Part 2: Fiduciary Duties Owed to an Employer by Departing Senior Employees
This should take less than 5 minutes to read.
In Part 1: Duties of Loyalty, Good Faith, Fidelity and Confidence Owed by All Departing Employees, published on March 10, 2023, we highlighted the importance of understanding the duties of loyalty, good faith, fidelity, and confidence that all departing employees (no matter how junior they may be) owe to their former employer. When the departing employee is a senior employee (i.e., an officer of the employer, a member of top management or a key employee), that relationship gives rise to additional fiduciary duties which arise, even if they are not set out in a written employment agreement.
Generally speaking, a senior employee will be deemed to be a fiduciary, subject to fiduciary duties owed to their employer, when:
- the senior employee has the ability to exercise some discretion or power;
- the senior employee can unilaterally exercise that power or discretion so as to influence their employer’s legal or practical interests; and
- the employer is peculiarly vulnerable to, or at the mercy of, the senior employee holding the discretion or power.
Employees who exercise real influence in directing the company, in whom the employer reposes trust and confidence on a continual basis, and on whom the employer relies in reaching business decisions, will be classified as fiduciaries. While a job title may be one indicator of fiduciary responsibilities, it is the actual duties of the employee that will determine whether or not that employee is a fiduciary. Fiduciaries are key, valuable, and trusted employees who carry out functions that are essential to the employer’s business.
An employee who owes their employer a fiduciary level of responsibility, has all of the same duties of loyalty, good faith, fidelity, and confidence that all ordinary employees owe to their employer, plus additional fiduciary duties which require them to avoid a conflict of duty and self interest. On that basis, a fiduciary cannot misappropriate business opportunities which belong to their former employer. A fiduciary employee is also prevented from soliciting customers and, in some cases, employees of its former employer.
Fiduciary duties generally extend for a reasonable period of time after the employment relationship has been terminated. The length of the period considered to be “reasonable” will depend on the facts of each case. A primary consideration is fairness and the need to prohibit unfair competition. The fiduciary employee remains bound for such reasonable period of time as would enable the employer to contact its clients and attempt to secure its customer relationships.
While fiduciary duties can be modified by express written agreements, they apply even in circumstances where there is no written employment agreement in place. Some of the basic rules, the do’s and don’ts which all departing fiduciary employees should understand, are summarized below.
Do’s and Don’ts for Departing Fiduciary Employees* (*subject to express contractual restrictions):
FIDUCIARY EMPLOYEES CAN DO
- Can set up business in direct competition with former employer after term of employment contract ends*;
- Can send out general notices, business announcements, advertisements and solicitations to the general public, after employment ends;
- Can accept business from former clients who make the first approach*;
- Can use skills, training and experience acquired from former employer to pursue new opportunities;
- Can hire, or permit their new employer to hire, employees of their former employer who, of their own volition, decide to cease employment with their former employer and seek new employment;
FIDUCIARY EMPLOYEES CANNOT DO
- Cannot compete “unfairly” with former employer (e.g. by directly soliciting former employer’s customers OR misusing its confidential information);
- Cannot directly solicit former employer’s customers because employer has a proprietary interest in its trade connection with its customer;
- Cannot take any property or business opportunity belonging to employer or an opportunity which employer is actively pursuing;
- Cannot, for a reasonable period of time, solicit or lure active employees of former employer to leave their employment and join new venture. Cannot use knowledge of the skills and circumstances of other employees to target select employees and induce them to leave their employment;
*Reasonable restrictive covenants prohibiting competition, solicitation and hiring may be added by express agreement.
It is always easier to explain to a departing employee, the nature of the duties which continue even after the employment has come to an end. By including written provisions in employment agreements which highlight these duties, they will be much easier to enforce against a departing employee, if the need arises.
From the point of view of the former employee, a written agreement which expressly sets out the nature of these duties will provide an important point of reference when they make a decision to resign from their employment to pursue a better opportunity.
For more information, or if you have questions about this post, email Employment & Human Rights Lawyer, Scott MacDonald at smacdonald@rbs.ca or call at 604.661.9217
