In Ontario, corporate directors can be held personally liable for unpaid wages if a company fails to pay its employees. This liability extends beyond the company itself, meaning that directors—whether of small businesses, startups, or large corporations—must be aware of their potential financial exposure.
Understanding the scope of this liability, the legal framework governing it, and the proactive steps directors can take to mitigate risk is essential for responsible corporate governance. This article explores the laws that hold directors accountable for unpaid wages in Ontario, the extent of their liability, and practical strategies to ensure compliance with employment laws.
Legal Framework for Directors’ Liability in Ontario
In Ontario, directors’ liability for unpaid wages is primarily governed by two key statutes:
1. The Ontario Business Corporations Act (OBCA)
2. The Employment Standards Act, 2000 (ESA)
Each of these laws sets out specific circumstances in which directors may be personally liable for unpaid wages, and they work together to ensure that employees are not left without compensation if an employer defaults on its obligations.
1. The Ontario Business Corporations Act (OBCA)
The OBCA imposes financial liability on directors for certain debts of a corporation, including unpaid wages. Under Section 131 of the OBCA, directors can be held personally liable for up to six months’ worth of unpaid wages and twelve months’ worth of vacation pay owed to employees if the company fails to make these payments.
However, for a director to be personally liable under the OBCA, the employee must first attempt to recover the unpaid wages from the corporation. If the company is insolvent, bankrupt, or otherwise unable to pay, the employee (or a regulatory body acting on behalf of employees) may pursue the directors directly.
To enforce liability under the OBCA, employees must take legal action within six months of ceasing employment with the corporation.
2. The Employment Standards Act, 2000 (ESA)
The ESA is Ontario’s primary employment legislation, ensuring that workers receive at least the minimum employment protections under the law. Section 81 of the ESA provides that if a corporation fails to pay wages, its directors may be personally liable for:
• Up to six months’ worth of unpaid wages
• Up to twelve months’ worth of vacation pay
This liability does not extend to other types of compensation, such as severance pay, bonuses, or commissions, unless they meet the definition of wages under the ESA.
Unlike the OBCA, the ESA allows employees to file complaints with the Ministry of Labour, which may investigate claims and enforce wage recovery on behalf of employees. If a company does not comply with an order to pay wages, the Ministry may take legal action against directors to recover the owed amounts.
When Can Directors Be Held Liable?
For directors to be held personally liable for unpaid wages under the OBCA or ESA, the following conditions must typically be met:
1. The corporation has failed to pay wages owed to employees.
2. The employee has attempted to recover wages from the corporation but has been unsuccessful.
3. The director was actively serving in a director role during the period when wages became due.
Liability applies regardless of whether the director was personally responsible for the non-payment of wages. Even if a director was unaware of the financial difficulties or did not directly manage payroll, they can still be held accountable.
Moreover, liability under the ESA and OBCA is joint and several, meaning that if multiple directors are named in a claim, each director may be required to pay the full amount of the unpaid wages. The directors can then seek contribution from one another, but employees do not have to pursue each director separately.
Exemptions and Limitations
There are limited protections available to directors facing liability for unpaid wages:
1. Resignation Before the Wages Become Due – A director who resigns before the unpaid wages accumulate may be able to avoid personal liability. However, resignation does not automatically absolve a former director of responsibility, especially if wage claims pertain to a period when they were still in office.
2. Bankruptcy of the Corporation – If a corporation is in bankruptcy, employees must first file claims with the company’s estate through the bankruptcy process before pursuing directors directly. However, bankruptcy does not shield directors from liability under the ESA.
3. Directors’ Defenses Under the OBCA – The OBCA provides a due diligence defense: if a director can prove that they exercised due diligence (i.e., took all reasonable steps to prevent non-payment), they may not be held liable. However, this defense requires strong evidence, such as financial records, board meeting minutes, and efforts to secure financing.
Practical Steps for Directors to Limit Their Liability
Given the serious financial consequences of being held personally liable for unpaid wages, corporate directors should take proactive steps to protect themselves and their companies:
1. Ensure Regular Wage Payments – Always prioritize wage payments to employees, even if the company is facing financial difficulties.
2. Monitor Financial Health Closely – Directors should actively review financial statements and address cash flow concerns before payroll issues arise.
3. Require Transparency from Management – Directors should insist on clear reporting from the company’s officers and managers about financial obligations, including payroll.
4. Maintain Proper Documentation – Keeping records of board meetings, financial decisions, and any efforts to rectify payroll issues can support a due diligence defense if needed.
5. Secure Directors’ Liability Insurance – While most Directors and Officers (D&O) Insurance policies do not cover wage-related liabilities, some policies offer specific coverage extensions. Directors should ensure they understand the scope of their insurance protection.
6. Consider Legal Counsel Before Resigning – Resignation may not absolve a director of liability if unpaid wages were incurred during their tenure. Consulting a legal professional before stepping down can help mitigate risks.
Corporate directors in Ontario have significant personal liability when it comes to unpaid wages. Under both the Ontario Business Corporations Act (OBCA) and the Employment Standards Act (ESA), directors can be held accountable for up to six months of wages and one year of vacation pay.
To minimize the risk of personal financial exposure, directors must take an active role in overseeing payroll, ensuring financial stability, and documenting their due diligence. By prioritizing wage payments, maintaining strong financial oversight, and understanding their legal responsibilities, directors can safeguard both their businesses and their personal assets.
For directors facing potential liability, seeking legal advice early can help navigate claims and develop strategies to mitigate risks. Being proactive is the key to avoiding costly legal consequences and ensuring compliance with Ontario’s employment laws.
