“A simple and common scenario”: Appeal court ruling upholding common employer doctrine stands

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On January 31, 2002, the Supreme Court of Canada refused to hear the employer’s appeal of the decision by the Ontario Court of Appeal in Downtown Eatery v. Alouche (May 22, 2001). At issue in the case was the “common employer” doctrine, as it is applied to common law employment relationships. Under this doctrine, a dismissed employee may recover reasonable notice damages from a business entity other than the one with which the employee had a contractual relationship. Whether the employee can recover from the related company will depend on the degree of relationship and common control between the related company and the primary employer of the dismissed employee. The effect of the doctrine is that an individual may be employed by more than one company at the same time, even though the contract is between the individual and one company only.

Downtown Eatery concerned Joseph Alouche, who was hired to manage a nightclub called For Your Eyes Only, the entity specified in his employment contract. However, the contract also indicated that Alouche would receive employment benefits available from an unidentified “sister organization” of the employer. Alouche’s pay cheques were issued by Best Beaver Management Inc.

When Alouche was dismissed, he sued Best Beaver. However, shortly before the start of the trial, Best Beaver ceased doing business as a result of a corporate reorganization effected by Grosman and Grad, the two principals. Alouche was successful in his action, and was awarded more than $60,000 plus costs. He was less successful in attempting to collect on his judgment from Best Beaver, and when two sheriffs seized $1,855 from the premises of For Your Eyes Only in execution of the judgment, Downtown Eatery Ltd. (the owner of the chattels and equipment at the nightclub) sued Alouche for the amount seized. Alouche then counterclaimed for the amount he was owed against all of the companies controlled by Grosman and Grad. Alouche lost at the trial of his counterclaim and then appealed to the Court of Appeal.

A SOPHISTICATED ARRANGEMENT

In reversing the trial judge’s decision against Alouche, the Court of Appeal noted that “beneath the surface of lights, liquor and entertainment” of For Your Eyes Only, “there was a fairly sophisticated group of companies involved in the operation of the nightclub”. Twin Peaks Inc. was the owner and lessor of the principals’ two nightclub premises. The Landing Strip Inc. leased the premises from Twin Peaks, owned the trademark for For Your Eyes Only, and held the liquor and adult entertainment licenses. Downtown Eatery owned the chattels and equipment at For Your Eyes Only, and operated it under licence from The Landing Strip. Best Beaver paid the employees. All of these companies were owned by Grosman and Grad’s family holding companies.

Invoking the common employer doctrine, the Court stated that this complex business arrangement could not be permitted to thwart Alouche’s right to reasonable notice:

    “[A]lthough an employer is entitled to establish complex corporate structures and relationships, the law should be vigilant to ensure that permissible complexity in corporate arrangements does not work an injustice in the realm of employment law. At the end of the day, Alouche’s situation is a simple, common and important one – he is a man who had a job, with a salary, benefits and duties. He was fired – wrongfully. His employer must meet its legal responsibility to compensate him for its unlawful conduct. The definition of “employer” in this simple and common scenario should be one that recognizes the complexity of modern corporate structures, but does not permit that complexity to defeat the legitimate entitlements of wrongfully dismissed employees.”

From this perspective, the Court noted, the absence of a contract between Alouche and the other companies in the employer’s operations was not determinative. Alouche’s true employer, the Court held, was the entire consortium of companies that operated For Your Eyes Only which, the Court pointed out, was not itself a legal entity. Noting that Alouche’s contract stipulated that he was entitled to all the benefits provided by the employer’s “sister organizations”, the Court held that this was an appropriate case for application of the common employer doctrine.

Further, the Court stated, this conclusion was not affected by the fact that the employer had reorganized its businesses some three years after Alouche’s termination. Judgment could be enforced against the successor organizations created by the reorganization. Noting that Grosman and Grad had testified that they had been careful to preserve all the rights of current employees affected by the reorganization, the Court observed that it was “obvious and fair” that Alouche also should not be disadvantaged by the restructuring.

In Our View

It is important to note that the Court explicitly stated that there was nothing suspect or fraudulent about the employer’s reorganizations. Therefore, there is no need to find an intent to evade an employer’s obligations in order to apply the common employer doctrine. That application will depend on the facts of the relationship between the companies and the extent to which these facts reveal a common control.

For further information, please contact Lynn Harnden at (613) 563-7660, Extension 226.