Worker fraud usually justifies dismissal

But it’s not a slam-dunk case and employers should act with haste, but not hastily

Lest there be any doubt, defrauding one’s employer is cause for dismissal. All too often, however, employers fail to properly and thoroughly investigate suspicions of employee fraud or theft prior to dismissal. Employers are well-advised, based upon reasonable suspicions of employee fraud or theft, to act with haste, but not hastily.

It is fundamental to the employment relationship that employees not steal from, or commit criminal acts against, their employers. An employee’s criminal deception, particularly to achieve an unjust personal gain, even once, generally amounts to just cause. Employee fraud can take many shapes and forms, such as the falsification of expense receipts, overcharging an employer on invoices for services, unauthorized personal long-distance phone calls, sick leave abuse and the misuse of company funds for personal gain.

But employers must also keep in mind that Canadian courts have set the bar fairly high when it comes to proving wrongdoing. To succeed in court, an employer must be able to produce compelling evidence.

The serious nature of an allegation of fraud typically requires an employer to provide the employee with an opportunity to answer the allegations. Therefore, an employer should conduct a full investigation before reaching any conclusions that could seriously impact an employee’s reputation and career.

Even the most serious and seemingly obvious cases of employee fraud must be investigated with great care, an open mind and fairness to the suspect employee. An incompetent investigation may not only result in an inability to establish fraud as just cause; it may also open the door to possible claims for damages for:

•wrongful dismissal;

•constructive dismissal;

•conspiracy to injure;

•defamation;

•negligent or intentional infliction of mental distress;

•negligence;

•punitive damages; and

Wallace damages for breach of the obligation to act in good faith in the manner of the dismissal.

Home Depot’s ‘flawed investigation’

In Tong v. Home Depot of Canada Inc., a 2004 decision out of Ontario, Peter Tong was fired for committing “time fraud.” He was successful in his wrongful dismissal action because the manager’s investigation was “fatally flawed.” Tong’s new manager kept him under surveillance and, eventually, wrote a report alleging Tong had committed time fraud by taking breaks longer than authorized.

After noting the manager was untrained in investigation methods and had begun his investigation of Tong “with the firm belief that Tong was a wrongdoer,” the court referred to the fact the floor manager destroyed his original notes and presented only a summary prepared just prior to his meeting with the store manager. The “incident witness statement” which he subsequently prepared contained inaccurate exaggerations. He failed to obtain corroborating evidence from other employees and did not interview any staff, including Tong’s immediate supervisor. He never passed his concerns on to Tong’s supervisor and never sought feedback, comments or an explanation from Tong.

The manager appeared to be consumed with building a case against Tong and, ultimately, the flaws in his investigation were fatal to the employer’s ability to prove just cause.

In developing a strategy for an investigation into employee fraud, consider the following steps:

•secure relevant documents;

•conduct the investigation on a “need-to-know” basis;

•prepare an outline of known facts for review with the suspect employee;

•identify all security concerns with respect to the suspect employee, including keys, pass cards, passwords, data stored on laptops and home computers, dealings with outside suppliers and any other source of vulnerability;

•consider whether employee fraud triggers fidelity insurance coverage or a duty to give notice to the insurer or regulatory authorities and, if so, take the appropriate steps;

•consider taking preliminary steps, such as commencing legal proceedings to secure any employee or third-party assets, before confronting the suspect employee;

•if the employee is a member of a union, take into account collective agreement rights and obligations, including the requirement to have a union representative in attendance;

•interview the suspect employee, providing ample opportunity to explain, and ensure one member of the interview team takes verbatim notes;

•be in a position to challenge the employee’s explanations and invite further detailed explanation; and

•consider including arrangements for restitution in any termination agreement with the employee, conditional upon full disclosure of the scope of the fraud and subject to fidelity coverage.

Expense account fraud

In Homer v. Rocca, a 1988 ruling out of New Brunswick, the employee was accused of claiming gas expenses in excess of amounts actually incurred for work. A trial judge found the employee’s explanations “suspicious,” but nevertheless ruled against the employer for having failed to meet the burden of proof.

By contrast, in Thompson v. Boise Cascade Canada Ltd., a 1994 ruling out of Ontario, employees accused of expense account fraud claimed they had entertained other company employees on a business trip. The employees said their expense reports were accurate and that names were occasionally substituted on the reports because they could not remember the names of the individuals they had entertained. The court was unwilling to accept the explanation and concluded they had deliberately attempted to deceive their employer.

In one of the more notorious cases of expense account fraud, Murphy v. Truck Bodies (1982) Ltd., a 1986 ruling out of Newfoundland and Labrador, the president was accused of using his expense account to pay for home repairs, travelling expenses for a companion, gas, the painting of his car and the building of a fence. The judge concluded the dismissal had been justified, even though the amount involved was relatively small — $4,000.

Abusing sick leave

Sick leave abuse can also amount to fraud, justifying an employee’s dismissal. In Gill v. IKO Industries Ltd., a 1996 ruling out of Ontario, the employee was observed by a private investigator working in his family’s doughnut shop while off work and receiving short-term disability benefits. The court concluded that, having absented himself on false grounds, the employee was justifiably dismissed.

It is important for an employer to assess such circumstances carefully, as illustrated in another case involving sick leave abuse. The case of Evans v. Sobeys Capital Inc. involved a 54-year-old maintenance supervisor who was off work due to severe back pain. However, four days into the prescribed 10 days of rest, the employee went hunting for moose. Unbeknownst to the employer, however, he did so with his doctor’s permission, restricting his activity to riding in the truck. The court concluded the employee’s activities had not been inconsistent with his doctor’s treatment and, thus, not a case of sick leave abuse.

Employers who suspect an employee of fraud must avoid rushing to judgment and terminating the employee without a thorough investigation.

For more information, see:

Tong v. Home Depot Canada Inc., 2004 CarswellOnt 1399 (Ont. S.C.J.)

Homer v. Rocca, 1988 CarswellNB 123 (New Brunswick C. A.)

Thompson v. Boise Cascade Canada Ltd., 1994 CarswellOnt 996 (Ont. Ct. (Gen. Div.))

Murphy v. Truck Bodies, 1986 CarswellNfld 158 (Nfld. S.C.).

Gill v. IKO Industries Ltd., 1996 CarswellOnt 1537 (Ont. Ct. (Gen. Div.)).

Evans v. Sobeys Capital Inc., 1995 CarswellNfld 122 (Nfld. C.A.).

Denise Bambrough is a partner in Borden Ladner Gervais’s fraud law group and Matt Certosimo is a partner in Borden Ladner Gervais’s labour and employment group in Toronto. They can be reached at (416) 367-6000 or www.blgcanada.com.

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