. In all of the circumstances, the Court concluded that Alouche’s true employer was the entire group of Grad-Grosman companies which operated For Your Eyes Only .

The Court also commented on the effect of the reorganization of the Grad-Grosman companies following Alouche’s dismissal. Noting that existing employment relationships were not affected by the reorganization, the Court concluded that Alouche should be in the same position as other employees and expanded the list of original common employers to include the reorganized companies.

Oppression Remedy

The Court found that Alouche, as a judgment creditor of Best Beaver, had a reasonable expectation that the company’s affairs would be conducted with a view to protecting his interests. The Court noted that Best Beaver was profitable when it went out of business, and that a reserve fund could have been created to meet the contingency that Alouche would prevail in his wrongful dismissal lawsuit. Although the corporate reorganization was undertaken for legitimate business reasons, the Court concluded that the oppression remedy could be granted even in the absence of an intention to harm the complainant:

The application of the principles governing s.248(2) of the OBCA to the trial judge’s findings of fact and to the evidence in the trial record leads to the conclusion that the trial judge erred in failing to grant an oppression remedy against Grad and Grosman. In our view, the trial judge failed to appreciate that the “oppressive” conduct that causes harm to a complainant need not be undertaken with the intention of harming the complainant. Provided that it is established that a complainant has a reasonable expectation that a company’s affairs will be conducted with a view to protecting his interests, the conduct complained of need not be undertaken with the intention of harming the plaintiff. If the effect of the conduct results in harm to the complainant, recovery under s.248(2) may follow.

In the Court’s view, there was no question that the actions of Grad and Grosman caused a result which was unfairly prejudicial to Alouche’s interests. They permitted Best Beaver, a profitable company, to go out of business and transferred its assets to other companies they owned. They did so in the full knowledge of a wrongful dismissal trial scheduled to begin a few months later. By diverting the accumulated profits of Best Beaver to other companies, they were able to insulate these funds from being available to satisfy Alouche’s judgment. Whether or not they did so in good faith was irrelevant. For all of these reasons, the Court ruled that Alouche was entitled to an oppression remedy against Grad and Grosman.

In the result, the Court allowed Alouche’s appeal against all of the Grad-Grosman companies. Alouche was entitled to recover his wrongful dismissal damages from the related companies.

ANALYSIS

This is a precedent-setting decision which makes it clear that an employer cannot always avoid paying wrongful dismissal damages by simply going out of business. In certain circumstances, related companies may be held liable for wrongful dismissal damages. Related companies may be considered a common employer if there is a sufficient degree of common control between the companies. The courts will look at such factors as individual shareholdings, corporate shareholdings, and interlocking directorships. The absence of an employment contract between the employee and the related companies is not determinative. However, there must be some evidence of an intention, either express or implicit, to create an employment relationship between the employee and the related employers. Here, the Court emphasized that Alouche’s employment contract referred to a “sister organization” and that he was paid by a related company, Best Beaver.

This decision is also significant in that it points to the corporate oppression remedy as another method by which employees can recover wrongful dismissal damages from an employer which has ceased operations. Such an action may be successful if the employee can prove that the corporate employer’s actions caused a result which was unfairly prejudicial to the employee. It is not necessary to prove an intention to harm the employee’s interests. However, the employee must have a reasonable expectation that the employer’s affairs would be conducted with a view to protecting the employee’s interests. In this case, Alouche had no way of knowing the details of the complex corporate structure which operated For Your Eyes Only . Moreover, it would have been a simple matter for Grad and Grosman, the owners of For Your Eyes Only, to protect Alouche’s interests by creating a reserve fund in case Alouche’s action for wrongful dismissal were successful. In this regard, the Court emphasized the profitability of Best Beaver at the time of the reorganization. The result might well have been different if Best Beaver had ceased operations due to insolvency.