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Oppression remedy may leave corporate directors liable for unpaid wages and constructive dismissal damages

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In a recent blog, we observed that directors, officers and shareholders may be deemed to be “common employers” together with corporations; and that in certain circumstances, owners and operators may be “on the hook” for claims by employees and former employees.

By way of another recent decision of the Ontario Superior Court of Justice, director liability for claims by employees and former employees has become the subject of further judicial commentary.

In El Ashiri v. Pembroke Residence Ltd. (2015 ONSC 1172), the Plaintiffs – Mohamed El Ashiri and Hesham Mohamed Ali – sought to recover unpaid wages, overtime pay, holiday pay, vacation pay, and constructive dismissal damages (i.e. termination pay and severance pay) from the sole director of the Defendant corporations.

In some circumstances, recovery of unpaid wages from a director is enabled by statute. For example, section 131 of the Ontario Business Corporations Act (the “OBCA”) stipulates that directors may be liable for debts to employees arising from services performed by the employee(s) for the corporation, to a maximum of six (6) months’ wages.

Similarly, pursuant to section 81 of the Employment Standards Act, 2000 (the “ESA”), directors may be subject to personal liability for an employee’s unpaid wages, vacation pay, holiday pay and overtime wages (i.e. to a maximum of six (6) months’ wages, plus interest). However, section 81 of the ESA clearly stipulates that directors are not liable for termination pay and/or severance pay.

In the El Ashiri case, the Plaintiffs each sought to recover more than six (6) months’ wages from the corporate director, together with termination and severance pay. Therefore, rather than pursuing a claim under section 81 of the ESA or under section 131 of the OBCA (i.e. where the amounts of their recovery may have otherwise been restricted), the Plaintiffs sought to rely on the oppression remedy provisions found at section 248 of the OBCA, which provide as follows:

248 (2) Where, upon an application under subsection (1), the court is satisfied that in respect of a corporation or any of its affiliates,

(a) any act or omission of the corporation or any of its affiliates effects or threatens to effect a result;

(b) the business or affairs of the corporation or any of its affiliates are, have been or are threatened to be carried on or conducted in a manner; or

(c) the powers of the directors of the corporation or any of its affiliates are, have been or are threatened to be exercised in a manner,

that is oppressive or unfairly prejudicial to or that unfairly disregards the interests of any security holder, creditor, director or officer of the corporation, the court may make an order to rectify the matters complained of.

Upon review of the evidence, Mr. Justice Boswell reached the following conclusions:

• The Plaintiffs were creditors of the Defendant corporations and, therefore, were entitled to apply for relief under section 248 of the OBCA;
• The director of the Defendant corporations knew when he hired the Plaintiffs that the Defendants were not in a financial position to pay them what they were due and, indeed, the Defendants failed to pay the Plaintiffs what they were due;
• The director of the Defendant corporations nonetheless persuaded the Plaintiffs to continue working on the basis of false promises (and the Plaintiffs’ continued expectation that they would be paid for services rendered was reasonable in the circumstances);
• The director of the Defendant corporations made payments to preferred creditors while continuing to withhold payments from the Plaintiffs;
• The conduct of the director of the Defendant corporations was “oppressive, high-handed, callous and unfairly prejudicial to the rights and interests of the plaintiffs”; and
• The director of the Defendant corporations benefitted, directly or indirectly, from the labour and efforts of the Plaintiffs.

In light of those findings, Justice Boswell ruled in favour of the Plaintiffs, and ordered damages payable jointly and severally by the Defendant corporations and the corporate director, as follows:

• $23,898.58 to Mr. El Ashiri, and
• $35,450.45 to Mr. Ali,

together with a contribution to the Plaintiffs’ legal costs in the aggregate sum of $24,000.

The Court’s decision in El Ashiri reflects a broadened interpretation of the oppression remedy provisions that appear at section 248 of the OBCA, and may open the door to a new opportunity for more employees to – in appropriate circumstances – circumvent the statutory restrictions on recovering wages and other employment-related payments from corporate directors.

Particularly in light of that possibility (and in any event as a matter of good HR practice and due diligence), employers should consider the following precautions to mitigate against the risk of directors being held personally liable to employees and former employees for unpaid wages and constructive dismissal damages:

• Ensure that employees are paid in a timely manner;
• Maintain adequate financial reserves (or credit facilities) to satisfy wage claims of employees;
• Ensure that other unsecured corporate creditors are not being paid in priority to (i.e. before) employees;
• Educate officers on their statutorily prescribed roles, responsibilities, and potential liabilities; and
• Obtain (and maintain) director and officer (D&O) liability insurance.

Ryan D. Campbell

About the Author: Toronto Employment Lawyer Ryan D. Campbell assists both employers and employees in all facets of employment law, workers’ compensation law, and occupational health and safety law. Ryan also has experience assisting Ontario employers in complying with the Accessibility for Ontarians with Disabilities Act, and advising on the use of social media and technology in the workplace.