Canada: Court To Employers: “We Will Not Be Fooled”

'Successor rights' allow a bargaining agent to continue to represent unionized employees when a business is sold or transferred. The successor employer becomes bound by the predecessor's existing collective agreement and becomes responsible for its predecessor's rights, privileges and duties toward the employees under the agreement. In a recent decision involving Finning, the International Association of Machinists and Allied Workers, Local Lodge No. 99 (the Union) brought an application for successorship and common employer declarations pursuant to the Alberta Labour Relations Code.

The Finning case had many twists and turns and moved through several levels of tribunals and courts. In the end, the Union prevailed, and common employer status and successor rights were restored. The Finning decision sends employers a clear message: The courts will not be fooled by elaborate attempts to evade legal obligations. This case is a must-read for all unionized employers contemplating a business transaction.

The Facts

Finning International (Finning) is a Canadian-based, international distributor of mobile heavy equipment for mining, forestry, agriculture, construction and other industries. Finning Canada, an unincorporated division of Finning International, sells and services Caterpillar equipment in Western Canada and the Canadian North.

Prior to the impugned transaction, the Union represented production employees working in Finning Canada's Alberta operations. Finning Canada operated a facility in west Edmonton known as the Component Rebuild Centre (CRC). There, employees represented by the Union repaired worn or damaged equipment components for Finning's customers. The principal activity at the CRC was remanufacturing, whereby worn or damaged parts are restored to new or close-to-new specifications so they may be reused.

On June 23, 2004, Finning announced it would close the CRC and lay off approximately 160 bargaining unit employees in the spring of 2005. Finning proposed to contract out its remanufacturing work to another company, O.E.M. Remanufacturing Company Inc. (OEM).

A number of facts about OEM and the transaction are noteworthy:

  1. OEM established itself in the remanufacturing industry using Finning's money.
  2. Finning financed 100 per cent of the cost of building OEM's new plant.
  3. Finning was the 100 per cent beneficial owner of OEM.
  4. The building and operation of the new plant was the object of a joint venture between Finning and the owner of OEM, Gerald McLaughlan.
  5. Finning possessed legal power over the operation of OEM through legal rights it possessed as a joint venturer, financier or both.
  6. Day-to-day operations of OEM were vested with Mr. McLaughlan and his management team.

The Decisions

In its original decision, the Alberta Labour Relations Board ruled that OEM was a successor to Finning Canada and that the two companies were in fact a common employer. The Board found Finning and OEM to be common employers based on Finning's control over OEM's management through the terms of a Joint Venture Agreement, an operational relationship and interdependence, common ownership and financial control. As a result, OEM was bound by the Union's collective agreement with its predecessor, Finning Canada.

The Labour Board was asked by the employer to reconsider the decision. Two months later, after taking the highly unusual step of using a Reconsideration Panel made up of five members rather than the customary three, the Labour Board overturned the decision. The Reconsideration Panel ruled that although transfer of capital is a relevant consideration when deciding whether to grant a successorship declaration, in this case, the capital transferred to OEM came from Finning International and not Finning Canada — the portion of the business for which the Union held bargaining rights. Addressing the common employer finding, the Reconsideration Panel found that Finning International exercised virtually no control or direction over the day-to-day management of employees or the work-generating activities, and therefore a common employer declaration was not appropriate.

At the Court of Queen's Bench level, the chambers judge upheld the Reconsideration Panel's decision. The Court of Appeal then overturned this decision. The Court of Appeal set aside the Reconsideration Panel's determination against successorship based on the Board's errors in the application of its reconsideration power and the errors in its analysis of the successorship issues. It found that the Reconsideration Panel had deviated from well-established successorship principles. The Court of Appeal also criticized the Reconsideration Panel for substituting its opinion for the factual findings of the original panel.

As that was sufficient to overturn the Board's reconsideration decision, it was unnecessary for the Court of Appeal to comment on the common employer issues raised by the Union. The Court of Appeal focused on the realities of the closely related entities and noted that Finning's $87-million capital infusion was perhaps the most critical aspect to the establishment of OEM as a viable, ongoing business operation.

The Court of Appeal also reminded labour tribunals to be wary of creative corporate restructuring that undermines collective bargaining rights.

Lessons for Employers

Although it is rare, this decision shows that courts will, from time to time, step in and overturn a Labour Board decision if the decision is "patently unreasonable," or, in other words, clearly irrational. A loss at the Labour Board is not necessarily the end of the road.

Courts are clearly becoming more knowledgeable about sophisticated corporate restructuring schemes aimed at evading collective bargaining rights. Employers must keep in mind that courts will focus on the realities of the collective bargaining framework and the true effect of the overall transaction.

This decision serves as a reminder of the importance of preparing for the consequences that a corporate transaction may have on bargaining units. Employers must be aware of such consequences so that applications for successorship declarations can be avoided. Employers are advised to take extra precautions when entering into transactions with related companies. As a rule, Labour Boards will scrutinize transactions involving related companies very closely.

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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