A new case has given a helpful reminder of the importance of the contract of employment in establishing if an employee is a fiduciary.
Employees are not fiduciaries in the normal course of events, but they can be if the employee holds a position of trust and acts on behalf of, or for the benefit of, the company. Courts will generally be cautious about imposing a fiduciary duty on an employee and typically it will be only the company’s senior employees whose actions and advice are relied upon by the company that would be considered to have fiduciary duties to the company. However, where an employee is found to be a fiduciary, it means that they owe a higher level of duty to their employer.
The key fiduciary duties are (i) for the individual to avoid any conflicts of interest, (ii) to not make unauthorised personal gain from their position, (iii) to owe undivided loyalty to their employer and (iv) to not disclose confidential information. This will be of particular interest to start-up and technology companies taking on employees initially at a junior level but who quickly develop into someone who plays a key role in the day-to-day running of the business and therefore becomes a fiduciary as a result. It is also often invaluable in trade secrets and non-compete cases for all sectors especially given that it enables employers to make a claim for account of profits against a former employee if they have gained financially from breaching their fiduciary duty.
In this recent case of Ranson v Customer Systems Plc, the Court of Appeal found that an employee did not owe fiduciary duties (despite being reasonably senior) and was therefore not in breach of his duties when he failed to tell his employer about meetings he had with the employer’s clients during his notice period (at which he discussed his future business plans) because his contract of employment was inconsistent with those duties.
The existence of a fiduciary relationship can be highly beneficial to an employer, as it offers greater protection to the company when an employment relationship comes to an end and provides greater leverage when dealing with tricky departures. In the event that the employee leaves to join a competitor, fiduciary obligations will increase the chances of any post-termination restrictions that they have in their contract of employment being enforced by the courts. Even if an employer is not minded to seek to enforce the post-termination restrictions, it will be better placed as a result of the fiduciary duty imposed on the employee during employment, to secure undertakings from the individual to refrain from certain activities, which will help protect the business’ interests.
The take-away message from this new case is that the contract of employment is of fundamental importance. It is what the courts will look at first in determining whether a fiduciary duty is owed. Although each case will depend on its own facts, there are several practical tips to assist employers looking to establish a fiduciary relationship with their employee:
- If someone is likely to be a fiduciary, this should be made clear in the contract of employment – in particular, the employee’s job title, job description and responsibilities should accurately reflect what is expected of them and indicate the position of trust in which the employee is held.
- Employers should ensure that employees’ contracts and job descriptions are regularly reviewed and updated so that they reflect the employee’s actual role and responsibilities as they evolve, in order to capture fiduciary obligations as they arise. In this recent case it was held that fiduciary obligations could not be imposed on the employee if that was inconsistent with the terms of his contract of employment.
- The contract of employment should be drafted carefully to provide the employer with adequate post-termination protection in any event – this will not only protect the employer in either case but may also help to establish a fiduciary status.