When “Regular” Employees Owe Fiduciary Duties and Why it Matters

While all employees owe a duty of fidelity to their employers, certain employees owe an elevated fiduciary duty. The significance of distinguishing non-fiduciary employees from fiduciary employees is that the duty owed by a fiduciary to an employer is more exacting. The remedies available to the employer may be broader when a fiduciary employee competes, solicits customers, or misuses confidential information. The consequence of finding that an employee is a fiduciary is that non-fiduciary employees are generally only liable for the damages suffered by their employer resulting from their misconduct. Fiduciaries are potentially liable for either the damages suffered by the employer or the profit the fiduciary gained from the misconduct.

In the employment law context, there are two categories of fiduciaries: “per se” fiduciaries and ad hoc fiduciaries. “Per se” fiduciaries are persons who owe fiduciary obligations by nature of their position (e.g., directors and officers of a company). Ad hoc fiduciaries are persons who are not fiduciaries by the nature of their position but who owe a fiduciary obligation for circumstantial reasons (e.g, persons in senior management-type roles).

Vulnerability was the paramount consideration when establishing an ad hoc fiduciary relationship for many years. The emphasis on vulnerability was the product of the following three-part test enumerated by the Supreme Court of Canada in Frame v. Smith, [1987] 2 S.C.R. 99:

  • Does the fiduciary have scope for the exercise of some discretion or power?
  • Can the fiduciary unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests? and
  • Is the beneficiary peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power?

Although the Supreme Court of Canada has since clarified that vulnerability alone is insufficient to establish an ad hoc fiduciary relationship, vulnerability still plays a vital role in the assessment.

In Barton Insurance Brokers Ltd. v. Irwin, our Court of Appeal cautioned against expanding the reach of fiduciary obligations to non-senior employees, noting:

…the general interest of the public in free competition and the consideration that in general citizens should be free to pursue new opportunities, in my opinion, requires courts to exercise caution in imposing restrictive duties on former employees in less than clear circumstances. Generally speaking…the law favours the granting of freedom to individuals to pursue economic advantage through mobility in employment.

Notwithstanding this caution, courts across Canada have found that lower level/non-management employees may owe fiduciary duties to their employers. In Boehmer Box L.P. v. Ellis Packaging Limited et al., the Ontario Superior Court of Justice summarized decisions where courts affirmed the existence of a fiduciary duty on non-management/key employees. Some of the cases are striking and include relatively low-level employees. Examples of where courts found that non-senior employees owe a fiduciary duty include:

  • A placement director of a personnel agency who had the exclusive right to deal with particular clients;
  • A sales manager, who had exclusive contact with customers and had access to employer’s confidential information about the customers;
  • A senior employee who placed consultants with clients.  She had the exclusive right to place particular consultants, but no exclusive right to deal with any client.  The employee had access to confidential information about consultants;
  • A salesmen who played a key role in the day-to-day operations of the business and who formed part of a leadership team that coordinated the activities of other employees; and
  • A salesman who had responsibility for all clients within a geographic area and independent authority for decisions, including type of payment and choice of manufacturer, and who had access to all information relating to customers in the particular area.

Whether an employee owes a fiduciary duty is not cut and dry. Ad hoc fiduciary relationships are established on a case-by-case basis. As the above decision shows, relationships that do not appear fiduciary on their face, may give rise to fiduciary relationships. Many employees are under the mistaken assumption that they can freely compete against their former employers or solicit customers in the absence of a non-competition or non-solicitation agreement. Given the above, employees who seek to do so should exercise caution as they may expose themselves to personal liability.

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