Employer, recruiter equally responsible for bad hire

Agency failed to conduct background checks on employee who stole $260,000
By Jeffrey R. Smith
|Canadian HR Reporter|Last Updated: 02/21/2008

Staffing and recruitment agencies can be a big help for employers when looking for the right employee. But which one is liable if an employee turns out to be a bad seed?

Can an employer hold an agency responsible for not conducting due diligence? Or does all the blame fall on the employer’s shoulders, since it actually hired the worker? The answer, according to the results of one court case, is both.

The Ontario Superior Court of Justice recently ruled on a case that involved a company that used a staffing agency that didn’t live up to its duty when it recommended an employee with a criminal past who then defrauded the employer out of nearly $260,000.

However, the court wasn’t totally sympathetic when it learned the employer didn’t do enough to protect itself.

Leather Treaty, a manufacturer of leather bracelets in Concord, Ont., began as a small business operating out of the owner’s basement. As it grew, it relocated to a permanent location and hired more employees, particularly to manage the financial aspects of the growing company.

Leather Treaty consulted Drake International, an employment placement agency, to find an administrative assistant to help with the business. Drake recommended someone for the position without performing a background check or consulting her references.

Leather Treaty, assuming Drake had performed the expected checks, accepted the recommendation and hired the employee, who performed duties such as bookkeeping, managing petty cash, issuing checks and paying accounts. She had little supervision in doing this work.

When the employee left the company after two years, Leather Treaty discovered she had defrauded it out of $261,951.81 over the course of her employment. The employee was charged and convicted of fraud in January 2001 and the company successfully sued the employee and her husband for the amount stolen.

After winning the judgment against the employee, Leather Treaty sued Drake, claiming the agency’s failure to check the employee’s references and background exposed Leather Treaty to the fraud. It turned out the employee had two previous criminal convictions for fraud against her employers and, had her references been consulted, they would have been negative. Leather Treaty said it wouldn’t have hired her if it had known about this history.

Judge splits blame

The judge found Drake was responsible for Leather Treaty’s loss because the agency recommended the employee and didn’t fully discharge its responsibilities in ensuring she was appropriate for the job.

However, the judge also found Leather Treaty made itself an easy target for the fraud committed against it. In addition to improper internal controls, which didn’t allow it to catch the fraud while it was happening, the employer didn’t take enough responsibility in accepting Drake’s recommendation of the employee.

The judge agreed Drake was guilty of negligence and breach of contract for failing to adequately check the employee, but was only liable for half of Leather Treaty’s loss — $131,662.

Leather Treaty took the decision to the Ontario Court of Appeal, seeking damages for the full amount of its loss from Drake. Drake cross-appealed, arguing Leather Treaty set itself up for the loss.

The court agreed Leather Treaty “wanted a competent employee” and wouldn’t have hired the employee if it knew about her background.

“Leather Treaty did not only care about ‘fit.’ The reference (Drake didn’t check) was extremely negative. The trial judge’s inference that Leather Treaty would not have hired (the employee) if it had been given this reference was a proper one,” the court said.

However, the court upheld the trial court’s decision that Drake was only 50 per cent responsible for the loss and Leather Treaty had to shoulder some of the blame.

The case serves as a cautionary tale for businesses that use staffing and recruitment agencies: Be aware of what’s going on during the recruitment process and don’t assume anything.

Tips for employers

Leather Treaty’s mistake was its assumption Drake performed all the necessary checks, according to Natalie MacDonald, a partner at the Toronto employment law firm Grosman, Grosman & Gale. Leather Treaty should have asked for documentation of reference checks and reports on the recruitment process itself, she said.

“I would think the employer really should be asking for references,” said MacDonald. “The judge wanted to send a message: The employer should be double-checking what the recruiter is doing.”

An employer should keep tabs on the staffing agency throughout the recruitment process so nothing comes as a surprise, particularly if the agency misrepresents anything to the job candidate, said MacDonald. Courts can consider a recruiter to be acting as an arm of the employer and if the employer doesn’t ensure it has been advised properly, it can be liable, she said.

However, as the above case indicates, even if the employer is found to have liability, it doesn’t mean the staffing agency is off the hook. Although Leather Treaty should have done more to protect itself, MacDonald said it still had a right to rely on Drake’s representations of what it did to find a job candidate, which included checking background and references.

“It’s a trust relationship between the two,” she said. “Their obligation is to be honest.”

If the staffing agency doesn’t follow through on its accepted duties, it will be found at least partially liable for any damages, said MacDonald.

The best practice for both employers and staffing agencies when working together to find employees is to show their involvement by documenting the process, recommended MacDonald.

“Courts want to see evidence the parties have all done due diligence to ensure the representations to each other are truthful,” she said. “The best defence is document, document, document.”

For more information see:

Treaty Group Inc. v. Drake International Inc

., 2007 CarswellOnt 4018 (Ont. C.A.).

Jeff Smith is editor of Canadian Employment Law Today, a sister publication to Canadian HR Reporter that looks at employment law from a business perspective. For more information, visit www.employmentlawtoday.com.

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