Directors Sent to Jail for Failure to Pay Employee Wages

Apr 30, 2019

If you are a director or a party to a unanimous shareholder agreement did you know that you are personally liable for unpaid wages and you could go to jail for up to one year for failing to pay them?

So if you are a small business owner, have signed a unanimous shareholder agreement, or are a director of a non-profit corporation that is experiencing cash flow problems and are thinking of deferring employee wages, then please read on.  

Three Directors Who Have Gone to Jail

This blog summarizes three cases where a director was sent to jail for 90 days for failing to pay unpaid wages.

Applicable Legislation

Under the Employment Standards Act a “director” means a director of a corporation and includes a shareholder who is a party to a unanimous shareholder agreement.  

A director of a  corporation is generally jointly and severally liable to the employees of the corporation for all debts not exceeding 6 months’ wages.

The director of an employer is generally jointly and severally liable for wages if, among other things,  the employer is insolvent, in receivership or in bankruptcy proceedings; or, the employer has not paid an order to pay.

A person who fails to comply with an order to pay wages is guilty of an offence and on conviction is liable, if the person is an individual, to a fine of not more than $50,000 or to imprisonment for a term of not more than 12 months, or to both.

90 Days Jail for Failure to pay Restaurant Employees

According to the Ministry of Labour, in August of 2018, the director of a restaurant chain was ordered to serve 90 days in jail for failure to pay unpaid wages. Yuk Ellen Pun was also fined $900,000 for failing to comply with an earlier order to pay wages. The companies she controlled owed 68 employees $676,000 for, among things, salary, overtime, vacation, and public holiday pay.

90 Days Jail for Failure to pay Student Lifeguards

According to the Workers’ Action Centre, Peter Check hired student lifeguards for his pool supply company each summer and refused to pay their last months’ wages.  He then closed the business and opened up the business again under a new name the next season. The students filed complaints covering 2007 and 2008 wages and the  Ministry of Labour ordered the employer to pay over $63,000 in unpaid wages. The employer failed to pay and Mr. Check, who was personally liable under the Employment Standards Act and refused to pay. In 2013, He was convicted to 90 days in jail and ordered to pay a $15,000 fine.

90 Days Jail for Failure to pay Order to Pay Wages

Similarly, according to the Ministry of Labour, in 2012 Steven Bondin, a director of six corporations, was sentenced to 90 days in jail and ordered to pay $280,000 in fines, for wages owed 61 employees from March 2007 to October 2009 plus a 25% victim surcharge. Before he was sentenced to jail, the Ministry of Labour had issued 113 orders to pay for over $ 125,000 which were not paid.

Lessons to Be Learned

1. If you are a director or a party to a unanimous shareholder agreement, make sure employees are paid wages owing or you may inadvertently become personally liable. Although unlikely, you could also be sent to jail

2. If you are the sole director of a corporation and the corporation is experiencing cash flow difficulties then think long and hard about deferring wages without getting legal advice or you may lose the benefits of a corporation’s limited liability.

3. If you are a director of a non-profit corporation or a charity then make sure the senior manager of the organization regularly informs the Board that there are no outstanding wages. Otherwise your volunteer experience could cost you money.

4. If you have signed a unanimous shareholder agreement – and you are a passive shareholder –  make sure the corporation regularly confirms to you that there are no outstanding wages. Otherwise the return on your investment could be significantly reduced.

5. Unpaid wages are just the tip of the iceberg as far a director’s liability is concerned. Directors are also personally liable for accrued and unpaid vacation, and some payroll taxes. Directors can also be sent to jail for violations of the Ontario’s Occupational Health & Safety Act –  but that is the topic for another blog.

For 30 years, Doug MacLeod of the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

There are many ways to attack the termination clause in an employment contract. 

I am now surprised if employee counsel does not claim that their client’s  termination clause is not legally enforceable - usually because the termination clause does not allegedly comply with the Employment Standards Act.

This blog considers a case, McKercher v Stantec Architecture Ltd., 2019 SKQB 100, where an employee successfully attacked the termination clause in his contract because he did not explicitly agree to it after being promoted. 

The Facts

In 2006, Mr. McKercher commenced employment as a staff architect. The termination clause in his employment contract stated: 

Termination other than for cause will be with notice or pay in lieu of notice, based on your length of service. If the Employer terminates your employment for other than just cause you will receive the greater of:

  1. a)   Two weeks notice or pay in lieu of notice during the first two years of employment increasing by one week for each additional completed year of employment to a maximum of three months notice or pay in lieu of notice.

      or

  1. b)   The minimum notice of termination (or pay in lieu of notice) required by applicable statutes.

Eleven years later, when Mr. McKercher was employed as a Business Centre Sector Leader, his employment was terminated. The employer paid him the three months termination pay he was owed under his employment contract.

 

Another way to attack a termination clause: What is the changed substratum doctrine?

An Ontario judge in a 2012 case, MacGregor v National Home Services, 2012 ONSC 2042 (CanLII), described this legal doctrine as follows: "The changed substratum doctrine … provides that if an employee enters into an employment contract that specifies the notice period for a dismissal, the contractual notice period is not enforceable if over the course of employment, the important terms of the agreement concerning the employee’s responsibilities and status has significantly changed."

 

The rationale for this doctrine has been described by one judge, Schmidt v AMEC Earth & Environmental Ltd., 2004 BSCS 2012 (CanLII), as follows: "In my view, it was incumbent on the defendants to advise Mr. Schmidt that they intended to continue to rely upon the termination provision set out in the Agreement when substantial changes in his employment occurred. This would have allowed him to consider the matter and to negotiate for other terms. If the defendants wished to continue to rely on the termination provisions there ought to have been a ratification of the provisions as the nature of Mr. Schmidt’s employment changed."

 

Decision

The judge hearing this case relied on the following factors when deciding not to enforce the termination clause in the employment contract: ”...there is no evidence that (the employer) made it clear to the (employee) that the notice of termination provisions were intended to apply to the positions to which he was promoted. The employment agreement contains no express wording to this effect, nor does it contain any wording to support the inference of such an intent. Further, and in keeping with the analysis in Schmidt, the Court received no evidence that, as it promoted the plaintiff, SAL reasserted its understanding and expectation that the notice of termination limit would remain in effect.”

 

Lesson to be learned:

An employer should make it clear that the termination clause in an employment contract applies when an employee is promoted. This expression of this intent should be in writing and should be clear and unambiguous. I recommend that an organization’s employment be reviewed by an employment lawyer every year or two. If your employment contract does not address this issue then think about doing so the next time it is reviewed.

 

For 30 years, Doug MacLeod of   the MacLeod Law Firm has been advising employers on all aspects of the employment relationship. If you have any questions, you can contact him at 416 317-9894 or at [email protected]

The material and information in this blog and this website are for general information only. They should not be relied on as legal advice or opinion. The authors make no claims, promises, or guarantees about the accuracy, completeness, or adequacy of any information referred to in this blog or its links. No person should act or refrain from acting in reliance on any information found on this website or blog. Readers should obtain appropriate professional advice from a lawyer duly licensed in the relevant jurisdiction. These materials do not create a lawyer-client relationship between you and any of the authors or the MacLeod Law Firm.

 

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