Companies are legally distinct from their officers, shareholders and directors. As a result of this principle, if an action is available against a company in respect of its wrongdoing, it is normally not possible to obtain a remedy against the individuals behind the company, even where they are directing the actions of the company.
However, sometimes the application of this principle can result in unsatisfactory outcomes for those with claims, for example, when the company is bankrupt and needs funds from which to pay out the claim. Courts have sometimes been prepared to hold the individuals behind the company personally liable for the company’s wrongdoing, referred to as “piercing the corporate veil.”
This article looks at piercing the corporate veil in the employment context, along with a recent Ontario Superior Court of Justice decision, in which an employee sought damages for termination against the company he was employed by and its owner, director and CEO. It serves as a reminder that creating a corporate structure does not necessarily prevent claims for compensation against an officer and director in their personal capacity.
What is the corporate veil?
The directors, shareholders and officers of a corporation are not normally liable for the actions of the corporation.
This has been a fundamental principle of company law since the 1896 English case of Salomon v Salomon & Co Ltd. The court decided that a company has a separate legal personality, and as a result, it was not possible for a company’s liquidator to claim against the company’s shareholder for debts owed to unsecured creditors.
When might it be possible to pierce the corporate veil?
Despite this general principle, courts are prepared to pierce the corporate veil in limited circumstances and hold the directing mind personally liable.
For example, Ontario courts have pierced the corporate veil where an individual directs a wrongful act to be done and uses a corporation as nothing more than an “alter ego.” This applies in the employment law context, as shown in the recent decision discussed below.
It is important to consult an experienced employment lawyer to discuss the prospects of being able to pierce the corporate veil, as the law in this area is complex. There are other routes to consider as well, including oppression remedy claims under the Business Corporations Act.
Plaintiff terminated after undergoing cancer treatment
In Griffon Integrated Security Technologies Inc. and Sheppard v Valley Associates Inc. and Martin, the plaintiff Mr. Sheppard, was originally employed by the corporate defendant for a two year-term. The written contract was between the plaintiff’s personal services company and the defendant’s company. After the two-year term, the plaintiff’s employment continued indefinitely, and he spent about another ten years as the defendant’s vice president and general manager.
In August 2018, the plaintiff was diagnosed with cancer. He continued working while undergoing treatment. In early 2019, the defendant terminated his employment without cause, giving no notice.
Plaintiff sued employer company and its owner, director and CEO
Shortly after, the plaintiff commenced a wrongful dismissal action against the defendant company, along with Mr. Martin, who was described as the company’s “owner, director, CEO and directing mind”.
Justice MacLeod was highly critical of the defence put together by the company and its owner:
“It was vigorously defended using what can only be described as a “scorched earth” strategy. The defendants accused the plaintiff of financial irregularities and argued after discovered cause. They launched a counterclaim for inter alia breach of contract, fraud and defamation. It is apparent from the discoveries and from the subsequent conduct of the defendants in the litigation that there was never any substance to the counterclaim and no basis to any defence. There are no documented performance issues, no warnings and no termination event.”
The defendants subsequently decided not to participate in the litigation. As a result, they were noted in default, which has the effect of the defendants admitting the allegations made by the plaintiff in his claim.
Court award damages for reasonable notice period
Justice MacLeod decided that the contract between the two companies was “in pith and substance” an employment contract. His Honour awarded damages equivalent to 20 months’ salary as reasonable notice after applying the ‘Bardal factors.’
The plaintiff also claimed punitive damages against the defendants. These are awarded in rare circumstances to punish the defendant where their conduct “shocks the conscience of the court” and needs to be denounced.
The plaintiff argued that all of the damages should be awarded against Mr. Martin in his personal capacity.
Court also awarded punitive damages and made the defendant company’s owner jointly and severally liable
In addition to approximately $290,000 for the notice period, plus interest and substantial indemnity costs, Justice MacLeod decided to grant the plaintiff an additional $75,000 as punitive damages to punish the conduct of the defendants.
Justice MacLeod also agreed with the plaintiff that Mr. Martin was jointly and severally liable. His Honour noted that he was the sole shareholder, director and most senior official, he directed the conduct of the litigation, and he knew he was being sued personally and that his defence was to be struck out as a result of the default.
His Honour decided that Mr. Martin directed a wrongful act to be done and used the company as an alter ego. As a result, the court was prepared to pierce the corporate veil and find the defendants jointly and severally liable for all the damages awarded.
Contact Haynes Law Firm in Toronto for Guidance on Employee Termination in a Corporate Context
Being terminated is a really stressful time. Paulette Haynes and her team at the Haynes Law Firm fight for the rights of employees that have not been paid appropriate termination packages or that have been mistreated in the termination process. We also advise employers on their obligations, helping them to transition employees in compliance with the law. Please contact us today via our online form or by phoning us at 416.593.2731.