Employer found liable to pay employee severance after shutting down one business to open another

Wisser v. CEM International Management Consultants Ltd.

When an employer shuts down and then starts up a new company to run its business, they are liable to pay its employee’s severance packages, if they do not intend on re-hiring them. This was addressed in the recent Alberta Court of Queen’s Bench decision Wisser v CEM International Management Consultants Ltd.  The Court also weighed in on how to properly count years of service where there was a “break in service” for an employee to perform work as an independent contractor.  

Facts 

• Wisser was hired by CEM International Management Consultants Ltd. as an employee in 2007. 
• In or around 2009, Wisser was converted to being an independent contractor as there was insufficient client work to cover his salary as an employee. 
• About 18 months later, when the plaintiff started making more money as a contractor than he did as an employee, the employer changed his status back to that of an employee. 
• Wisser’s employment was terminated in March of 2015, and he claimed severance from CEM. 
• By the fall of 2016, CEM, ceased operating and its principals incorporated a new company
• The individual defendant directors of CEM and the new company took the remaining assets out of CEM, started the new company, and successfully ran substantially the same business as had been run through CEM. 
• CEM was left with no assets to pay Wisser’s severance.  
• Wisser sued CEM, the new company and the individual directors for his severance.  

Court’s Analysis

• Years of service to determine severance: The length of time, or “years of service” an employee has worked for an employer is one of the important factors considered in determining the amount of severance that the employee is owed.  Generally, the longer the years of service, the bigger the severance package.  However, independent contractors are not owed severance, so CEM argued in this case that only the last few years of Wisser’s employment, subsequent to when they converted him to independent contractor status, should be considered when determining the appropriate severance package. The Court disagreed and used the entire length of Wisser’s service (seven-and-a-half years) to determine severance.
• Independent vs. Dependent Contractor: The Court found as important the fact that all that had changed was how Wisser’s compensation was determined, as he had continued to do the same work, with the same title, for the same people, and did not do work for anyone else.  The Court stated that Wisser was misclassified as an independent contractor and should be classified as dependent, and therefore the time period when he was a contractor was relevant.  Further, the Court stated that, even if he had been an independent contractor, an 18-month break in the middle of almost eight years of service was not enough to sever the continuous service for the purposes of calculating severance. 

Arguments

The individual defendants and the new company argued that:

• CEM died a natural corporate death because it had no assets and no prospect of business, and;
• They incorporated the new company in September of 2016 to legitimately capitalize on an opportunity to re-enter the marketplace as a new service provider with a new product.  As such, their position was that Wisser should not be able to claim for severance against the individual defendants and the new company. 

Wisser argued:

• As the individual defendant directors simply abandoned CEM and took its remaining assets in the face of his claim, only to start up the same or similar company, which was very successful, he should be able to claim his severance from them and from the new company. 

Court’s Decision

The Court agreed with Wisser, stating that even though avoiding Wisser’s claim may not have been the driver of the restructuring, the only thing accomplished by re-starting their business under a new corporate identity was to shed any liability for Wisser’s severance. The individual directors and the new company were liable to Wisser for his severance. 

Lessons for Employees

• Years of service can span periods while you are a contractor: If you are being provided with a severance package and your employer is telling you that any periods when you performed services as a contractor don’t count in the calculation, don’t accept that as true.  Often periods of contracting work factor into the severance calculation, so contact an employment lawyer at Samfiru Tumarkin LLP right away to have your situation evaluated. 
• Business shutdowns don’t necessarily mean you can’t get your severance:  Employees often assume that if their employer is going out of business, severance is a lost cause.  However, there may be a way to claim against individual directors or a new company so, contact an employment lawyer at Samfiru Tumarkin LLP for help. 

Lessons for Employers

• Independent versus dependent contractor versus employee:  Just because you call a worker an independent contractor doesn’t mean a Court will agree.  Instead of relying on the term independent contractor to lower severance liability, a properly drafted contractor or employment agreement with enforceable termination language is a better option.  A lawyer at Samfiru Tumarkin would be able to assess whether you have a true independent contractor relationship on your hands and advise as to how to properly implement the agreement. 
• Oppression Remedy:  Wisser used the oppression sections of the Alberta Business Corporations Act  to recover damages jointly and severally against the new company and the directors personally.  Simply moving assets from one corporation to another is not a sound way to avoid severance liability. Instead,  contact an employment lawyer at Samfiru Tumarkin LLP to assist you in a negotiation with a terminated employee who is disputing severance entitlement.