How Key is the Employee? Identifying When an Employee is a Fiduciary
A fiduciary employee is an employee trusted with a measure of responsibility by their employer. This in turn creates corresponding duties owed by the fiduciary that go over and above those normally owed by an employee to an employer.
It is therefore important to understand if an employee is a fiduciary employee both during employment as well as upon termination. It is especially relevant upon termination because the obligations owed by the fiduciary employee to the employer survive for a reasonable period following the end of the employment relationship. A fiduciary employee has the continuing obligation not to exploit advantages derived from their prior position in order to compete with the former employer. This includes for example, soliciting other employees to quit and join in the employee’s new business, or soliciting the business of the former employer’s clients/customers.
The Alberta Court of Appeal in HRC Tool & Die Mfg Ltd v. Naderi, considered the characteristics indicating a fiduciary employee from an “ordinary” one. There, the employer, HRC Tool & Die Mfg Ltd. (“HRC”), operated a machine shop in Edmonton. Two employees were hired, one as a purchasing agent and one as a machine operator. HRC’s owner/shareholder was often absent for days and months at a time, although he remained in telephone contact with the business. Thus, the employees were entrusted with the day-to-day control of the business. The employees resigned together in June 2008 after 8-10 years of employment and started their own machine shop which serviced many of the same clients as HRC. HRC applied to the court claiming that the employees owed it fiduciary obligations and breached those obligations by using confidential client information and taking its clients. At trial, the judge determined that the employees were not fiduciary employees and even if they were, had not breached their fiduciary obligations to HRC. HRC appealed.
When is an Employee a Fiduciary?
The Court of Appeal emphasized that a fiduciary relationship must be assessed on a case-by-case basis and highlighted the four characteristics of a fiduciary employee:
- the employee has scope for the exercise of some discretion or power;
- the employee can unilaterally exercise that power or discretion so as to affect the employer`s legal or practical interests;
- the employer is peculiarly vulnerable to, or at the mercy of, the employee holding the discretion of power; and
- the existence of an undertaking by the employee to act in the best interest of the employer.
With respect to the application of these characteristics to the facts, the employees were on the Management Review Board, reported directly to the owner/president and were admittedly “key employees”. In addition, HRC was vulnerable in the sense that the employees ran the day-to-day business in the absence of the owner.
The More Key the Employee, the Heavier the Obligation
The vulnerability of the employer or the discretionary power granted to the employee need not be “total” to generate a fiduciary relationship. Even where there is only limited discretion there may be a fiduciary duty. Instead, the scope of the power or control given to the fiduciary employee will inform the scope of the duties owed to the employer and the reasonable length of time required before the fiduciary employee is relieved of their fiduciary obligations.
It is important to note that the undertaking to act in the interest of the employer need not be an express representation (e.g. representation in the employment contract). The Court held that the undertaking can arise from the context or may be inherent in the relationship. In the case of HRC, by agreeing to become key employees, the employees implicitly undertook to discharge the fiduciary duties inherent in that employment.
The Court ultimately determined that the employees had discretion/power, an ability to affect the rights of HRC and HRC was vulnerable to the employees. As such, the Court concluded that the employees were fiduciary employees.
No Harm No Foul
While the Court found that the fiduciary obligations owed by the employees would have extended three months post-termination, HRC was unable to recover for the alleged harm resulting from the employees’ actions in setting up their new business. In this case, there was no evidence that the employees took confidential information upon their departure from HRC and the customers’ identities were well known in the industry and not special, unique or exclusive to HRC. Thus, HRC was unable to provide evidence of harm resulting from the employees’ breach of their fiduciary duties and not entitled to recovery for any alleged breach.
It is important for employers to understand whether an employee is a fiduciary employee and therefore owes the employer continuing obligations after the end of the employment relationship. Indeed, fiduciary employees have been found liable for soliciting clients of their former employer even if they did not personally conduct the solicitation or expressly direct an intermediary to do so.1 Field Law’s Labour and Employment lawyers can assist you and your organization in determining whether an employee is a fiduciary employee and, where necessary, enforcing a fiduciary employee’s duties and obligations in order to safeguard your interests.
1 Evans v. The Sports Corporation, 2013 ABCA 14 (CanLII)