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Primer
on Liability of Directors of Non-Share Capital Corporations in Employment
Matters by Ian Werker Barrister
& Solicitor January
29, 1996 Introduction Corporate directors are
obliged to act in the best interests of the corporation. It is also
generally accepted that directors should consider their corporation's
responsibility to others, including the corporation's employees. This paper will review
the liability of directors of non-share capital (not-for-profit)
corporations pertaining to employment matters. First, it will note
obligations under the Day Nurseries Act. A summary of key requirements
under the Employment Standards Act will be followed by review of
liabilities that arise under the Income Tax Act. Directors should always
exercise prudence. The first step in reducing the risk of liability is to
be aware of a corporate employer's basic statutory and contractual
obligations. Next, directors should be aware of the current state of the
corporation’s fiscal affairs. With this information, directors may
reasonably ensure that the corporation is in compliance with its current
obligations, thereby restricting any practical personal exposure to
liability. Day Nurseries Act Section 16 of the Day
Nurseries Act empowers program advisors to enter and inspect day care
centres. The program advisor may also review books of account, enrolment
records and other records. This would include payroll information. It is
an offence under the Act to obstruct a program advisor in the exercise of
his or her duties. A person shall not supply false information or refuse
to supply information which the Act empowers the program advisor to
inspect. Under section 21 of the
Act, directors, officers and employees who "knowingly concur" in
a contravention of section 16 by the corporation is guilty of a provincial
offence and is liable to a fine of up to $5,000 or imprisonment of up to 2
years. In the current
environment, to the extent that program advisors are reviewing payrolls to
make sure that there is money on hand to pay accrued liabilities, it would
be prudent for the directors to satisfy themselves that money has been put
aside in accordance with true information furnished to a program advisor. Employment Standards
Act Record Keeping Directors should ensure
that the corporation keeps employment payroll records in accordance with
the Employment Standards Act (ESA). Under the ESA, an
employer is required to keep for each employee:
The above records
marked with an "*" must be kept for 5 years after work is last
performed by the employee. The other records must be kept for each
employee for 2 years from the date the employee last worked for the
employer. Vacation pay accrues
for employees as it is earned, not when it is paid. The payroll system
should show, at any given time, how much vacation pay has accrued for each
employee. By ensuring that the
proper records are kept, a director should, at the same time, be able to
satisfy himself/herself that there are financial controls in place to
account for payments to employees and remittances to Revenue Canada
(discussed below). They will also be able to ensure that the employer has
sufficient funds to meet the current payroll and accrued vacation pay. Statutory
Notice/Termination Pay under the Employment Standards Act The Employment
Standards Act requires the employer to give the following minimum written
notice of termination/termination pay:
Different notice
procedures and longer statutory notice periods apply to a
"group" or "mass" termination of 50 or more within a
four-week period. If the corporation does not have more than 49 employees,
then even a closure of operations would not activate the special rules. Statutory
Severance Pay under the Employment Standards Act The ESA also says that
an employer must provide statutory severance pay if:
Statutory severance pay
is calculated based on a formula: 1 week of pay for each complete year of
service plus 1/12 of a week of pay for each completed month in the last
partial year, up to a maximum of 26 weeks' pay. Statutory severance pay
is distinct from statutory termination pay. It cannot be converted into
working notice. In planning the affairs
of the corporation, the directors should be aware of the above obligations
in respect of termination pay and (if it applies) statutory severance pay.
However, as will be explained in the next section, directors are not
personally liable for termination pay and severance pay under the
Employment Standards Act. Nor are they liable for pay in lieu of notice to
which a former employee may be entitled under common law. Directors of
Non-Share Capital Corporations under ESA The provisions covering
the liability of directors under the Employment Standards Act do not
apply to:
Non-profit day care
centres would probably fall into one of the above categories. Accordingly,
the liability of directors of such corporations is covered by the
Corporations Act. Accordingly, a director of a non-share capital
corporation cannot be personally ordered to pay under the director's
liability provisions of the Employment Standards Act. Under the Corporations
Act, a director is liable for amounts the corporation owes to employees:
Directors are liable
only if the corporation has been sued for the debt within 6 months and the
judgment has not been satisfied (or, within that period, has gone into
liquidation or has been ordered wound up) and the director is sued within
6 months after he or she ceased to be a director. Liability extends only
to the part of the obligation that the corporation cannot pay. Directors of non-share
capital corporations are not liable under the Corporations Act for
termination pay and severance pay which the corporation may owe a former
employee, because these payments do not relate to services performed.
Similarly, common law damages for pay in lieu of notice are not considered
payments for services performed. For this reason, a director would
not be liable for any common law pay in lieu of notice that the
corporation may owe a former employee who did not receive notice of the
termination of employment in accordance with his/her contract of
employment. Withholding/Remitting
Taxes and Premiums for CPP and EI The Income Tax Act says
that directors are liable for taxes the corporation failed to withhold and
remit during period in which they were directors. The same
provisions apply to Canada Pension Plan and Employment Insurance premiums.
Directors are also liable for interest or penalties relating to such taxes
or premiums. In addition to a number
of procedural hurdles limiting a director's liability, a director is not
liable under the Income Tax Act for the corporate failure to withhold and
remit where the director "exercised the degree of care, diligence and
skill to prevent the failure that a reasonably prudent person would have
exercised in comparable circumstances." If the appropriate
financial controls are in place, a director may reasonably and regularly
verify that the corporation has deducted at source and remitted the
required amounts to Revenue Canada. The frequency of
monitoring should increase where the corporation is in a tenuous financial
position. Revenue Canada has produced information circulars (IC 98-2
Directors' Liability) which a board of directors should review with
professional advice and compare against its own practices. Conclusion While directors of
non-profit corporations are exposed to potential personal liability, if
they pay attention to the affairs of the corporation, the likelihood of
being called upon to pay a debt of the corporation is remote. In planning the affairs
of the corporation, the directors should consider their statutory and
common law obligations to their employees. At monthly directors' meetings,
the agenda should include a review of current and accrued financial
obligations to employees and related obligations to Revenue Canada. If
prudent management is followed, then the directors will know, well in
advance, if the corporation is in danger of failing to meet its payroll. In the unlikely event
that the prudently managed non-share capital corporation ceases operations
without notice, directors will not be liable for statutory termination
pay, statutory severance pay or common law pay in lieu of notice which the
corporation owes its employees. |
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