In a recent Ontario decision, 2551965 Ontario Ltd. v. Warkentin, 2024 ONSC 4876 (Warkentin), the court provides significant insight on the distinction between being an employee and a controlling or operating mind of a corporation. The court also reinforces the significance of companies obtaining signed releases from workers in the context of company sale purchases.
Factual background
Warkentin involves a dispute between the plaintiff companies, 2551965 Ontario Ltd. and Cabin Country Realty Ltd. (Cabin), and the defendant, Harold Warkentin, the founder of Cabin. Warkentin founded Cabin in 1990 and was its sole owner, officer and director until selling the company to 2551965 Ontario Ltd. in 2016. During his tenure with Cabin, Warkentin did not have an employment agreement and did not receive a defined salary, benefits or commission rate. Instead, Warkentin paid himself from Cabin's available profits at his discretion.
As part of Cabin's purchase, Warkentin executed a release with Cabin and resignation as its director and president. In 2017, months after selling Cabin to 2551965 Ontario Ltd., Warkentin received a termination letter alleging cause for willful misconduct and willful neglect of duty, including threats of violence, unprofessional behaviour, and misleading and improperly advising clients.
The plaintiffs alleged, among other things, that Warkentin interfered in contractual and economic relations against the companies, while Warkentin counterclaimed for wrongful dismissal.
Notice of termination: controlling mind vs. employee
One of the pivotal issues in this case was whether Warkentin should be considered an employee for the purpose of determining his potential notice entitlements upon termination. The court found that Warkentin was the sole controlling and operating mind behind Cabin before its purchase, and thus not an employee of the company before its sale. Several factors distinguished Warkentin's role as Cabin's controlling mind from that of an employee prior to Cabin's sale:
- Autonomous control. Warkentin had sole discretion in Cabin's hiring, firing and other key operational decisions, such as the benefit plans and commission rates of his employees, without the constraints of acquiescence to any other reporting relationships. While the court recognized that a person can, for example, "be [both] a director and an employee of a corporation", this distinction must be shown through facts such as an employment agreement or engaging in reporting relationships as a subordinate.
- Lack of an employment agreement. Warkentin never had an employment agreement with Cabin, and never signed an employment agreement after Cabin's purchase. This meant Warkentin was not subjected to typical company policies and procedures, including with respect to performance reviews, incentive plans, salary or payment metrics, and vacation time and pay.
- Lack of a defined start date. Given Warkentin's lack of an employment agreement, his start date with Cabin was never mutually agreed upon. The share purchase agreement between Warkentin and the companies, which contained restrictive covenants, also remained silent on his start date.
- Discretionary income. Warkentin unilaterally determined his and his wife's incomes based on Cabin's available funds, after paying employee wages and covering Cabin's operating costs. Warkentin also failed to produce T-4s with respect to his income from Cabin from 1990 to 2009. The court notes Warkentin's murky "employment status" during this period indicated it was part of a "tax planning device".
The court concluded, among other things, that Warkentin was not an employee of Cabin up until its sale to 2551965 Ontario Ltd., and that his employment began on January 1, 2017, when he was hired by Cabin's new owners. This distinction was crucial in determining Warkentin's notice entitlements as a 10-month employee at the time of termination, as opposed to an employee with more than 27 years of service.
Effective release
What's more, even if Warkentin had been considered an employee of Cabin instead of its controlling mind prior to the sale, the court found that the general release he signed in connection with Cabin's sale would have alone discharged Cabin from any claims Warkentin may have had against the company prior to its sale. This includes claims in respect of his service from 1990 to 2016 for the purpose of calculating reasonable notice of termination. This, which reinforces the critical importance of buyers obtaining well-crafted general releases from key sellers, especially those involved in operating the business prior to the sale.
Conclusion and takeaways
The Warkentin decision underscores the importance of clearly defining the roles and statuses of a company's "controlling minds" with respect to notice entitlements.
For founders or owners who consider themselves employees, and want to retain certain legal rights qua employee, it is important to confirm the nature of their relationship with the company (e.g., by entering into an appropriately crafted employment agreement).
For employers, the decision is a good reminder that there can be a legal distinction between an employee and operating mind of the business, but the facts and nature of the relationship will be determinative.
For buyers, the nature of a founder's or owner's relationship with the business should be carefully evaluated during due diligence. The buyer's objectives with respect to an ongoing relationship with the founder or owner should be paramount when drafting both a post-closing employment agreement (or other services arrangement) and a general release to be signed in connection with closing.
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.
