The role of fiduciary employees

The rights and responsibilities of fiduciaries


Attracting and retaining top senior management means organizations have to offer high salaries, attractive benefits and, sometimes, share-purchase options to underline the connection between management’s and the company’s performance. In return, companies insist on scrupulous loyalty from senior management.

But it’s rare for a senior manager to stay with a single company for her entire professional career. Organizations, recognizing this, worry about a manager taking confidential information when she leaves and are concerned about that employee using skills learned on the job to entice customers to her new employer.

The fiduciary employee

All employees, by virtue of their employment, owe a duty of loyalty and good faith to their employer. These duties require the employee to act in the employer’s best interests.

But a fiduciary employee is held to a higher and more exacting standard. In Felker v. Cunningham, the Ontario Court of Appeal said:

“An employee who stands in a fiduciary relationship to his or her employer has an equitable obligation of loyalty, good faith, honesty and avoidance of conflict of duty and self-interest. The employee must act honestly, in good faith and with a view to advancing the employer’s best interests.”

After a termination, fiduciary duties become even more important. Although a departing fiduciary does not have a duty not to compete, she has a duty not to compete unfairly. Departing employees, whether fiduciary or not, have an absolute right to directly compete with their former employers and to make use of the skills and general knowledge they accumulated during their period of employment. This right is subject only to contractual restrictive covenants that are closely scrutinized by the courts for unfairness. Unless the employee is very senior, personifies the business and, generally, has an equity interest in the company, a non-competition clause likely will be void.

Although fiduciary employees often sign contracts that more precisely define the scope of their fiduciary duties, the fiduciary duty precluding unfair competition exists even without a written employment agreement. Unfair competition has three components:

•the misuse of confidential or proprietary information;

•the solicitation of an employer’s customers or prospective customers with whom the fiduciary dealt or had inside knowledge during employment for a reasonable period of time post-termination; and

•usurping corporate opportunities known to the fiduciary by virtue of the employment relationship, whether or not the employer intended to pursue them.

Since a regular employee only has an implied duty not to use or disclose confidential information, the second and third components impose a much higher standard on fiduciaries than other employees.

Because fiduciary status entails higher obligations, it only applies to a select group within an organization. High echelon managers and directors certainly hold fiduciary status. Beyond this category, the Supreme Court of Canada has articulated three factors to consider in determining whether an employee qualifies as a fiduciary:

•the employee has the scope for the exercise of some discretion of power;

•the employee can unilaterally exercise that power or discretion so as to affect the employer’s legal or practical interests; and

•the employer is particularly vulnerable to or at the mercy of the fiduciary holding the discretion of power.

The third factor is considered to be the most essential one. From a practical standpoint then, who are fiduciaries? It is a rather exclusive club as the courts are reluctant to expand its membership, particularly in light of the implications it has on the employee’s post-termination employment. In Barton Insurance Brokers Ltd. v. Irwin, the British Columbia Court of Appeal noted that “in certain circumstances, which I would think would be relatively rare, a former employee of less than senior management or directorial status might be found subject to fiduciary duty — for instance a ‘key employee’ finding might serve to found such duty. But I do not believe that courts should be easily persuaded to find that ordinary employees would be subject to such continuing duties.”

The courts have adopted a functional approach which focuses on an individual’s actual role within an organization as opposed to the title held. An independent consultant who functioned as the company’s president has been found to be a fiduciary. A strict employment relationship is not necessarily required.

Fiduciaries generally have supervisory responsibilities, although not all supervisors are fiduciaries. An organization’s senior management team — provided the net is not cast too wide — will have fiduciary status. Fiduciaries have the power and the burden of making decisions that bind an organization and materially affect its interests. It is this power that creates the vulnerability that triggers fiduciary status.

Despite their direct relationships with and influences over customers, sales representatives or account executives generally do not qualify as fiduciary employees. But sales representatives, in particular, and other employees as well, may acquire this status if they associate with a fiduciary post-termination. The point is that fiduciaries cannot evade their obligations by acting indirectly through an individual who would not normally have fiduciary duties. So, if a senior sales manager leaves and two sales reps go with him, they, while not fiduciaries themselves, will be bound to follow the senior sales manager’s fiduciary responsibilities.

For more information see:

Felker v. Cunningham, 2000 CarswellOnt 2974 (Ont. C.A.)

Barton Insurance Brokers Ltd. v. Irwin, 1999 CarswellBC 190 (B.C. C.A.)

KJA Consultants Inc. v. Soberman [2003] O.J. No. 3175 (S.C.J.)

Post-termination implications for fiduciaries

Following a termination of employment for any reason — for cause, without cause or resignation — all employees are prohibited from using or disclosing confidential or proprietary information they accessed during employment.

But aside from this duty of confidence, an employee is entirely unrestricted in her activities. Working for a competitor, soliciting the former employer’s clients and prospective clients is entirely unrestricted, unless the employee has entered into a written agreement that prevents this behaviour.

A fiduciary employee, in the same circumstances, has additional restrictions. She is required to abide by the same duty of confidence. The only difference here is that a fiduciary will have enjoyed greater access to sensitive, confidential and proprietary information than a regular employee.

The more onerous restrictions relate to solicitation and corporate opportunities. In terms of solicitation, even without a written agreement, a fiduciary is precluded from soliciting customers with whom she developed a relationship during her employment for a reasonable time period following termination. This same obligation applies to prospective clients whom the fiduciary may have played a role in developing during the employment relationship. A “reasonable” period post-termination is a function of the industry in which the employer operates and the period of time required for the employer to solidify its relationship with customers following the cessation of the fiduciary’s employment. It usually varies from six to 18 months in an exceptional case.

In addition to not soliciting an employer’s customers, a fiduciary is precluded from usurping corporate opportunities of which the fiduciary is aware by virtue of her employment. Until recently, the corporate opportunities protected from fiduciaries were “mature” or “ripe” ones developed by the organization and usually the fiduciary during employment. Whether or not the organization opted to pursue it has been found to be irrelevant.

Even if the organization had unequivocally decided not to pursue it, it would be a breach of trust and fiduciary duties for a senior executive to decide to pursue it independently. More recently, however, this fiduciary duty has been expanded to preclude a former employee from accepting work from a client of his former employer, where the client solicited the former employee, not the other way around, on the basis that it would constitute improperly seizing a corporate opportunity.

In KJA Consultants Inc. v. Soberman, Soberman worked for KJA for 13 years and, for the last four years of his employment, was the general manager. He did not sign a formal employment agreement or have any restrictive covenants during his employment. He resigned from his position with four weeks’ notice and told KJA he intended to start a competitive business. Prior to his resignation, Soberman took only minor steps toward setting up his own business. Before the effective date of his resignation, KJA’s lawyers advised him in writing what KJA considered the scope of his fiduciary duties to encompass.

Despite this letter, Soberman directly solicited many KJA clients. KJA moved for an injunction to prevent solicitation and the use of confidential information. The injunction was granted. The matter proceeded to trial on the issues of breach of fiduciary duties and damages.

The granting of the injunction and the damages awarded for breach of Soberman’s fiduciary duty not to solicit KJA’s clients for a reasonable period following his resignation are not surprising. Where Soberman had improperly solicited KJA’s clients, secured projects and provided services, he was required to divest all of the money earned on each project.

The surprise in the decision is the court’s finding that Soberman breached his fiduciary duties when a KJA client contacted him, without any solicitation, to request a proposal from his new company. He submitted a proposal and secured the project. The court acknowledged that in a personal service business, personal relationships can figure largely in client decisions about whom to retain for their business. In this case the court found Soberman’s familiarity with the customer’s contract with KJA was the basis for his retainer and that, because Soberman only had this knowledge because of his position and duties at KJA, he breached his fiduciary duties when he sold this knowledge to take a significant asset away from them.

Taken to its logical conclusion, the court’s finding means a fiduciary, in any personal service business, cannot compete against a former employer for a period of time post-termination even if the opportunity falls into her lap. The concern is that the principle developed by the Supreme Court to prevent fiduciary employees from usurping or diverting maturing business opportunities her employer is actively pursuing has been distorted beyond recognition to creating an indirect duty not to compete which the courts have universally rejected in its direct form as something to ever be implied into any employment relationship.

An appeal has been filed of this decision.

This in-depth look at fiduciary duty was provided by Kristin Taylor, a partner with Fraser Milner Casgrain in Toronto. She can be reached at [email protected] or (416) 863-4612.

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