Traditionally, the most common form of claim advanced by employers against employees has been based on confidentiality, fidelity and/or restraint of trade obligations. However, in three recent cases (one earlier this year and two in 2009), the respective employers successfully claimed against former employees for losses incurred as a result of the employee's misconduct or failed performance.

This trio of cases is useful for employers seeking to recover losses caused by an employee's wrongdoing or sub-standard performance in breach of their duties of employment, in particular where once confronted, the misbehaving employee resigns before a disciplinary investigation can be completed.

Employee's breach of duty must cause loss - loss must be reasonably forseeable

To succeed in such a claim:

  • the employee's conduct must be in breach of an expressed or implied term in their employment agreement;
  • the employer must have suffered financial loss;
  • the loss must be attributable to the employee's breach; and
  • the loss must be reasonably foreseeable as a serious possibility resulting from the breach.

As to the extent of losses recoverable, an employer is required to mitigate its losses where possible.

Therefore, it is prudent to ensure that employees are aware of and understand their employment duties, and that a breach of one or more of their duties is likely to result in losses or costs to the employer which may be recoverable. For example, in the case of a poor performing employee, an employer would need to demonstrate that the employee had the requisite training and/or experience to appreciate the standard of performance required and that it was foreseeable that poor quality work would result in losses to the employer.

Careless employee to pay substantial losses

In the most recent case of the three, the Employment Relations Authority ordered a careless mortgage manager to pay his bank employer damages of just under NZ$1.3 million for losses caused by his conduct (ANZ National Bank Ltd v Hussain (28 January 2010)).

Hussain was found to have repeatedly breached the bank's credit risk policy in respect of 18 transactions by recommending unconditional approval of mortgage applications to borrowers without exercising proper diligence. In each of the transactions, the borrowers defaulted on the loans. The applications were part of a fraudulent scheme, currently the subject of a Serious Fraud Office investigation.

The Authority held that Hussain had breached the implied duty to exercise proper care and skill in carrying out his duties. Further, given Hussain's training and experience, he must have known that such careless or reckless actions could lead to significant losses for the bank. Therefore, he was liable for all losses incurred by the bank in relation to these specific transactions.

In addition, given the repeated nature of Hussain's breach of duty (in each of the 18 transactions), the Authority ordered him to pay a $3,000 penalty for each separate breach, totalling $54,000.

Dishonest employee liable for losses, investigation costs and disruption to business

Late last year, the Auckland Regional Council successfully claimed damages against a manager it had dismissed for dishonestly authorising payment of false invoices for private gain (Auckland Regional Council v Tilialo (15 October 2009)).

Tilialo engaged his girlfriend to provide services to the Council, which she had no qualifications to perform, and then authorised payment of two invoices in respect of the services of $4,500 each. Bank account records showed that the girlfriend withdrew the funds to pay for an overseas trip for the couple.

The Authority held that Tilialo's actions amounted to breaches of the implied duties of fidelity and trust and confidence, and the obligation to use proper care and skill. Further, he had breached certain express terms of his employment agreement relating to fraud, dishonesty, use of Council funds and disclosure of material conflicts of interest.

As in the ANZ case, the Authority ordered the employee to pay the full amount of damages sought, being the value of the false invoices ($9,000). In addition, Tilialo was required to pay the Council $28,000 for costs it incurred in investigating the matter; $3,000 in general damages for consequent inconvenience and interruption to the Council's business; and a penalty of $2,000.

Costs of rectifying poor performance recoverable

Prior to the above cases, the Employment Court accepted an employer's claim for damages for losses arising from an employee's poor workmanship (Masonry Design Solutions Limited v Bettany (21 August 2009)).

The Court found that Bettany (a well qualified and experienced draughtsperson) was careless about the quality of his work in breach of express terms in his employment agreement. The work was of such poor quality that it had to be rectified at significant cost to the company. The Court stated that it was reasonable for the company to rectify the work as it was responsible to its clients and engineers for the accuracy and professionalism of its designs. Further, it was foreseeable that such poor quality work would need to be rectified.

The Court ordered Bettany to pay the company $12,000 in special damages for the cost of engaging a senior draughtsperson to rectify his mistakes.