Is Dishonesty Still Grounds for Termination?

In the last several months, the courts handed out two cases of significant importance to fraud investigators.

Just Cause:

The 2001 decision of the Supreme Court of Canada in McKinley v. B.C. Tel was the first ever handed down by that court in the area of just cause for discharge. Mr. McKinley was employed by B.C. Tel as a financial executive, a position of trust, for seventeen years. He absented himself on short term disability, expressing a desire to return to a less stressful position. He was fired, rejected the severance offered
and brought an action alleging wrongful dismissal. Three days after the trial commenced, B.C. Tel amended its defence to assert cause, alleging that he had been dishonest about his medical condition and the treatments available for it. The court agreed with that determination noting that, when he requested modified work, he did not disclose that he had been advised by a doctor of a treatment for his condition which would have allowed him to return to his previous position. However, the jury found that his dishonesty was not incompatible with the employment relationship. The B.C. Court of Appeal reversed this, concluding that any dishonesty, however minor, was always cause for dismissal, particularly for a fiduciary financial executive.

McKinley successfully appealed the Supreme Court. Justice Iacobucci, for a unanimous court, noted that courts have held that factors such as the nature and degree of the misconduct and whether it violates the essential conditions of the employment contract, or breaches an employer’s faith in an employee must be considered in drawing conclusions as to whether there is just cause.

The Supreme Court recognized that McKinley was somewhat dishonest in communicating to his employer the medical information he received but, notwithstanding that, found there was not cause for dismissal. In making that finding, the court endorsed the principle of proportionality, calling for a balance between the severity of an employee’s misconduct with the punishment imposed. This will obviously apply to all forms of misconduct and not merely dishonesty. The Court relied on the principle that employment is fundamental to every person’s identity so that care must be taken before imposing rules that will immediately terminate the employment relationship. The court must determine, the context of the particular infraction, whether that act, was severe enough to justify the termination of employment.

This decision causes considerable concerns. Although noting that the entire circumstances and nature of the impuned conduct must be examined, the court provided no clear criteria for just cause for discharge. Previously, if an employee is not truthful, the essential substratum of the relationship was deemed removed. This is no longer the law. Now, even counsel cannot safely predict whether conduct would be considered just cause until the conclusion of trial.

Full Disclosure:

The next case of importance is that of the Ontario Court of Appeal in May 2001 in Felker v. Cunningham which held that a fiduciary owes an obligation to disclose that he is seeking work to his employer and that failure to do so is cause for dismissal.

In the summer of 1995, Kurt Felker was in an industry golf tournament where he shared a golf cart with Sherman Cunningham, the CEO and founder of Electrosource, an electronic component manufacturer. Between strokes, Felker made two comments of note: (1) that, for the right opportunity, he would leave his employer; (2) one day he hoped to do what Cunningham had done, start up his own manufacturer’s rep business in the electronic component field.

Cunningham had no position available for Felker at the time but, when one became available, a few months later, Cunningham called Felker and hired him as his sales manager. Three months later, Felker heard of an opportunity to become the manufacturer’s rep for Electrochip, another company in the field, an opportunity which Electrosource had turned down. Felker prepared his presentation on the company laptop, working on the evenings and weekends, although acknowledging that he probably wasn’t working as hard as he might for his employer while preparing his presentation. His new boss, Cunningham, learned about his job search but did not confront him, waiting to see if he would volunteer the information of his own volition. When he did not, Cunningham terminated Felker, stating, I cannot trust this executive anymore.

The Court of Appeal said:

As a fiduciary, Felker’s duty of good faith required he be open, honest and forthright with Electrosource and make full disclosure of all material facts that his employer was entitled to know to successfully operate its business. In this regard, Felker was required to make full disclosure to Electrosource that he was engaged in preparing a presentation for Microship with the intention of acquiring it and thereby carrying on business in competition with his employer.

Since he did not tell Cunningham, the court held he was terminable for cause.

The level of the specific issue in the case, some interesting questions arise. Does an executive give up looking for other job prospects? Does he or she look but not tell his or her boss, disclosing everything? What if they are approached and merely listen? Do they look and tell and risk any chance of ever advancing in the organization if they are ultimately not hired for the job or if the job does not work out? What remedies might they have if that occurs?

Instead of making employees more candid with their employers, as was the court’s intention, this ruling might make them more circumspect. For example, they might ask for an agreement with the prospective employer to keep the information confidential knowing they would be fired otherwise. That raises another interesting issue: if the new employer reveals the information, can the employee then sue them for the damage they can no longer obtain from their existing employer? Does the prospective employer who makes such a deal become a joint tort feasor?

In the underlying ration of the case, there are far more interesting questions. Do employees have a duty now to inform their employer if they learn that one of the other employees is intending to leave? Do they have a duty to inform their employer of misconduct, even off-duty misconduct, of other employee? Do they have to report their own misconduct? Do they have to advise of aspects of their background the employer failed to ask during the initial interview process? Do they have to advise their employer of the background of other employees they learn of? Do they have to advise of all manner of business opportunities that come to their attention anyway? Has this case created new duty of constant full disclosure at the risk of dismissal? This opens up the ambit for fraud investigators dealing with fiduciary employees to examine, not only their conduct, but their failure to conduct themselves in ways that the company could have reasonably expected. The McKinley case, for its part, makes it important for fraud investigators to not only establish employees misconduct but rule out any potential excuse before the law suit commences.