Cox & Palmer Employment & Labour Case Update

PARTNERS IN A LAW FIRM ARE NOT EMPLOYEES UNDER THE HUMAN RIGHTS CODE

The British Columbia Court of Appeal issued its much-anticipated decision in Fasken Martineau DuMoulin LLP v. British Columbia (Human Rights Tribunal), 2012 BCCA 313, on July 19th. As the latest in a series of cases on independent contractors vs. employees, the decision signals what may be a shift in the case law. The trend in the authorities has been to consider individuals who would otherwise be “independent contractors” at law to be “employees” for the purpose of applying a remedial statute. However, in its decision, the Court of Appeal rejected the argument that the remedial purpose of the Human Rights Code justified the conclusion that a partner in a law firm was an employee under that statute.

THE FACTS

A partner in a law firm (“McCormick”), complained that his forced retirement at age 65, which was based on a retirement clause in his partnership agreement, constituted discrimination. The Human Rights Tribunal refused the law firm’s application to dismiss the complaint without a hearing because it held that the relationship between McCormick and the law firm was one of “employment”. On judicial review, the British Columbia Supreme Court considered that human rights legislation is quasi-constitutional in nature and therefore must be given a “broad, liberal and purposive interpretation to ensure the attainment of its purposes”. (Fasken Martineau DuMoulin LLP v. British Columbia (Human Rights Tribunal), 2011 BCSC 713.)

The Court went on to state that because of its special character, legal principles developed in other legal contexts are not determinative of the rights and liabilities created by human rights legislation. As a result, a human rights tribunal must consider the question of “employment” in light of the statute’s remedial nature, “not from the narrow perspective of partnership law or the law of contract”. Factors considered by the Court included: that the law firm partnership was of the limited liability variety (which it held was more reflective of a traditional corporate entity than a true partnership), the law firm utilized the service of equity partners for their mutual benefit, McCormick earned income from services he provided to firm clients and that work product belonged to the firm, and McCormick’s compensation was determined by a compensation committee. These factors contributed to the dismissal of the law firm’s application for review because the Court found that “employment” is not based on the label the parties agreed to but rather, what the relationship is in fact and substance. As a result, the human rights tribunal had jurisdiction to determine the discrimination complaint.

THE DECISION

Fasken Martineau DuMoulin LLP appealed the British Columbia Supreme Court decision to the Court of Appeal. The Court found that there was a well-established legal principle that there can be no employment relationship between a partner and the firm of which he is a member. The Court accepted the firm’s argument that this principle cannot be displaced by a broad, liberal and purposive interpretation of the Human Rights Code. The Court stated:

…the principles of interpretation of the Human Rights Code, R.S.B.C. 1996, c. 210, which mandate a broad, liberal approach consistent with its remedial purposes, do not change underlying legal relationships to the extent found by the Tribunal and the chambers judge. In particular, they do not extend to overriding the fundamental and well-established principle of law that a partnership is not, in law, a separate entity from, but is a collective of, its partners, and as such, cannot, in law, be an employer of a partner. (para 3)

The Court cautioned that judges must be careful to interpret statutes within the boundaries of the law. It emphasized that if the interpretation of a statute reveals that a group is not protected, it is the role of the legislature (and not the courts) to remedy this gap.

LESSONS FOR EMPLOYERS

The decision suggests that the trend of expanding the definition of employee for the purpose of interpreting a remedial statute is subject to limitations. The Court has stated in clear language that well-established principles of law cannot be overridden solely on the ground that the statute at issue has a public welfare purpose. This reasoning could provide the basis for future arguments that individuals who are true independent contractors at common law should not be considered employees for other purposes.

CORPORATE LIABILITY DOES NOT ACT AS A SHIELD AGAINST INDIVIDUAL LIABILITY

In Ontario Human Rights Commission v. Farris, 2012 ONSC 3876, the Ontario Divisional Court recently confirmed that principals and managers of companies may be found personally liable for damages in human rights cases.   In overturning a decision of a Human Rights Tribunal not to award damages against Harry McKeague and Michel Leonard, the Court noted that they were not only managers and principals but were also the only two shareholders of Staubach Ontario Inc. – a defunct company. Both McKeague and Leonard were found to have failed to recognize and address a poisoned work atmosphere and to have terminated the Complainant’s employment instead of attempting to resolve the workplace issues.  Those facts were sufficient to justify an award of damages against them as well as Staubach.

FORMER EMPLOYEES OWE MILLIONS TO FORMER EMPLOYER

The Ontario Court of Appeal has ruled that, along with their new company, four former fiduciary employees are jointly and severally liable for in excess of $12 million dollars to their former employer.  While this may sound like a landscape-changing case, the Ontario Court of Appeal in GasTOPS Ltd. V. Forsyth, [2012] ONCA 134 has simply reaffirmed the obligations, and potential personal liabilities of fiduciaries.

THE FACTS

GasTOPS Ltd. (“GasTOPS”) develops computer software products that assess machinery conditions for maintenance purposes for operators of jet engines. This is a highly specialized niche industry with few customers. As an industry leader, the Canadian Armed Forces and Department of National Defence were among GasTOPS’ most significant customers, each of which generated significant revenues for the company, and the U.S. Navy was being vigorously pursued. Bradley Forsyth was a manager of product development and head of the industrial systems group; Douglas Brouse was head of the aerospace business unit; Jeffrey Crass was the chief software developer; and Robert Vandenberg was the project manager for a major customer.  These four employees were considered the designers of GasTOPS core programs and part of the senior management of the company.

On October 7, 1996, Brouse and Forsyth resigned from GasTOPS with two weeks’ notice. Three days later, Cass and Vandenberg also resigned. Brouse, Forsyth and Cass subsequently informed other GasTOPS employees of their plans to start up their own company, and, as a result, a number of other employees left GasTOPS to join the new company, MxI which was incorporated on October 15, 1996. As a result of the exodus of Brouse, Forsyth, Cass and Vandenberg and their representations to GasTOPS customers that they could offer “a seamless transition” to the next iteration of GasTOPS’ technology, several existing and prospective GasTOPS customers, including the U.S. Navy, chose to do business with MxI. To the significant financial detriment of GasTOPS, in the 10 years that followed, MxI earned profits totalling $12,306,495.00 from its military contracts.

At trial, the judge found that Brouse, Forsyth, Cass and Vandenberg had been “fiduciary” employees of GasTOPS (the “Four Fiduciaries”) as “[t]hey were responsible for developing a significant commercial component of GasTOPS business, and achieved that through the use of sensitive technological information that they helped develop and which was at the very core of GasTOPS corporate identity”. In addition, they were privy to the requirements of GasTOPS’ existing and potential customers. The judge went on to find that the Four Fiduciaries:

1. Breached their fiduciary duty by:

a. Leaving without giving reasonable notice knowing other employees would follow and knowing that it would leave GasTOPS unable to fulfill existing contracts or pursue other business opportunities;

b. Soliciting GasTOPS’ customers and prospective customers; and,

c. Using GasTOPS’ confidential information to compete unfairly.

2. Breached their duty of confidence by acquiring confidential commercial and technical information and misusing that information to the detriment of GasTOPS and the benefit of MxI; and,

3. Breached their employment contracts by resigning without giving reasonable notice.

The trial judge ordered that MxI account to GasTOPS for the improper profits it made over its first 10 years of operation, being $12,306,495.00, and that it pay pre-judgement interest in the amount of $3,039,944.00 along with GasTOPS’ full legal costs in the amount of $4,252,920.24. The judge further ordered the Four Fiduciaries jointly and severally liable to GasTOPS for the amounts ordered.

THE DECISION

On appeal, the Court deferred to the findings of fact made by the trial judge in determining that the employees were fiduciaries, and that each had breached their fiduciary duty and their duty of confidence. The Court also upheld the trial judge’s award of damages, including the use of 10 years in crafting the amount of damages payable by MxI and the Four Fiduciaries.

While the Court was not asked to rule on the trial judge’s finding that the Four Fiduciaries owed GasTOPS 10-12 months’ of reasonable notice, they did agree with the premise that had the Four Fiduciaries provided reasonable notice, it would have lessened the effect of their breach of fiduciary duty.

LESSONS FOR EMPLOYERS

This case is important for employers in several respects. Firstly, this case magnifies the need for well-drafted employment contracts.  Employers should ensure that their employment contracts, particularly those with fiduciary employees, contain non-complete, non-solicitation and confidentiality clauses when appropriate. This is especially true where the employer operates in a niche market (i.e., limited number of complex clients, lengthy relationship building process, small number of large contracts, etc.).

Secondly, this case illustrates that when fiduciary employees depart to a new company, the new company is not permitted to use the confidential knowledge of the fiduciary to compete unfairly with the former employer. Employers may be liable when they hire a key employee away from a rival company. Accordingly, they should satisfy themselves that their newly acquired employee is not breaching any of his or her continuing duties to the former employer.