A fiduciary employee is a person whom, by virtue of their particular role, is in a position to use their power or authority in a manner that could negatively affect their employer’s interests. As such, in order to protect employers from a misuse of such power or authority, the law recognizes (by way of an implied term of employment) that such employees must act at all times in the best interest of their employer. Moreover, this obligation survives the end of the parties’ employment relationship and acts, in effect, to restrict certain conduct post-employment.
The Ontario courts apply a three-part test to determine whether an employee is a fiduciary:
- The fiduciary has the ability to exercise some discretion or power;
- The fiduciary can unilaterally exercise that power or discretion to affect the beneficiary’s legal or practical interests; and
- The beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power.
Conflicts between employers and fiduciary employees most commonly arise where the individual has sought for herself a business advantage which should have accrued to the employer or attempted to solicit clients and/or misused confidential information following the end of the employment relationship.
In such circumstances, the beneficiary employer can take action for breach of fiduciary duty. This may involve (in addition to a potential dismissal for just cause) seeking damages for resultant loss or an injunction to stop the fiduciary from further harming the employer’s business.
In pursuing damages, an employer may demand an accounting and disgorgement of profits, or alternatively, quantify its damages in light of the direct loss to the employer (i.e. the value of a specific contract for services). An injunction, on the other hand, is an extraordinary remedy which will be granted only where the requesting party can show that:
- There is a serious issue to be tried;
- The requesting party will suffer “irreparable harm” if the injunction is denied; and
- The balance of convenience weighs in favour of granting the injunction.
A recent decision from the Ontario Superior Court of Justice, Viana Canada Inc. v. Sartotex Inc. 2021 ONSC 1288, provides a useful illustration of the circumstances in which: an employee may be found to be a fiduciary; how a fiduciary’s actions may be restricted post-dismissal; and when an interlocutory injunction may be granted.
In Viana, Claudio Baldo, a sales manager with a fabric import business left his employer to focus on his own company, Sartotex, which would likewise import fabrics (albeit of a different, and lower, quality).
Viana brought an action for breach of fiduciary duty and sought an injunction to prohibit Mr. Baldo from competing with Viana and soliciting its customers. In response, Mr. Baldo denied soliciting any Viana customers and asserted that he could conduct business with customers of his choosing.
Upon review, the court found Mr. Baldo to be a fiduciary. Notably, Mr. Baldo reported solely to Viana’s owner and operated as the “face” of the company to its customers. Nevertheless, the court observed that despite being a fiduciary, Mr. Baldo was not “automatically estopped from carrying on business with prior customers” of Viana.
In reaching this conclusion, the court relied upon the following passage from an earlier Ontario court decision which helpfully outlines the scope of duties owed by former fiduciary employees:
Even former employees who are fiduciaries are not prohibited from competing with their former employer altogether, provided they do so “fairly”. Even a fiduciary employee, absent a valid agreement or statutory restriction, has the right to compete directly against his former employer. A fiduciary, under some circumstances, may even do business with a former employer’s customer when the customer has sought out the fiduciary. If a customer of the former employer comes to the fiduciary from the former employer because of the fiduciary’s reputation, or the customer’s personal relationship with the fiduciary, there is generally no breach of the employee’s fiduciary duty. The mere fact that a former customer of the employer becomes a customer of the employee very soon after the termination of the employee’s employment is not sufficient, in and of itself, to establish solicitation by the employee.
Accordingly, the court found that Mr. Baldo did not breach his fiduciary duty and was free to operate his new business. In reaching this conclusion, the court noted there was no evidence that Mr. Baldo had solicited Viana’s customers, and that his fabrics were not in competition with those offered by Viana. Largely as a result of this determination, the court likewise refused to grant an injunction and dismissed Viana’s motion. Finally, from a practical standpoint, it is notable that in Viana, the employee was engaged pursuant to a verbal employment agreement. Employers do not have to rely on a finding of fiduciary duty to restrict an employee from taking steps post-employment that may harm their business interests. Rather, employers should ensure they implement for each of their staff a written employment agreement that includes carefully drafted language to address the employee’s confidentiality obligations and restrictions on their ability to solicit staff and/or clients. In limited circumstances, it may also be appropriate to put in place a non-competition obligation (this, however, should be done in consultation with legal counsel).