Trust Issues: Employees as Fiduciaries
Owning or operating a business or enterprise requires a certain degree of trust. Unless you are a one-person show, chances are if you run a business, your trust will be placed on your employees. Some of these employees will be executives making important business decisions on your behalf; others will be low-level personnel managing day-to-day operations. Regardless of at what level these employees are found, once you place your trust in these individuals, they can be held legally liable to you for any violations of that trust.
Employees are fiduciaries. A fiduciary is a person in a position of trust – a person who has agreed to undertake the responsibility to act on behalf of or in the interest of another person or company with regard to the exercise of power or discretion in both a legal and practical sense. A fiduciary is accountable to the employer to perform with loyalty, in good faith and to avoid conflict of interest. An employee who is a fiduciary has the duty to not abuse the trust or confidence that has been placed upon them. If an employee violates that trust, they are liable to face legal consequences.
Historically, Canadian courts have limited fiduciaries in employment situations to those employees who are considered to be in established per se fiduciary relationships, such as that of registered directors of corporations or lawyers to their clients. Outside of these per se relationships, fiduciary duties are also be found in senior officers and upper management.
In recent judicial decisions, Canadian courts determined that even low-level employees can be considered fiduciaries. In Evans v. The Sport Corporation, 2013 ABCA 14, a hockey agent employee worked for a sports company employer for several years but was never promoted to the position of director of the company, nor did he have any real managerial powers. However, it was held in Evans that the hockey agent acted as the ‘face and voice’ of the employer company and held significant ‘power and influence’ over the company’s economic assets and interests, and as such, a fiduciary relationship was found and the agent was held liable for breach of duty to over $200,000.00. In an earlier decision for Navrab Investments Inc. v. Vaidyan, 2012 ONSC 6844, a sales employee who worked the night shift at a specialty store in Toronto was held in breach of his fiduciary duty to his employer when he stole over $70,000.00 from the store’s till while being entrusted with his employer’s valuables and security.
Canadian courts have emphasized that a person does not become a fiduciary simply because they are given a fancy title; rather, it is the individual’s role and the nature of their responsibilities that decides whether or not they owe a fiduciary duty to their employer. This is especially true for small businesses where individuals outside of management often play a significant and influential role either generally or with regard to specific transactions. Canadian courts are promoting the idea that they are willing to extend fiduciary relationships to ensure the protection of the ‘dependent or vulnerable party’ in employment situations – in this case, the ‘vulnerable’ employer who has placed his trust in his employee.
Breach of the fiduciary duty between employers and employees can happen and is, unfortunately, becoming more and more prevalent. Occupational fraud and theft is on the rise, resulting in millions of dollars in loss assets for many businesses. In the Association of Certified Fraud Examiners Report to the Nations 2014 study, of the 1483 occupational fraud cases examined, the median loss was $145,000.00 for victim employers, with over one-fifth losing at least $1,000,000.00.
From the Association of Certified Fraud Examiners “Report to the Nations on Occupational Fraud and Abuse” (2014), at pg. 9
There are several ways to protect yourself as an employer against breach of fiduciary duty by your employees. One way to prevent a breach of trust is through a well-crafted employment contract. An employment contract can set out the specific role and responsibilities of the employee with emphasis on the trust relationship and expectations placed upon them. Further, an employment contract may also set out stipulations such as non-competition clauses and confidentiality agreements that further protect the employer’s interests. While these types of clauses are not iron-clad, they are a good place to start for employers seeking to protect themselves against breaches of their trust.
Despite early prevention methods, the fact that occupational fraud and theft is becoming more common means that employers still find themselves in situations where an employee has stolen their assets. As noted above, employees are fiduciaries and employers trust their employees to handle their assets responsibly – breach of that trust means legal consequences. One method of recovery is to prosecute the theft criminally; however, there is a growing trend in Canada where employers favour civil remedies. The recent shift in the definitions of fiduciaries has aided employers in ensuring their success in court against rogue employees. Employers should not shy away from pursuing employees for breach of their fiduciary duty. Canadian law establishes that these employees have legal responsibilities and employers have legal rights to pursue employees for breaches of the fiduciary duties they owe. The Canadian legal system has many mechanisms, from pre-judgement asset preservation to post-judgement garnishing procedures, to further the success of employers in civil recovery against such employees.
Learning to trust is one of the most difficult tasks, but employers cannot fear placing their trust in their employees. Canadian law protects employers by making employees fiduciaries and formally establishing this trust relationship as a legal responsibility. Employees must honour this responsibility and if they breach this trust, employers have the right to pursue them as fiduciaries and recover what is rightfully theirs.
by Jennifer Cao, summer student