Employees are a critical part of any business' success. Most companies are now aware of the importance of the recruitment process, and take considerable care in selecting employees. But what can an employer do when an employee causes considerable loss to the business?
In a couple of recent cases in the Employment Relations Authority and the Employment Court, employers have brought damages proceedings in an attempt to recover some of their losses.
Elements of a Claim
In order to claim damages from an employee, an employer must satisfy three requirements. First there must be a breach of the employee's employment obligations. Second, this breach must cause loss to the employer. Finally, the loss caused by the breach must have been reasonably foreseeable.
The cases below illustrate the different circumstances that can lead to such a claim, and also illustrate the range of damages that may ultimately be awarded should the employer be successful.
Masonry Design Solutions Limited v Bettany
This Employment Court decision confirmed an employer's ability to claim costs where an employee's carelessness in performing their duties had caused foreseeable loss to the employer.
The employee in question, Mr Bettany, was a computer-aided design (CAD) draughtsperson. He had been employed on a fixed term, 3 month contract. A week before this was due to expire, Mr Bettany was summarily dismissed for failing to work his contracted hours and excessive private use of the employer's internet and email facilities. Mr Bettany brought a personal grievance claim against the company for unjustified dismissal.
After Mr Bettany was dismissed, Masonry Design Solutions Limited (MDSL) found that some of Mr Bettany's work was of very poor quality, and needed to be redone at significant expense. MDSL therefore counter-claimed against Mr Bettany for $18,000, the cost of rectifying Mr Bettany's deficient work.
The basis of the company's claim was that Mr Bettany had breached his contractual requirement to perform his duties with all reasonable skill and diligence. He had also breached the requirement to devote the whole of his time, attention and abilities during work hours to carrying out his duties.
The Employment Court was satisfied that Mr Bettany's dismissal was justified. It then considered MDSL's claim for damages. The Court considered that the error-ridden nature of Mr Bettany's work was as a result of carelessness and inattention to detail. It held that Mr Bettany had breached express obligations in his employment agreement and his contractual requirement to perform his duties with reasonable skill and diligence. Mr Bettany's draughting work was held to have failed to meet the minimum standards he had agreed to in the employment contract.
The Court found that MDSL had satisfied the requirements of a legal claim for damages. Mr Bettany had breached his employment agreement, causing loss to MDSL. That loss was attributable to the breaches, and the Court was satisfied that it was foreseeable that if an employee produced such poor quality work it would have to be rectified at the employer's expense. The Court therefore upheld the claim for damages, although it assessed the damages at $12,000 rather than the $18,000 claimed.
Auckland Regional Council v Tilialo
This case is an example of an employer successfully initiating a claim against an employee for damages. Interestingly, the damages awarded included the reasonably foreseeable costs of investigating the employee's behaviour.
Mr Tilialo was a programme manager for Auckland Regional Council (ARC), with delegated authority to enter into contracts worth up to $50,000. Mr Tilialo engaged Ms X as a contractor to assist him with customer service strategy, and to create a customer service charter. Ms X had no experience in this area of work. Mr Tilialo authorised payments to Ms X totalling $9,000. Unbeknown to Mr Tilialo's manager, Mr Tilialo was having an extra-marital affair with Ms X.
The Council then received a report that Ms X had said that she was going on a trip to New York with her boyfriend, paid for by ARC. This caused ARC to start investigating. Through its investigation, ARC found no evidence of any work performed by Ms X, aside from a customer service charter that was described by Mr Tilialo himself as a "shocker". ARC also discovered that the $9000 that had been paid to Ms X was instantly transferred to her credit card, which was also used to pay for the trip to New York.
At this point, ARC dismissed Mr Tilialo for serious misconduct. It then brought a claim in the Authority against Mr Tilialo alleging numerous breaches of the express and implied terms of Mr Tilialo's employment agreement.
The Employment Relations Authority held that even on the most favourable view of events Mr Tilialo had breached the implied duty to exercise proper skill and care in the engagement and payment of Ms X. The Authority also held that Mr Tilialo had breached express terms of the discipline and dismissal policy incorporated into the employment agreement. Mr Tilialo had misused funds and abused his delegated authority to authorise expenditure. He had failed to follow procedures for engaging contractors, and also failed to disclose his relationship with Ms X. In examining his conduct, the Authority noted it was difficult to avoid an inference of dishonesty.
The Authority awarded ARC $9,000 for the unjustified payments to Ms X, in order to return it to the position it would have been in had the breach not occurred. Mr Tilialo was also ordered to pay ARC special damages for the reasonably foreseeable costs of the investigation into his dishonesty (amounting to $22,048 for legal fees incurred prior to the issuing of proceedings, and $5,408.90 for the cost of a forensic investigator). General damages of $3,000 were also awarded for the loss of executive time, inconvenience and interruption to the Council's business caused by the breaches.
Finally, the Authority ordered that Mr Tilialo pay ARC $2,000 in penalties. The Authority considered that punishment and deterrence was appropriate in the circumstances.
ANZ National Bank v Hussain
ANZ National Bank v Hussain is another case where an employee's negligent (and potentially fraudulent) actions caused his employer considerable loss. The employer brought a claim for penalties and damages against the employee.
Mr Hussain was employed by ANZ as a mobile mortgage manager. During a routine audit of customer files, ANZ identified concerns with some loans processed by Mr Hussain. ANZ subsequently investigated these concerns.
ANZ concluded that Mr Hussain had been involved in a scheme where valuation documents were altered to increase the value of a property in order to secure a larger mortgage. The borrower would purchase the house at its true valuation, and pocket the difference in value. When the borrower defaulted on the mortgage, the bank could only sell the property for its actual value, rather than the inflated value.
ANZ found Mr Hussain had processed 18 transactions involving this type of fraud. It considered that Mr Hussain's actions suggested he either knew about the fraud, or was not exercising the care and skill required under his employment agreement.
The employment agreement included an expectation of "maintaining a high standard of professional and personal integrity". Mr Hussain was required to work within ANZ's established policies. ANZ's credit risk policy required him to check the financial position of applicants, including ensuring the file contained valid valuation reports. Mr Hussain was also subject to an implied term requiring him to exercise proper care and skill in the performance of his duties.
The Authority held that Mr Hussain had repeatedly breached the requirements of the credit risk policy, and noted that the valuation reports had clearly been altered. ANZ was held to have established that Mr Hussain had breached the terms of his employment, resulting in loss to ANZ.
As this loss was a foreseeable consequence of Mr Hussain's conduct, Mr Hussain was liable for the losses incurred by ANZ. ANZ's losses were to be quantified in a separate hearing. However the Authority awarded penalties of $3,000 per transaction. This amounted to a total penalty of $54,000. In setting the penalty, the Authority took into account the fact that Mr Hussain had benefited from his actions, as he had received a commission for processing each of the 18 fraudulent transactions. It also considered that a penalty per transaction was warranted because the conduct was repeated.
These cases involve diverse situations, but all resulted in the employer being able to recover damages from a former employee. The cases demonstrate that provided any loss caused by a breach is reasonably foreseeable, employers can expect errant employees to be called to account.