Generally speaking, all employees owe their employer a duty of good faith, loyalty, and fidelity. This typically means that an employee is expected to show up and fulfill their employment duties in accordance with any relevant contract and applicable policies and not disparage their employer publicly. While such a duty applies irrespective of the level of seniority or employment enjoyed by the employee, fiduciary duties differ in that they are applicable only in specific circumstances.

In particular, fiduciary status is typically only attributable to those employees who occupy senior management positions with an employer, as greater power in the workplace accords with greater responsibility in respect of that power. In this blog, we explore the concept of fiduciaries in the context of employment law, including who may constitute a fiduciary, what criteria are considered in making such a determination, and the consequences of classification as same.

Former Employees Leave Employer to Start a Directly Competing Business

The case of Strength-N-U Inc. v Silva involved two former employees of the plaintiff’s employer. The plaintiff operates a health and wellness business that offers nutrition, therapy, fitness and training services. The individual defendants had each worked for the plaintiff, one as a chiropractor and the other as a physiotherapist, respectively, until they decided to open a similar, competing business. When they advised the plaintiff of their intention to open a competing business, the plaintiff immediately terminated the employment of both defendants.

Upon their departure from the plaintiff’s company, the individual defendants incorporated a new company that provides services directly competitive with those offered by their plaintiff’s former employer. Moreover, the individual defendants are officers and directors of this new company, which is also named a defendant in this lawsuit.

Employer Alleges Former Employees are Fiduciaries

The individual defendants’ former employer commenced a lawsuit seeking an injunction to prohibit the defendants from further engaging in any business that directly competes with the plaintiff’s own business. In particular, the plaintiff alleged that the individual defendants had been fiduciaries of the plaintiff’s business and had breached their fiduciary duties when they started up a business that directly competes with the plaintiff’s company.

The Characteristics of a Fiduciary Relationship

Characteristics of a fiduciary relationship include:

1. the ability and permission to exercise discretion/power in respect of the employer
2. the ability and permission to act unilaterally in exercise of that power/discretion to affect the legal or practical interests of the employer
3. the employer is at the mercy of the fiduciary who holds the power/discretion

How Can Fiduciary Status be Proven?

Two approaches may be employed in ascertaining whether a particular employee is a fiduciary of the employer: the broad approach and the key employee approach. The broad approach, which focuses on the degree of vulnerability of the employer in terms of competition from the employee, has been ruled by the Supreme Court of Canada to be inconsistent with the fundamental right of every Canadian to earn a living. As such, the courts apply the key employee test in determining whether a given employee is a fiduciary of his or her employer.

The key employee test involves consideration of the following criteria:

1. whether the employee in question can be considered an indispensable and integral part of the employer’s management team and, as such, participates in guiding the employer’s business affairs;
2. whether it is necessary that the employee in question be included in the employer’s decision-making processes;
3. whether the employee in question is provided unfettered or otherwise broad access to confidential, proprietary information of the employer that, if disclosed, would render significant damage to the competitive advantages enjoyed by the employer

Corollary considerations include whether the employee is entitled and empowered to establish prices and unilaterally enter into contracts on behalf of the employer, whether the employee has been provided supervisory responsibility over any other employees, and whether the employee maintains any exclusive relationships on the employer’s behalf.

As a finding that a particular employee is,, in fact, a fiduciary of a particular employer necessarily restricts competition in that it restrains the employee from engaging in certain behaviours and imposes significant duties and responsibilities on them concerning their employment, courts are generally quite cautious in undertaking an examination of whether a given employee is a fiduciary of a given employer, and are loathe to impose such restrictions on any employee in “less than clear circumstances.”

Were The Employees Fiduciaries of Their Former Employer?

The court noted that the chiropractor defendant had begun to work for the plaintiff business in February of 2018 and had signed a part-time contractor agreement commensurate with accepting that job and that the physiotherapist defendant had begun to work for the plaintiff in 2018 and had signed an independent contractor agreement in 2021. The plaintiff terminated both employees on the same date in July of 2023. The court further noted that these employees represented only 2 of the plaintiff’s 44 total staff members and that no evidence had been presented to substantiate the notion that either defendant had the power to direct or guide the plaintiff’s affairs. Moreover, there was no evidence that either of the defendants had the ability or power to establish prices on the plaintiff’s behalf, enter into exclusive relationships on the plaintiff’s behalf, bind it in contract, or be otherwise integral to the plaintiff’s operations. Furthermore, neither of the defendants had occupied a supervisory role, enjoyed broad, unfettered access to confidential information of the plaintiff, or were integral to the management team that oversaw and guided the plaintiff’s business affairs.

In these circumstances, the court was satisfied that the individual defendants, both former employees of the plaintiff, had not been fiduciary employees of the plaintiff. The court determined that the plaintiff’s ‘real’ complaint was that the individual defendants “are competing at all,” which is anathema to our society’s value of competition as healthy.

Toronto Employment Lawyers Advising Employees At Every Point of Their Employment Cycle

Whether you are an employer who requires advice concerning drafting an employment contract or an employee who seeks to understand the rights and obligations afforded you under your employment agreement, you need sage legal advice to protect your rights.

The lawyers at Grosman Gale Fletcher Hopkins LLP possess the expertise and knowledge required to handle any employment law matter. Contact us today, either online or by telephone at (416) 364-9599, and one of our friendly, helpful staff will be pleased to schedule a confidential consultation.