What is ‘Self-Dealing’ in Employment? - LawNow Magazine

What is ‘Self-Dealing’ in Employment?

Employment Law ColumnIntroduction

While they have human bosses, most employees work for corporations, which are legal fictions with no physical existence. That renders employers technically vulnerable to their own employees who might want to take advantage of them. It is both impossible and undesirable to scrutinize every employee during every minute on the job.

There are many ways in which employees can put their own interests ahead of their employers’ interests. This “self-dealing” may include taking the employer’s business opportunity, using corporate funds or equipment for personal use, purchasing company stock on insider information, and working in a competing business. Employees can lie, steal and act dishonestly and disloyally to their employers in uncountable ways to gain personal advantage. They can use knowledge, processes and relationships gained from their employer in ways that injure the employer.

To offset this vulnerability and to ensure an alignment of interests, the common law imposes a general duty of fidelity, good faith and loyalty on all employees.  They must be honest and cannot let their personal interests conflict with those of the employer.

Senior managers and those in special positions of trust and authority are called “fiduciary employees”. They must not use their positions to gain a personal advantage, profit or opportunity. They are held to the highest standard in advancing the employer’s best interests, and they face the strictest scrutiny in that regard.

Policies and Codes of Conduct

There are many ways in which employees can put their own interests ahead of their employers’ interests. This “self-dealing” may include taking the employer’s business opportunity, using corporate funds or equipment for personal use, purchasing company stock on insider information, and working in a competing business. Employers should enact and publicize Codes of Conduct to prohibit self-dealing.  Policies and Codes of Conduct are enforceable obligations in the employment contract if they are brought to employees’ attention when they are hired.  One such clause in a large Calgary employer’s Code of Conduct prohibits:

Influence, or seeking to influence, a corporate decision in a manner that favours another individual or organization in the expectation of realizing personal gain for yourself, a related person, or others with whom you have or have had an association.

The UPM-Kymmene Case

Steven Berg was a corporate director and largest shareholder of the forestry company Repap.  He sought the Senior Executive Officer role and an enhanced employment contract with renewable five-year terms and benefits such as a signing bonus of 25 million shares and stock options.  If he was terminated,  the new contract would have to pay him out the remainder of his five-year term.

Repap, meanwhile, was cash-strapped and thought Berg did not bring any special skills or expertise to justify adding to the three existing executive officers.  Repap did not need – nor could it afford – his new contract.  Nevertheless, Berg persisted and the newly appointed members of the Board of Directors relented.

Repap was sold to another company and the new management terminated Berg’s employment.  By that time, he had only worked for seven months and had been paid $200,000.  He sued for $27 million.  The employer counterclaimed to set aside Berg’s employment contract on the basis of his breach of fiduciary obligation.

The trial judge found the generous package Berg had secured for himself was detrimental to the company’s interests and created a massive liability it could not afford.  Berg had failed to act honestly, in good faith and in the best interests of the company.  His actions, motivated by greed and self-interest alone, were the  opposite of what was required of him as a fiduciary.  The dismissal was upheld and the enriched employment contract set aside. The Ontario Court of Appeal dismissed the appeal, noting that the trial judge concluded Berg:

made false allegations . . . his motive . . . was entirely improper, that he threatened to collapse the company’s capital structure if his wishes were not carried out, that he completely lost sight of his obligations to the company, that he ‘failed utterly’ in his duties to the company, that his conduct was ‘exactly opposite to the conduct that the law required of him as a fiduciary’, and that he was ‘greedy and overreaching and failed miserably in his duties to Repap’.

Self-Dealing is Ultimately About Money

Self-dealing may involve gaining a promotion, prestige or a good reputation with the employer.  In Poirier v Wal-Mart Canada, Poirier was appointed manager of a new Wal-Mart store in 2003 due to his performance as a manager at another store which conducted $60 million in yearly sales.  After announcing his appointment, Wal-Mart discovered that Poirier had manipulated payroll to keep his store within budget.  This involved deleting workers’ hours and paying them cash, and entering worked hours as sick time.  Poirier’s manipulations did not cost Wal-mart an extra penny but his store performance looked better than it was.  Poirier was terminated.  He sued for wrongful dismissal.

The judge noted that Poirier did not gain financially from his manipulations, which served only to enhance his own reputation and standing in the company.  What he gained was not directly monetary.  The judge upheld the termination, stating (para 68):

. . . enhanced reputation from this type of activity, in terms of appearing to be a better manager than one actually is, though clearly a personal benefit and not a financial one, may over time translate into monetary gain through advancement.

Authors:

Peter Bowal
Peter Bowal
Peter Bowal is a Professor of Law at the Haskayne School of Business, University of Calgary in Calgary, Alberta.
 

Malhar Shahani
Malhar Shahani is a student at the Haskayne School of Business.
 


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