September 9, 2005
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In a world of increasing corporate restructuring and non-standard employment relationships, companies can find themselves in the situation of being liable for wrongful dismissal damages where they might not have expected. Two recent appellate cases demonstrate situations where businesses will be liable for wrongful dismissal damages even though there were other separate legal entities that were directly responsible for providing reasonable notice to the employees in question.

Predecessor employer liable

In Major v. Philips Electronics Ltd., [2005] B.C.J. No. 638 (C.A.), the court addressed whether a vendor of a business was liable to an employee for notice when the employee continued in the same position with the purchaser of the business and the purchaser recognized the employee's previous service and benefits. The plaintiff, after working for Philips in India from 1994 to 2001, agreed to come to Canada to become site manager of a Philips plant in Richmond, B.C, effective May 1, 2001. On July 18, 2001, Philips informed all employees of the plant, including Major, that their employment would be terminated as of Aug. 31 because it was closing the plant. However, Philips instead sold the plant to a third party, Holley Communications Canada Ltd. Holley then offered Major continued employment on substantially the same terms and conditions with Philips, including recognition of his previous service.

Three weeks after Holley became his employer, Major was dismissed because of differences that had developed. Major accepted Holley's offer of 17 weeks' pay in lieu of notice and released Holley from liability, but deleted from the release a provision that would have also released Holley's predecessors. Major then sued Philips for wrongful dismissal damages.

Philips argued that it was not liable for any wrongful dismissal damages to Major. It argued that his acceptance of employment with Holley had been a novation. Novation requires a three-part test being met:

  1. The new debtor must assume the complete liability.
  2. The creditor must accept the new debtor as principal debtor and not merely as an agent or guarantor; and
  3. The creditor must accept the new contract in full satisfaction and substitution for the old contract.

The trial judge and appeal court rejected that argument. The appeal court concluded that it was open for the trial judge to find that there was no novation as there had been no express communications between the parties regarding reservation or extinguishments of rights because of Major's acceptance of employment with Holley.

Secondly, Philips argued that Major could not have concurrent rights against both former employers for the same relief. In support of this position, the company cited s. 97 of the B.C. Employment Standards Act, which reads: "If all or part of a business or a substantial part of the entire assets of a business is disposed of, the employment of an employee of the business is deemed, for the purposes of this Act, to be continuous and uninterrupted by the disposition." The appeal court rejected this argument and found that s. 97 (equivalent to s. 9 of the Ontario Employment Standards Act, 2000) does not extinguish the common law action against Philips because it applies only "for the purposes of this Act." The court concluded that employment standards are intended to supplement the common law, not strip employees of their common law rights.

However the appeal court did reduce Major's damages to prevent any double recovery by offsetting the 12-month notice period by the 17 weeks paid by Holley and the period of working notice.

Effective control makes company liable

In another appellate decision, Jakl v. Goodyear Canada Inc. [2005] O.J. No.88 (C.A.), the Ontario Court of Appeal found that a third party company that had assumed effective control of the employer by way of an option agreement was liable for wrongful dismissal damages for the period of time when it was a "coemployer". Jakl was dismissed from his job as a mechanic and foreman at Russell Tire in 1999 after nine years of employment. He sued and was awarded $33,660.17 against Russell Tire, which was the equivalent of nine months' notice. However, because it was likely that he would be unable to collect from Russell, he also pursued Goodyear Canada Inc. as co-employer. This claim was based on Goodyear's option agreement with Russell Tire that gave it effective control of the company.

At trial, Jakl's claim against Goodyear was dismissed on the basis that Goodyear was not his employer. However on appeal, Justice Karen Weiler ruled that the trial judge had erred in finding that Goodyear had no liability in the matter:

"The trial judge found as a fact that, between the time of the option agreement (July 31, 1997) and the date of the sale of Russell Tire's business to the Beverly Group Ltd. (April 10, 1999), Goodyear was in effective control of Russell Tire's business and employees. Based on this finding, we conclude that, as a matter of common law, Goodyear became a co-employer of Russell Tire's employees."

Therefore, the court held Goodyear responsible for providing reasonable notice of termination to Jakl. The appeal court concluded that Goodyear should be responsible for a period of 12 weeks’ notice (in light of the fact that it only controlled Russell Tire for 20 months). As the trial judge had awarded Jakl nine months notice separately against Russell, essentially, the appeal court did a separate notice period calculation for Goodyear based only on the period of their control.

These appellate level decisions are examples of the courts’ continued application of the common employer doctrine to expand the net of entities that will be found liable as employers. Plaintiff's counsel should therefore make sure to examine corporate relationships closely before commencing claims in order to ensure that all potential employers are named in the action. Businesses who want to avoid any unexpected liabilities will want to ensure that they don't act in a fashion that makes them de facto employers or when selling their enterprises that they be cognizant of liability for any future wrongful dismissal damages and negotiate which party will be responsible.

Steve Levitt practises employment law with Nelligan O’Brien Payne LLP, a full service law firm in Ottawa.

[This article is reprinted with permission and first appeared in the September 2005 issue of The Lawyers Weekly.]

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Employment Law