Primer on Liability of Directors
of Non-Share Capital Corporations
in Employment Matters
Barrister & Solicitor
August 16, 1999
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
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:
* employee's name and address,*
* employee start/anniversary date,*
* date of birth if employee is less than 18 years old,
* number of hours worked each day and week,
* wage rate and gross earnings for each pay period,
* vacations with pay or vacation pay,*
* amount of each deduction and purpose for each deduction, and
* net amount paid to 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:
Period of Employment
Notice/Pay in Lieu of Notice
more than 3 months, but less than one year
more than 1 year, but less than 3 years
more than 3 years but less than 4 years
more than 4 years but less than 5 years
more than 5 years but less than 6 years
more than 6 years but less than 7 years
more than 7 years but less than 8 years
more than 8 years
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:
* the employer has an annual payroll of $2.5 million or terminates the employment of 50 or more employees within a six-month period, and
* the employee has 5 or more years of service.
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:
* corporations without share capital, formed under the Corporations Act;
* co-operatives, under the Co-operative Corporations Act; and
* corporations not carried on for gain or corporations similar to corporations without share capital and co-operative corporations.
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:
* for services the employees performed,
* while the director was on the board of the corporation,
* up to 6 months' wages, and,
* up to 12 months' accrued vacation pay.
Directors are liable only if the corporation has been sued for the debt within 6 months and the judgement 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.
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.
This paper is for general information only. It is not intended to provide legal advice for any particular situation and should not be construed as doing so. If you have any specific legal questions you should contact a lawyer.