Northern Exposure

Junior Employees Owe Duty of Good Faith, Too

By Stephen Acker and Ariel Thomas

Canadian employment law imposes a number of legal duties on employers and employees. One of the key duties is the duty of good faith. The duty of good faith requires employers and employees to act in each other’s best interests. It begins when employment does and can last until after the employment relationship has ended.

There is little dispute that senior employees owe a duty of good faith to their employers. But what about junior employees – do they owe their employers the same duty? Some junior employees may be surprised to learn that they too may owe the same duty of loyalty to their employers depending on their relationship and position.

GasTOPS case
The Ontario Superior Court of Justice’s recent ruling in GasTOPS Ltd. v. Forsyth should serve as a warning to those junior employees. In this case, the court decided that several junior employees owed their former employer a duty of good faith because they were “key employees.” They weren’t executives and weren’t involved in business planning, but their special knowledge and position relative to their employer made it fair to impose the duty.

The court decided that these junior employees breached their duty of good faith. They also engaged in unfair competition and misuse of proprietary confidential information. As a result, their former employer, GasTOPS, was awarded an astounding $11.4 million in damages.

Who is a “key employee”?
In the GasTOPS case, the four employees being sued resigned from GasTOPS after giving only two weeks notice. One week later, two of the former employees incorporated a competing company and hired the other two.

They were all highly skilled technical employees who had worked for GasTOPS with minimal supervision. They had been involved in contractual negotiations with customers. Overall, the court said that they had gained confidential information, trade secrets, and customer contacts during the time they were employed by GasTOPS. The fact that they resigned as a group left GasTOPS particularly vulnerable. As such, the former employees were “key employees.”

When do “key employees” owe their employers a duty of good faith?
Once it’s determined that someone is a “key employee,” the court will decide whether that person owes his or her employer a duty of good faith. According to the court in GasTOPS, a “key employee” might owe a duty of good faith when he or she:

  • is permitted to exercise discretion or power that affects the employer, which is vulnerable to that exercise of power;
  • has knowledge of the employer’s customer base such that the employee can influence customers;
  • has knowledge of the employer’s business or marketing opportunities;
  • has knowledge of, and access to, confidential information;
  • has direct and trusted relationships with existing and potential customers; or
  • has job functions that are essential to the employer’s business such that the employer would be vulnerable to the employee’s departure.

What exactly is the duty of good faith?
The duty of good faith has three components. Any employee who owes this duty:

  • must avoid conflicts of interest;
  • must act in his employer’s best interests; and
  • can’t personally profit as a result of his position.

By starting a competing company using the knowledge and customer relationships they gained while employed, the GasTOPS employees breached their duty of good faith. They profited from their willful failure to act in their employer’s best interests.

How long does the duty last?
According to the decision in GasTOPS, the duty of good faith extends after the employment relationship has ended. For how long? In this case, for 10 months following resignation – being the reasonable notice period to which the employees would have been entitled had they been dismissed without cause.

Impact on employers
This decision is good news for employers. In the future, courts may be more willing to hold junior employees to a standard of behavior that’s based on their actual influence over their employers’ fortunes instead of one based on an artificial distinction between junior and senior employees. Hopefully courts in other provinces will follow suit and make more employees accountable to their employers.