What Are The Limits on a Fiduciary Employee When There is no Employment Contract?

Written on behalf of Arbesman Hamilton LLP

Employment contracts often outline limitations on an employee when they leave a job, such as the disclosure of confidential information or the ability to solicit clients or work for a competitor. Some employees, usually senior executives, also have what’s known as a fiduciary duty to their employer, which means they have the power or discretion to use information in a way that might harm an employer’s interests.

The Ontario Superior Court of Justice recently heard a case where there was a fiduciary relationship but no employment contract, leaving the court to outline what those responsibilities were.

The Employee Quits, the Employer Calls Foul

The employee worked for an engineering firm (the employer) from 2005-2015, ultimately working his way up from an engineer to the role as a vice-president. During that time he acquired close to $900,000 in stock, which he agreed to sell back to the employer, who would pay him in ten annual installments. He received his first payment before leaving the employer. However, when the employer learned he had taken on the position of CEO with a rival firm and had hired five others who had worked for the employee, they refused to issue any additional payments, claiming the employer had breached his fiduciary duties to the employer.

The employee sued the employer for payment of the shares he sold, while the employer sought damages from the employee’s alleged breach of fiduciary duties.

Different Limits for Different Employees

The limits on the types of jobs the employee could take were not clear since there was no employment contract in place. As a result, the court had to determine what the employee’s fiduciary duties were.

To do so, the court turned to common law, citing a 1977 Ontario High Court of Justice case where the court said a non-fiduciary employee can work for a competitor and can solicit business from their previous employer so long as :

  1. There is no valid restrictive covenant in the employment agreement that prevents this action;
  2. Material is not used that has been acquired from the former employer through fraud; and,
  3. The employee does not misuse the employer’s confidential information.

A fiduciary employee, however, is not able to directly solicit business from a previous employer until a reasonable period of time has passed to allow for the employer to regain client loyalty and settle any unrest that may have occurred upon the departure of the employee.

The Supreme Court of Canada has ruled that such periods of time must be determined on a case-by-case basis and incorporate several factors into consideration, including:

“The factor of position or office held, the nature of the corporate opportunity, its ripeness, its specificness and the director’s or managerial officer’s relation to it, the amount of knowledge possessed, the circumstances in which it was obtained and whether it was special or, indeed, even private, the factor of time in the continuation of fiduciary duty where the alleged breach occurs after termination of the relationship with the company, and the circumstances under which the relationship was terminated, that is whether by retirement or resignation or discharge.”

However, the Supreme Court also ruled that fiduciary employees can directly compete with a former employer so long as there is no employment contract containing a non-competition clause. Since the employee did not have a contract, he was not in violation of any such clause. Furthermore, the court found that the five employees who followed were not recruited, but approached the employee on their own. As a result, the court ruled in favour of the employee.

Employment contracts are valuable instruments for both employers and employees. They allow all parties in an employment relationship to understand their rights and responsibilities. At Arbesman Hamilton LLP we represent both employees and employers in all matters of employment law. By working with both sides in employment law matters, we have gained valuable insight and understanding into the perspectives and needs for both employers and employees. Call us at 416-481-5604 or contact us online to start talking today