Canada: Ontario, Canada: Professional Service Employer's Use Of Different Corporate Structures In Employment Agreements Does Not Negate Uninterrupted Service In The Calculation Of Reasonable Notice

Last Updated: July 5 2019
Article by Rhonda B. Levy and George J.A. Vassos

 A recent decision of the Court of Appeal for Ontario, Theberge-Lindsay v. 3385022 Canada Inc. (Kutcher Dentistry Professional Corporation), 2019 ONCA 469 ("3385022 Canada"), confirms that the utilization by a professional service employer of different corporate structures to enter into employment agreements with employees will not interrupt the length of their service in the calculation of reasonable notice upon termination without cause.  The court left open the question of whether this principle may apply in the context of employees not employed in professional practices.  3385022 Canada also contributes to the jurisprudence on the subject of resignation from employment and the impact of a retraction of a resignation in creating a new employment agreement. 

Background

A hygienist worked in a dental practice from 1993 until 2012, when she was terminated without cause.  Although she was not asked to sign an employment agreement when first hired, during her 19 years of service, the hygienist was required to execute agreements three times. 

The hygienist signed the first employment agreement in 1999 when, to obtain tax benefits and engage in income splitting, the dentist decided to contract the services of his hygienists through a management company.  The 1999 agreement limited the hygienist's entitlement to notice upon termination without cause to the minimum required under the Employment Standards Act, 2000 (ESA). 

On March 28, 2005, the hygienist resigned from her employment effective July 7, 2005.  In May 2005, prior to the effective date of her resignation, she advised the dentist of her intention to remain employed and the dentist agreed. 

On June 30, 2005, the hygienist signed another agreement with the management company; the 2005 agreement also limited the hygienist's entitlement to minimum ESA notice.

In 2011, the dentist wound up his management company and decided to contract the services of his hygienists through a professional corporation.  He advised the hygienist that she had to sign another agreement with the professional corporation to continue employment.  After receiving independent legal advice, she signed this agreement, which again limited her entitlement to the ESA minimum.  

In 2012, when she was 54 years old, the hygienist was terminated without cause and given one week's salary, the ESA minimum based on her most recent 2011 agreement. 

The hygienist sued for wrongful dismissal claiming damages in lieu of a reasonable common law notice period based on 19 years total service. 

The Lower Court Decision

Length of Hygienist's Service at Termination

In Theberge-Lindsay v. 3395022 Canada Inc., 2018 ONSC 322, upon considering whether the different corporate structures impacted the length of the hygienist's service at termination, the trial judge concluded that the hygienist's service ran uninterrupted.

Throughout the 19 years, the plaintiff was employed by 3 separate legal entities.  Significantly, however, during this time the plaintiff worked at the same location and performed the same job under the management of Dr. Kutcher.  Her employment was consistently in the operation of the dental and periodontal practice of Dr. Kutcher.  The primary employment relationship has always between Dr. Kutcher and the plaintiff.  Dr. Kutcher structured the employer of his practice's hygienists differently.  The structure in and of itself, however, does not negate the plaintiff's continuity of employment with his practice or the control consistently maintained by Dr. Kutcher over the terms and conditions of the plaintiff's employment.  Rather, the structure was an intentional decision made by Dr. Kutcher for his own financial benefit and had no impact on the plaintiff's continuous length of service.  (para. 26) 

. . .

It may be open to Dr. Kutcher to employ accounting practices and tax laws to design the employer of the hygienists of his practice in a way that provides him with the most financial benefit.  It is not open to him however to then use that structure as a sword against the plaintiff's uninterrupted service to his practice.  At all times, independent of the choice of employer as structured by Dr. Kutcher, the plaintiff was employed by the practice of Dr. Kutcher.  It is the practice of Dr. Kutcher that was the plaintiff's substantive employer for over 19 years.  The plaintiff is entitled to rely on her employment history with the practice of Dr. Kutcher in the calculation of reasonable notice. (para. 28) [Emphasis added]

Impact of Resignation

The court concluded that the hygienist's resignation had no impact on the continuity of her service. 

Enforceability of the Employment Agreements

The lower court stressed that to modify an existing employment contract, there must be fresh consideration and that continued employment is not consideration.  Noting that the hygienist was required to sign each of the three agreements or she could not continue to be employed, the court concluded that none were enforceable for lack of consideration. 

Hygienist's Entitlement to Common Law Reasonable Notice

Considering factors such as the age of the hygienist, character of employment, length of service, availability of similar employment, and experience, training and qualifications, the court decided that her common reasonable law notice period should be 15 months, or $71,650 in damages.

Decision of Court of Appeal

The Court of Appeal for Ontario agreed with the trial judge's finding that the 2011 agreement was unenforceable and therefore the hygienist was not obliged to accept one week's salary, the minimum ESA entitlement.  The court took a different position, however, on the impact of the resignation and re-hiring in 2005.  In its view, this dynamic created a break in the employment relationship, after which an entirely new contract was reached; consideration for the 2005 agreement was the hygienist's offer to again be employed by the dentist and his acceptance of her offer.  On this basis, the Court of Appeal concluded that: (a) the 2005 agreement and its ESA termination clause were valid; and (b) the ESA notice to which the hygienist was entitled should be measured from 2005 and amounted to 7.5 weeks of salary.

Bottom Line for Employers

The 3385022 Canada case sends several important messages to employers in professional practices, and arguably to employers in general. 

First, the decision puts professionals on notice that if

  • they employ their employees by more than one entity throughout their employment, for the professional's financial benefit or otherwise;
  • the employment is consistently in the operation of the professional practice; and
  • the primary employment relationship is consistently between the professional and the employee,

then the employee will be viewed as providing uninterrupted service to the practice and entitled to rely on that service in the calculation of reasonable notice.  The central question in the analysis is: who has been the employee's substantive employer throughout the relationship? 

Second, the decision reinforces the well-known employment law principles that: (a) to modify an existing employment agreement, there must be fresh consideration; (b) continued employment is not consideration; and (c) agreements that lack consideration will not be enforceable. 

Finally, the decision makes clear that when an employee resigns from employment, and then offers to again be employed by the employer and the employer accepts the offer, a break in the employment relationship is created; in effect, the employee is viewed as being re-hired.  Notably, this will be the case even when the employee's intention to remain employed is communicated to the employer prior to the employee's effective date of resignation.  Furthermore, when an entirely new employment agreement is reached between the parties following this break, fresh consideration for that agreement is the employee's offer to again be employed and the employer's acceptance of that offer.  With this consideration, the new employment agreement will be enforceable and, unless the agreement states otherwise, calculation of the length of service for a determination of reasonable notice on termination will begin from the date of the new agreement.    

This article was originally published by The Lawyer's Daily (www.thelawyersdaily.ca), part of LexisNexis Canada Inc.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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