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Howard Levitt: What Makes You a Fiduciary and What Are Your Obligations?

posted 2 years ago

Part of the fallout from the pandemic has been large numbers of employees rethinking their employment situation. For some, it involves working remotely. For others, a greater work-life balance (this invariably means working less, as we have yet to hear of anyone who thinks balancing their life means working more). Many decided to cease being employees and made the jump to becoming employers.

This article is for those brave ones who have decided to start their own businesses.

We are going to focus on the sometimes delicate dance of leaving your current employer, particularly if you intend to compete with it or it is perceived that you will be doing so. (Any existentialist will tell you that perception is everything.)

There are four independent but contemporaneous duties owed by a departing employee: 1. You can’t compete with your employer while still employed, obviously enough; 2. If you have an enforceable non-competition agreement you will be bound by it; 3. You can’t take confidential information; and 4. If you are a departing fiduciary you may owe certain obligations to your former employer.

For the purposes of this article, we will assume that you are not competing with your current employer and will not do so until after you have left that employment. We will also assume that you have not taken confidential information as we have covered that in some detail previously.

We will also assume that you are not subject to an enforceable non-competition agreement. This is not a stretch as most such clauses are unenforceable. As of last month, it is now illegal to enter into a new contract with such a clause for a non-C-suite employee, although we predict that non-competition clauses for C-suite employees will be no more enforceable that their predecessors.

This brings us to the point of this column. Even if you do not have a non-competition agreement with your previous employer, and you are not using its confidential info, the long arm of Canadian law may still require you to have a duty to that former employer if you were a “fiduciary”

You may ask yourself; what is a fiduciary? There are several legal definitions, but a good one is that a fiduciary is an employee who the employer is particularly vulnerable to and who thus must put the interests of the employer ahead of their own interests. In the employment context, it is usually, but not necessarily, an executive.

We will point out that this concept has been advanced more in Canada than in any other common-law nation including the United Kingdom, Australia and New Zealand, among others. This is not terribly surprising as Canadians do not seem to value competition as much as, say, our southern neighbour. We are a country that loves or, at least tolerates, monopolies.

The next questions are what makes you a fiduciary and what are your obligations if you are one?

Once again, there is no hard-and-fast definition of the requirements to be held to be a fiduciary. If you are a corporate director, you are a fiduciary of the corporation. If you are a member of the C-suite (i.e., the president or CFO or CEO) you are probably a fiduciary. However, this (unwelcome) status may be conferred on lesser employees. If you hold a position that makes your employer uniquely vulnerable to you, you may be a fiduciary.

In the years before the First Canadian Place skyscraper in Toronto was renovated, it was covered in beautiful white marble slabs.

Unfortunately, with the passage of time, these slabs had a disconcerting tendency to randomly fall off the building. Whenever a slab fell off the building it was replaced with another slab that was simply wedged into place. There was apparently one employee who kept track of which of the thousands of slabs still had the original fasteners and which slabs were wedged into place. That person was probably a fiduciary! (Now you know why the building was re-faced.)

The lesson here is that if you are a key employee, you might be a fiduciary.

If you are a fiduciary what are your obligations? As the case law has evolved, it appears that the main obligation is that you cannot usurp your former employer‘s business and opportunities so cannot solicit its customers/clients for some “reasonable” period of time. What is reasonable you ask?  It depends on the exigencies of the situation (a lawyerly answer). Depending on the length of employment and position held by the fiduciary it could be anywhere from several months to two years. Each case is determined on its particular facts.

The key point here is that while it may not be legal for a fiduciary to solicit a former customer, the customer may deal with whomever it likes. After all we are still, despite the best efforts of Justin Trudeau, a generally free country. Therefore, as long as the customer finds you, that customer may deal with you, even if you were a fiduciary of your former employer.

You can advertise (as long as you aren’t targeting the former customers). You can change your LinkedIn status. You can send email “blasts” as long as they are to the universe at large. You can hang a shingle. What you can’t do is directly or indirectly initiate contact with that customer.

Many of our clients will tell us that the customers that they wish to advise of their new competitive business are customers that they first brought into the old company and are therefore “their” customers.  It seems counterintuitive that they are unable to initiate contact with those customers. However, in the eyes of Canadian law those customers that you brought into your former employer are the former employers’ customers, not yours.

The situation may be somewhat different if the customers in question had a relationship with the departing employee prior to that employee’s tenure. In one case we successfully defended a client on the basis that the customers he solicited actually had a relationship with him long before his job at his previous employer and had been following him around for years, from new position to new position.

Let’s face it, if you had a great relationship with your customers, they will inevitably find you without being solicited and all will be well.

There are many other issues to deal with in separating from your previous employer, but this is the issue that seems to bedevil our clients the most. Hopefully this article makes this issue a little clearer and you can start that new business unimpeded by the old.

After all, do you not want the shackles of the old in the form of a lawsuit distracting you from all the tasks required to successfully start a business – especially when that distraction comes with time spent in court and a financial burden, too.

BY HOWARD LEVITT AND PETER CAREY

Howard Levitt is Senior Partner of Levitt Sheikh, employment and labour lawyers with offices in Toronto and Hamilton. He practises employment law in eight provinces. He is the author of six books, including the Law of Dismissal in Canada. Peter Carey is a Partner at Levitt Sheikh.

THIS ARTICLE ORIGINALLY APPEARED HERE: https://financialpost.com/fp-work/howard-levitt-what-makes-you-a-fiduciary-and-what-are-your-obligations

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