Senior executives owe a fiduciary duty to their employers, as they have the power to make decisions that can leave their employers vulnerable. A decision from the Court of King’s Bench of Alberta (“ABKB”), Breen v Foremost Industries Ltd. [Breen], illustrates the consequences of a senior executive (the “Employee”) deliberately breaching his fiduciary duty, among various other duties, to his employer (the “Employer”). Ultimately, the Employee was ordered to pay $480,000 in compensatory damages and $50,000 in punitive damages for his breaches.
The Employee became the Employer’s President and Chief Executive Officer (“CEO”) and was accountable to the Board of Directors and a Fund Board. The Employee was required to consult and obtain approval from the Fund Board for expenditures beyond his spending limit, any contract containing “red flag” terms, unusual matters, and matters regarding compensation. The Employee engaged in several of these activities without seeking the Fund Board’s approval. The Employee also entered into non-arm’s length transactions in breach of his duty to avoid conflicts of interest and was dishonest about several matters.
Despite receiving multiple warnings, the Employee continued to engage in misconduct. The Employee was ultimately dismissed for just cause in for failing to follow company policies, misrepresenting business information, and failing to follow corrective actions.
Upon his dismissal, the Employer uncovered a fraudulent scheme orchestrated by the Employee, where the Employee deposited misappropriated funds into his numbered company.
After the Employee sued for wrongful dismissal, the Employer issued a counterclaim, alleging the Employee knowingly breached several duties to the Employer.
The ABKB dismissed the Employee’s wrongful dismissal claim, finding the Employer had just cause for dismissal. The Employee’s misconduct not only breached company policies and conflict of interest provisions in his employment agreement, but broke the honesty and trustworthiness required in his employment relationship, particularly in his role as the most senior executive of the company.
The ABKB also found in favour of the Employer for its counterclaim. Specifically, the ABKB held the Employee, who owed a fiduciary duty to the Employer, blatantly misappropriated funds through an elaborate scheme to fraudulently enrich himself. For his misconduct, the Employee was found to be personally liable for the payments he had received, for $200,000 in damages that the Employer suffered as a result of the breach of the employee’s fiduciary duties, and for $50,000 in punitive damages for the manner in which he abused his position and tried to cover up his misconduct.
Takeaways for Employers
The ABKB decision in Breen is an example of how a just-cause dismissal can be appropriate and how employee misconduct can attracts punitive damages. Employers should note the following:
- Elevated Standards for Senior Executives: CEOs and senior executives are held to an elevated standard of conduct within an organization due to their ability to jeopardize the company’s interests and reputation through their actions. Employers should underscore the duties their fiduciary employees owe to their organization in policies and employment agreements.
- Just Cause Threshold is High: The ABKB held that any one of the Employee’s actions alone would have been sufficient for dismissal, given his dishonesty and the trust required in his position. However, employers should note that just cause is a very high threshold and requires a contextual analysis, assessing factors that include but are not limited to the employee’s years of service, their disciplinary record, the nature of the misconduct, the nature of the employee’s position, and the degree of trust require for the employment relationship.
- The Duty of Good Faith is Reciprocal: Employers should remember that the duty of good faith is not solely incumbent on employers but is reciprocal in nature. This duty of good faith and honesty also extends to employees in the course of the employment relationship, and is of particular importance in senior management positions, where the employee can seriously harm the employer through breaching the trust placed in them.
- Punitive Damages Require Substantial Proof: Prevailing in a claim for punitive damages as an employer against an employee is a rare occurrence. Employers should be cautious not to issue a counterclaim against employees in response to a wrongful dismissal claim merely for strategic reasons. Employers should only consider this step where they have incontrovertible evidence of serious misconduct. Considering the imbalance of power in the employment relationship, courts will scrutinize employer counterclaims against employees, and pursuing a counterclaim based on suspicion without definitive proof may attract punitive and aggravated damages against the employer.
In our previous blog, we discussed a case where the Ontario Superior Court of Justice ordered punitive damages against an employer for using a “scorched earth” strategy during litigation, where frivolous counterclaims for fraud and defamation were launched against an employee suing for wrongful dismissal.
This blog is provided as an information service and summary of workplace legal issues.
This information is not intended as legal advice.