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The Role of the Key Employee in a Fiduciary Relationship

February 24, 2022

Ontario

,

Canada

Issue

Is a Vice President of Sales a fiduciary by virtue of their role or title?

Conclusion

The case law in this area is well settled. In order for a fiduciary relationship to arise in an employer/employee context, the employee must have scope for the exercise of discretion or power and the potential to exercise this discretion or power unilaterally to affect the employer’s legal or practical interests. This renders the employer particularly vulnerable and at the mercy of the employee in respect of the business asset in question. The law does not lightly impose the mantle of a fiduciary on an employee. The title given to the employee is not determinative of his or her status. There must be power to “guide and direct” the affairs of the company. Varying degrees of trust, reliance, and dependency can suffice to establish a fiduciary duty in an employer/employee relationship, depending upon the situation. The issue is one of ultimate power and responsibility. (Sanford Evans List Brokerage v. Trauzzi)

There are three hallmarks of a fiduciary relationship:

(i) the fiduciary has scope for the exercise of some discretion or power;
(ii) the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interest, and,
(iii) the beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power.

When considering whether an employee is a fiduciary, the court must consider his actual authority or control over the employer’s operation; fiduciary duties do not arise from an employee’s title. Courts have extended fiduciary duties to lower-level employees where an individual is found to be “key employee,” whose position and responsibilities are essential to the employer’s business, making the employer particularly vulnerable to competition upon that employee’s departure. An employee may be a key employee if he has knowledge of the names, contacts and needs or preferences of clients or suppliers, a direct and trusted relationship with existing and potential customers, access to confidential information, knowledge of pricing, or other duties which show them to be a key person to the corporation. The notion of a “key employee,” referred to in Jardine, descends from the decision of the Supreme Court of Canada in Canadian Aero Service Ltd. v. O’Malley, (1973), where the Court distinguished “top management” from “mere employees”, on the basis that these “key employees” have larger and more exacting duties similar to those owed by a director to a corporate employer. In contrast, the duties owed by mere employees, unless enlarged by contract, consist only of respect for trade secrets and confidentiality of customer list. While the factors listed above assist in identifying a key employee, the determination of whether someone is a fiduciary requires not just ticking off those boxes, but considering the employee’s role in the context of the hallmarks of fiduciary relationships. (PointOne Graphics Inc. v. Roszkowski et. al.)

Sanford Evans List Brokerage v. Trauzzi concerned an allegation that the defendants breached their fiduciary duties of loyalty and good faith. One of the defendants had been a vice-president for 7 years in advance of resignation. Chapnik J. considered whether she owed a fiduciary duty. Chapnik J. found that the vice-president's role was that of a fiduciary given her day-to-day management of operations.

However, titles no more make a fiduciary than lack of titles preclude it, although a title is a factor to be taken into account. Managers, particularly low-level managers with only limited amounts of trust and discretionary authority vested in them, are not presumptively fiduciary in the way directors and senior officers are. A case-specific analysis of the actual responsibilities and role of the employee is required to determine the scope of the employee to exercise unilateral authority in a way that could affect the employer’s economic and legal interests. Possession of technical skill or competence, even if that skill is portrayed as comparatively rare, does not create a fiduciary relationship. When “key employees” have been found to be subject to fiduciary duties, the feature of control over the relationship of the employer with clients has been a very key feature. (Lockwood Fire Protection Ltd. v Jason Caddick et al.)

Regardless of title, managers authorized to act on a company’s behalf may be fiduciaries based on their duties. The analysis is a question of fact in the circumstances of the specific relationship. The question to ask is whether, given all the surrounding circumstances, one party could reasonably have expected that the other party would act in the former’s best interests with respect to the subject matter at issue. Discretion, influence, vulnerability, and trust are non-exhaustive examples of evidential factors to be considered in making this determination. What is required is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party. (410784 Ont. Ltd. v. Little Zinger)

In Dialadex Communications Inc. v. Crammond et al., Potts J. referred to a case where the court declined to find a fiduciary duty upon a person who bore the title of, inter alia, vice-president, finding instead that he was "many levels below top management".

In Harder v. Sheehan & Rosie Ltd., dealing with an interlocutory injunction, Henderson J. held, in passing, that one of the parties was a fiduciary because of the fact that he was a former vice president. Henderson J. held that if the person had access to confidential client information through his position as Vice President he owed a fiduciary duty.

Law

Sanford Evans List Brokerage v. Trauzzi, 2000 CanLII 22741 (ON SC) concerned an allegation that the defendants breached their fiduciary duties of loyalty and good faith. One of the defendants had been a vice-president for 7 years in advance of resignation. Chapnik J. considered whether she owed a fiduciary duty.

Chapnik J. held as follows with respect to when a person is considered to be a fiduciary, finding that the vice-president's role was that of a fiduciary given her day-to-day management of operations:

38 The case law in this area is well settled. In order for a fiduciary relationship to arise in an employer/employee context, the employee must have scope for the exercise of discretion or power and the potential to exercise this discretion or power unilaterally to affect the employer’s legal or practical interests. This renders the employer particularly vulnerable and at the mercy of the employee in respect of the business asset in question: Frame v. Smith, 1987 CanLII 74 (SCC), [1987] 2 S.C.R. 99 (S.C.C.), at 102 citing Misener v. H.L. Misener & Son Ltd. (1977), 1977 CanLII 1815 (NS CA), 77 D.L.R. (3d) 428 (N.S. C.A.).

39 The law does not lightly impose the mantle of a fiduciary on an employee. Canadian Industrial Distributors Inc. v. Dargue (1994), 1994 CanLII 7319 (ON SC), 20 O.R. (3d) 574 (Ont. Gen. Div.). The title given to the employee is not determinative of his or her status. There must be power to “guide and direct” the affairs of the company. Sure-Grip Fasteners Ltd. v. Allgrade Bolt & Chain Inc. (1993), 46 C.P.R. (3d) 443 (Ont. Gen. Div.); R.W. Hamilton Ltd. v Aeroquip Corp. (1988), 1988 CanLII 4527 (ON SC), 65 O.R. (2d) 345 (Ont. H.C.), at 351. See also 57134 Manitoba Ltd. v. Palmer (1989), 1989 CanLII 2743 (BC CA), 37 B.C.L.R. (2d) 50 (B.C. C.A.); Tomenson, Saunders, Whitehead Ltd. v. Baird (1980), 7 C.C.E.L. 176 (Ont. H.C.) and Reed Stenhouse Ltd. v. Foster (1989), 1989 CanLII 3191 (AB QB), 69 Alta. L.R. (2d) 80 (Alta. Q.B.).

40 Varying degrees of trust, reliance and dependency can suffice to establish a fiduciary duty in an employer/employee relationship, depending upon the situation. The issue is one of ultimate power and responsibility: Sure-Grip Fasteners Ltd. v. Allgrade Bolt & Chain, supra at 455.

41 In the circumstances before me, I find no difficulty whatsoever, in defining the role of Linda Trauzzi as manager of the list brokerage division of Sanford Evans from 1974 until her departure at the end of 1991, to be that of a fiduciary. For much of that time, she was an officer of Sanford Evans and the manager and vice-president of the division. As noted above, she was responsible for managing its day-to-day operations and Sanford Evans relied on her knowledge and experience to do so in a proper and enterprising manner. I am satisfied that her overall role and mandate did not change after Québecor acquired Sanford Evans; if anything, her responsibilities increased. I found no evidence of any interference in her management of the division’s operations after 1988.

42 Following the acquisition of the company by Québecor, there may well have been a general letter circulated seeking resignations of department heads as officers of the company; even if that were so, it is evident that Linda Trauzzi was later reinstated as an officer of the company. Moreover, the bonus she received in 1991 was roughly equivalent to that awarded previously. Although the evidence regarding the method of calculating executive bonuses, both prior to and after the takeover, is somewhat unclear, the matter was, I find, wholly immaterial to Linda Trauzzi’s position in the company or her decision to leave Sanford Evans. It was demonstrated to my satisfaction as well, that Linda Trauzzi’s authority to make expenditures, which had always required approval, was not undermined in any way under Québecor’s tenure. Her requests for more computers, staff and better accommodation were being addressed and her requirements were included in the 1992 budget proposal for the division. The approvals may well have taken longer to obtain; but there was no evidence of urgency regarding them. Indeed, in an affidavit sworn January 22, 1992, Ms. Trauzzi stated that the additional staff and equipment had been authorized in October 1991 (although there was no space to put the people or equipment).

In Harder v. Sheehan & Rosie Ltd., 2002 CanLII 7914 (ON SC), dealing with an interlocutory injunction, Henderson J. held, in passing, that one of the parties was a fiduciary because of the fact that he was a former vice president. Henderson J. held that if the person had access to confidential client information through his position as Vice President he owed a fiduciary duty:

[32] Complicating matters is the fact that Harder has a fiduciary duty to Sheehan & Rosie because of the fact that he is the former Vice President of Sheehan & Rosie. I will assume that evidence will be led at the arbitration that will confirm that Harder had, through his position as Vice President, access to confidential client information. If so, Harder has a fiduciary duty to Sheehan & Rosie to not act unfairly toward his former employer. See Wallace Welding Supplies Ltd. v. Wallace (1986) 8 CPC (2nd) 157.

In 410784 Ont. Ltd. v. Little Zinger, 2014 ONSC 2510 (CanLII), Chiapetta J. held that, per Can. Aero v. O'Malley, [1974] SCR 592, 1973 CanLII 23 (SCC), regardless of title, managers authorized to act on a company’s behalf may be fiduciaries based on their duties. The analysis is a question of fact in the circumstances of the specific relationship:


[107] In Canadian Aero Service Limited. v. O’Malley, 1973 CanLII 23 (SCC), [1974] S.C.R. 592, at pp. 605-607, the Supreme Court of Canada found that, regardless of title, managers authorized to act on a company’s behalf may be fiduciaries based on their duties.

[108] The analysis is a question of fact in the circumstances of the specific relationship. As directed by LaForest J. in Hodgkinson v. Simms, 1994 CanLII 70 (SCC), [1994] 3 S.C.R. 377, at pp. 409-410:

The question to ask is whether, given all the surrounding circumstances, one party could reasonably have expected that the other party would act in the former’s best interests with respect to the subject matter at issue. Discretion, influence, vulnerability and trust [are] non-exhaustive examples of evidential factors to be considered in making this determination.

Thus, outside the established categories, what is required is evidence of a mutual understanding that one party has relinquished its own self-interest and agreed to act solely on behalf of the other party.

Of note, in Dialadex Communications Inc. v. Crammond et al., 1987 CanLII 4419 (ON SC), Potts J. referred to a case where the court declined to find a fiduciary duty upon a person who bore the title of, inter alia, vice-president, finding instead that he was "many levels below top management":

An interesting contrast is found in Tomenson Saunders Whitehead Ltd. v. Baird et al. (1980), 7 C.C.E.L. 176. In that case the court declined to find a fiduciary duty upon a person who bore the titles of vice-president and senior account executive, finding that he was "many levels below 'top management' " (p. 188).

In PointOne Graphics Inc. v. Roszkowski et. al., 2021 ONSC 629 (CanLII), Akbarali J. considered whether a former employee of a company was a fiduciary, and whether he breached his fiduciary duties. The employee in question was a long-term sales employee, and was described by the employer as a key senior sales representative. Akbarali J. outlined the following factors for determining if the employee was a fiduciary or not:

Breach of fiduciary duty

[28] In order to ground its claim for injunctive relief in breach of fiduciary duty, PointOne must first establish that Mr. Roszkowski was a fiduciary.

[29] There are three hallmarks of a fiduciary relationship: (i) the fiduciary has scope for the exercise of some discretion or power; (ii) the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interest, and (iii) the beneficiary is peculiarly vulnerable to, or at the mercy of, the fiduciary holding the discretion or power: Guzzo v. Randazzo et al., 2015 ONSC 6936, at para. 107, Imperial Sheet Metal, at para. 49.

[30] When considering whether an employee is a fiduciary, the court must consider his actual authority or control over the employer’s operation; fiduciary duties do not arise from an employee’s title: RBC Dominion Securities, at para. 50.

[31] Courts have extended fiduciary duties to lower-level employees where an individual is found to be “key employee,” whose position and responsibilities are essential to the employer’s business, making the employer particularly vulnerable to competition upon that employee’s departure. An employee may be a key employee if he has knowledge of the names, contacts and needs or preferences of clients or suppliers, a direct and trusted relationship with existing and potential customers, access to confidential information, knowledge of pricing, or other duties which show them to be a key person to the corporation: Jardine Lloyd Thompson Canada Inc. v. Harke-Hunt, 2013 ABQB 313, at para. 40.

[32] The notion of a “key employee,” referred to in Jardine, descends from the decision of the Supreme Court of Canada in Canadian Aero Service Ltd. v. O’Malley, (1973), 1973 CanLII 23 (SCC), [1974] S.C.R. 592, 40 D.L.R. (3d) 371 (S.C.C.), at p. 606, where the Court distinguished “top management” from “mere employees”, on the basis that these “key employees” have larger and more exacting duties similar to those owed by a director to a corporate employer. In contrast, the duties owed by mere employees, unless enlarged by contract, consist only of respect for trade secrets and confidentiality of customer lists: Jardine, at para. 38.

[33] Thus, while the factors listed above assist in identifying a key employee, the determination of whether someone is a fiduciary requires not just ticking off those boxes, but considering the employee’s role in the context of the hallmarks of fiduciary relationships.

Lockwood Fire Protection Ltd. v Jason Caddick et al., 2015 ONSC 6320 (CanLII) concerned, inter alia, whether a person who was a service manager was a fiduciary. Although involving a service manager rather than a vice-president, the principles discussed remain instructive.

Dunphy J. held that titles no more make a fiduciary than lack of titles preclude it, although a title is a factor to be taken into account. Managers, particularly low-level managers with only limited amounts of trust and discretionary authority vested in them, are not presumptively fiduciary in the way directors and senior officers are. A case-specific analysis of the actual responsibilities and role of the employee is required to determine the scope of the employee to exercise unilateral authority in a way that could affect the employer’s economic and legal interests. Possession of technical skill or competence, even if that skill is portrayed as comparatively rare, does not create a fiduciary relationship. When “key employees” have been found to be subject to fiduciary duties, the feature of control over the relationship of the employer with clients has been a very key feature:

(i) Jason’s title as Service Manager.

[39] While acknowledging that titles no more make a fiduciary than lack of titles preclude it, the plaintiff suggests that Jason’s managerial role, as suggested by his title, is a factor to be taken into account. I concur that it is a factor. However, it cannot be contended that every manager is, by reason of that title alone, a fiduciary. Managers, particularly low-level managers with only limited amounts of trust and discretionary authority vested in them, are not presumptively fiduciary in the way directors and senior officers are. A case-specific analysis of the actual responsibilities and role of the employee is required to determine the scope of the employee to exercise unilateral authority in a way that could affect the employer’s economic and legal interests: AMD Diagnostics Inc. v. Bozza, 2008 CanLII 58606 (ONSC) at para. 10.
[...]

[41] Mr. De Souza and Mr. Greco both testified to the high regard in which they held Jason’s skills (in the case of Mr. De Souza, skills he attributed to training from Wayne whose skills he also praised). The skill appreciated by both was Jason and Wayne’s ability to repair worn components rather than simply recommending (expensive) replacement as many competitors do. This is not indicative of some proprietary knowledge of confidential business secrets. This simply indicates that Jason (and Wayne) had well learned a degree of technical skill that was not common and was thus valued. Possession of technical skill or competence, even if that skill is portrayed as comparatively rare, does not create a fiduciary relationship. A skilled Porsche mechanic may be a very valuable and hard to find employee, but possessing such a skill does not render that mechanic a fiduciary for that reason alone. An employee is free to offer his or her skills, even those learned from the previous employer, to the highest bidder. There are no proprietary trade secrets the plaintiff has been able to articulate or identify with evidence that Jason. Jason knew how to repair equipment and he was familiar with the equipment clients had – he shared this knowledge with other non-fiduciary technicians who serviced the same clients. There is no trade secret in that, particularly when the equipment is of non-exclusive, third-party manufacture.
[...]

[43] The simple fact is that even if Jason got to know and be appreciated by a number of Lockwood Fire’s employees over the course of his employment, he never had anything resembling “control” over the relationship with any of them. When “key employees” have been found to be subject to fiduciary duties, the feature of control over the relationship of the employer with clients has been a very key feature: Metatrade Limited v. Lal, [2002] O.J. No. 3106 at para. 7. The non-exclusive relationship between Jason and some of the clients of Lockwood Fire displays none of the characteristics of “intimate contact and control” of a client mentioned by Molloy J. in that case.

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