Overtime class actions: directors take note of your potential exposure

Overtime class actions: directors take note of your potential exposure
The Ontario Court of Appeal’s 2012 trilogy of overtime class action decisions Fresco v. CIBC, Fulawka v. Bank of Nova Scotia, and McCracken v. v. Canadian National Railway Co. confirmed the viability a relatively new form of class action previously unexplored and highly uncertain in Ontario.

In the United States, overtime class actions are an established and substantial industry, and now the Ontario courts have set a clear road map for the path to overtime class action certification, it is likely we will see more proceedings across a wide range of industries and businesses, extending well beyond the banks and substantial national corporations that have been the targets to date.

While the risk and expense of responding to an overtime class action may be a manageable cost of business for healthy corporations with millions or billions of dollars of market capitalization, that may not be the case for a company teetering on the edge of insolvency. However, corporate directors should be attuned to the fact the financial peril of a company may not dissuade its employees from pursuing a class proceeding for unpaid overtime wages. Indeed, directors should be aware in the event the corporation does become insolvent, the threatened or extant overtime class action may not fizzle up and die, rather the directors themselves may become the defendants against whom the class action proceeds.

It is well established the insolvency of a company will not absolve its directors from personal liability for wages owed to the company’s employees. Under both the Ontario Business Corporations Act and the Canada Business Corporations Act, as well as under s. 251.18 of the Canada Labour Code, and s. 81 of the Ontario Employment Standards Act, directors are personally liable to pay earned, but unpaid, wages to the company’s employees.

Earned but unpaid overtime falls squarely within the scope of a director’s personal liability under these statutes. Hence, if the company is unable to meet the obligation, the directors are personally at risk to pay the unpaid overtime up to the statutory cap.

Under s.131(1) of the OBCA, directors are liable for all debts not exceeding six months wages and 12 months vacation pay that become due and payable while they are directors. Section 119(1) of the federal statute contains similar language: “all debts payable to each employee for services performed for the corporation,” and the directors’ liability is limited to six months wages. The performance of services by the employee while the director is in office is the fundamental criteria triggering personal liability.

The policy behind imposing personal liability upon the directors is to provide a measure of financial protection to employees who continue to provide services to the company, may be unaware of the company’s deteriorating financial position, and are not in a position to be able to protect themselves from the risk of not being paid while they continue to serve the company. The directors ultimately control the payment of wages to the employees, so if payments are in arrears, public policy holds the loss should be borne by the directors rather than the employees, as the directors were in a position to protect the employees and failed to do so.

Under both acts, directors are not liable for all debts owed by the corporation to its employees. Liability is only imposed for debts for “services performed for the corporation,” and they are quantitatively limited to a sum equivalent to six months wages (and 12 months vacation pay under the OBCA). Directors are not liable for employees’ wrongful dismissal damages. The obligation is secondary to the obligation of the company to pay the wages. To trigger a director’s personal liability, recovery from the company must be impossible or very unlikely.

Under the CBCA s. 123(4), a director can avoid liability to unpaid employees if she or he can prove she or he was also an unwitting dupe to the true financial state of the company. The director must prove he or she relied in good faith upon the company’s financial statements or similar reports showing the wages were paid or had been provided for. If the directors had no reason to know the report was incorrect, then they can avoid personal liability under this section. If, however, the directors knew or reasonably ought to have known the report was wrong, the defence will not stand.

The concept of holding directors liable for unpaid wages is long-standing. It originated in Ontario in 1874 with the Ontario Joint Stock Companies Letters Patent Act in 1894 (Ont.) c. 35, which followed from the 1869 federal Canada Joint Stock Companies Letters Patent Act, 1869, S.C. 1869, c. 13. This legislation came as a significant incursion on the general rule that directors of corporations will not be held liable for the debts of the company.

The purpose of this section, both originally under the Ontario Joint Stock Companies Letters Patent Act and under the current Business Corporations Acts, was and is to protect employees in the event of bankruptcy or insolvency of the corporation (per justice Claire L’Heureux-Dubé at p. 75 of Barrette v. Crabtree Estate), while at the same time capping the directors’ personal exposure.

To date, there have been virtually no class actions that have made use of these special protective provisions, other than an action relating to the insolvency of Dylex Ltd., which resulted in a settlement in the insolvency proceeding, and a default judgment against a director in the class proceeding for a modest sum. However, now that overtime class actions have found their place among the pantheon of certifiable class actions, expect to see an increase in the number of actions naming directors as defendants in those proceedings, particularly in cases where the company is insolvent, or nearly so. Directors — take note!

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