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Putting on the Brakes: The Limits of the Common Employer Doctrine

One of the more deceptively complex questions in some cases can be: Who is the employer?

Many businesses and organizations now consist of multiple, separate corporations, organized for tax, liability, and other legitimate commercial purposes.  Although in some contexts such structures prevent any liability from flowing between the constituent elements, in wrongful dismissal cases such a structure can often come under attack, as plaintiffs attempt to draw unrelated elements of the same organization into litigation to access assets or because of confusion over the correct party to name.

Sproule v. Tony Graham Lexus Toyota involved such a corporate structure.  The plaintiff had been dismissed from his employment at a car dealership.  The dealership was one of several, separately incorporated dealerships owned by a network of holding companies.

The plaintiff brought a wrongful dismissal action against all of the dealerships, holding companies, and the directors of the organization.  The defendant brought a motion for summary judgment to have the holding companies and the personal defendants removed prior to trial.

In defending its decision to include the various defendants in the action, the plaintiff relied on the “common employer” doctrine.  That doctrine provides that an employee may be employed by multiple related corporations simultaneously under a single contract of employment if there is an indication that the parties intended for the employee to be directed and employed by all of those related corporations.  In such a case, all of the employers may be liable to the employee in a wrongful dismissal action.

The court did not accept the plaintiff’s argument that the common employer doctrine applied to the holding companies.  The court found it undisputed that they were “true” holding companies, which did not engage in business on their own behalf or exercise any employment control or direction over the plaintiff.  The common employer doctrine could not apply because the facts simply could not support the plaintiff’s assertions that the holding companies were employers.  The court dismissed the case as against the holding companies.

The court also dismissed the case as against the personal defendants.  Despite the fact that they had ultimate control over the organization, their actions in dealing with the Plaintiff, particularly his termination, were undertaken in good faith and within the scope of their authority.  As a result, there was no reason for them to be held personally liable in the wrongful dismissal action.

The employer did not attempt to have the action dismissed as against the other dealerships in the group.

What employers should know

This case illustrates the limits of the common employer doctrine.  In order for the doctrine to apply, the companies must be more than merely related or not “arms length”; they must also be engaged in some type of employment function with respect to the particular employee.  Because the holding companies were not engaged in any economic activities, they could not be held to be employers, and could not be held liable in the wrongful dismissal action.

While the common employer doctrine can still lead to employment law liability across multiple corporations, this decision goes to illustrate that a corporate structure can help contain such liability.

Directors and officers should take care to ensure that corporate vehicles are used for their intended purposes.  In our practice, we often see that the best laid plans are simply not followed in practice.  For example, holding companies are not holding companies that have active employees and issue T4s and ROEs in their own corporate names.

Employers with complex corporate structures should review their organizational charts to evaluate their level of protection, and improve that protection where warranted or take advantage of that structure where possible.

This blog was first published on First Reference Talks.

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