Anonymised, illustrative composite. Director liability for wages under the Employment Standards Act, 2000 is a different debt, with a different cap and a different window, from the source-deduction liability buyers usually have in mind. Its most important feature is what it excludes.
At a glance
The buyer acquired all the shares of a facilities services company with 210 employees across nine sites. Cash had been tight for a quarter and the target had run two pay periods late. At closing the two outgoing directors resigned and the buyer appointed two of its own executives to the board the same afternoon, in the ordinary sequence of a share closing.
The buyer's diligence had covered source deductions carefully — see source deductions two quarters in arrears for that exposure — and had treated employment standards director liability as the same risk under a different name. It is not.
The wage arrears were $412,000 of regular wages and $61,000 of accrued vacation pay, all of which had become payable before the board changed. Separately, the buyer's own hundred-day plan closed two sites and eliminated 34 roles, generating $780,000 of termination pay and statutory severance pay in the four months after closing.
The buyer's nominees assumed the arrears were the old board's problem and the restructuring cost was theirs. Half of that is right and half of it is backwards, and both halves come out of the same subsection.
Section 81(7) reads: “The directors of an employer corporation are jointly and severally liable to the employees of the corporation for all debts not exceeding six months' wages, as described in subsection (3), that become payable while they are directors for services performed for the corporation and for the vacation pay accrued while they are directors for not more than 12 months under this Act and the regulations made under it or under any collective agreement made by the corporation.”
Three limits are doing work in that sentence, and the middle one is usually missed. Six months' wages is a cap on the amount, not a look-back period. Twelve months' vacation pay is a separate cap on a separate head. And “as described in subsection (3)” imports a definition that removes the largest item on this file: s.81(3) provides that the wages directors are liable for are “wages, not including termination pay and severance pay as they are provided for under this Act or an employment contract and not including amounts that are deemed to be wages under this Act”.
So the $780,000 of termination and severance pay the buyer's own restructuring generated is outside s.81 entirely. The $412,000 of regular wages and $61,000 of vacation pay are inside it — and they became payable before closing, which puts them in the outgoing directors' window, not the incoming directors'. The buyer's nominees had it exactly the wrong way round in both directions.
The liability does not exist until something triggers it. Section 81(1) makes the directors liable only where one of four things has happened: the employer is insolvent and a claim filed with the receiver or trustee is unpaid; “an employment standards officer has made an order that the employer is liable for wages, unless the amount set out in the order has been paid or the employer has applied to have it reviewed”; an officer has made an order against a director on the same terms; or the Board has issued, amended or affirmed an order under s.119 that is unpaid. Section 81(7) is the cap on a liability that s.81(1) creates.
The trigger and the slice are different dates, and conflating them is the error that produces the wrong allocation. An order issued eight months after closing can reach wages that became payable eleven months before it, and the directors who answer for those wages are the ones in office when the wages became payable. Resignation at closing does not end exposure for the pre-closing period; appointment at closing does not create exposure for it.
Two further features change the closing mechanics. Section 81(2) provides that “the employer is primarily responsible for an employee's wages but proceedings against the employer under this Act do not have to be exhausted before proceedings may be commenced to collect wages from directors under this Part” — so a claimant need not chase the company first. And “director” is defined more widely than the corporate register: s.79 defines it as “a director of a corporation and includes a shareholder who is a party to a unanimous shareholder agreement”, and s.80(1) applies the Part to such a shareholder to the extent the directors are relieved of the wage liability under OBCA s.108(5) or CBCA s.146(5). A rollover shareholder who signs a unanimous shareholder agreement to protect a minority position can acquire a personal wage liability with it.
Contracting round it does not work, but indemnifying against it does. Section 82(1) provides that “No provision in a contract, in the articles of incorporation or the by-laws of a corporation or in a resolution of a corporation relieves a director from the duty to act according to this Act or relieves him or her from liability for breach of it.” Section 82(2) separately permits the employer to indemnify a director against costs, charges and expenses on the usual honest-and-good-faith conditions. The duty is unshiftable; the economic burden is not. And between directors, s.81(9) provides that “A director who has satisfied a claim for wages is entitled to contribution in relation to the wages from other directors who are liable for the claim.”
The closing mechanics changed rather than the price. The seller ran a special payroll two days before closing that cleared the $412,000 of arrears and the $61,000 of accrued vacation out of the pre-closing period, funded from the proceeds through the funds flow. The buyer's nominees took by-law indemnities and a run-off directors' and officers' policy, and the purchase agreement carved employment standards director liability out of the general cap so that a post-closing order for pre-closing wages was recoverable in full.
The restructuring cost was budgeted where it belonged: as a corporate liability the buyer had chosen to incur, outside s.81 and inside its own hundred-day plan.
The direct exposure of the incoming directors on these facts was smaller than the buyer feared and continuous rather than one-off. What they were genuinely on the hook for was wages becoming payable from closing forward, up to six months' worth, and vacation pay accruing from closing forward, up to twelve months' worth — roughly $61,000 a quarter of vacation accrual on a payroll of this size, growing every pay period, and personally payable if the company failed. On a business bought with cash-flow problems already visible, that is the risk worth insuring, and it is not the risk the diligence had priced.
The tell was on the closing agenda. Resignation and appointment resolutions dated the same day, with the next scheduled payroll date two days after. Nobody had asked which side of that payroll date the arrears fell on, because nobody had noticed that the question decided who paid them personally.
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