Can a unionized employee moonlight in his off hours to earn some extra money by doing the same work he does for his daytime employer at cut rates? Can a high level executive take kickbacks for directing contract work to a friend? In both unionized and non-unionized environments, an employee who engages in a conflict of interest can lead to a just cause termination.

Courts have repeatedly held that there is an implied duty of good faith, loyalty and fidelity by an employee to his or her employer. This implied duty has been found to be a fundamental term of employment. Where an employee puts his or her self interest in conflict with his or her duty to his employer, an employer may be justified in terminating the employee for cause.

Since the Supreme Court of Canada’s decision in McKinley v. B.C. Tel, when faced with an allegation that an employee has participated in a conflict of interest, employers must now ask whether the conduct violated an essential condition of the employment contract, breached the faith inherent to the work relationship, or was fundamentally or directly inconsistent with the employee’s obligations to his or her employer. If the answer to these three questions is "yes", then the employer will be justified in terminating the employee for just cause.

What is a conflict of interest?

There is no exhaustive definition for a conflict of interest. According to Echlin & Certosimo in Just Cause: the Law of Summary Dismissal in Canada, Loose-leaf Ed. (Toronto: Canada Law Book, 2011) at pg. 12-2:

Conflict of interest is conduct "incompatible with the due or faithful discharge" of an employee’s duties. Accordingly:

There is no doubt that conflict of interest, or even potential conflict of interest, may constitute cause for dismissal.

Some arbitrators have used broad brush strokes to paint conflicts of interest, but each situation will be considered in light of the individual circumstances at play. In British Columbia Systems Corp. and B.C.G.E.U., Arbitrator Vickers made an attempt to consider situations which might give rise to a conflict of interest, at p. 17, as follows:

In my opinion, a conflict of interest might arise in any one of the following situations:

  1. Where the interests of an employer are directly or indirectly affected or likely to be affected in some negative way by the private activities of an employee;
  2. Where private activities of employees impair their ability to pursue the interests of their employer;
  3. Where private activities of employees compromise the business interests of their employer;
  4. Where private activities of employees leave them in a position of gain or potential gain at the expense of their employer;
  5. Where employees use knowledge or information imparted to them for the purposes of pursuing their employer’s interests to pursue their own private interests.

I do not consider the foregoing examples to be exhaustive. Many situations will turn upon their own facts but in the final analysis, I am satisfied that it makes no difference if the activities are directly or indirectly, i.e., through some third party, impacting upon an employer. Equally, it makes no difference if there is a loss or gain by either an employee or an employer. The conflict arises immediately upon engaging in the activity.

(Emphasis added.)

Many may be surprised to hear that actual prejudice to the employer need not be proved; potential harm is sufficient: see Bursey v. Acadia Motors Ltd. A conflict of interest, or even potential conflict of interest will give rise to just cause.

The leading case concerning conflicts of interest in New Brunswick is Duguay v. Maritime Welding and Rentals Ltd.In Duguay, an employee of Maritime Welding and Rentals incorporated a company for the purpose of submitting a bid to one of the defendant’s customers. In his dealings with the customer with respect to this bid, while he didn’t say anything to suggest that he was acting on behalf of the defendant, he did nothing to dispel the impression that he was. When his employer discovered what Duguay had done, Duguay immediately ended his involvement with C Ltd., but Maritime Welding terminated his employment on the grounds that Duguay had engaged in a conflict of interest that constituted a breach of his duty of loyalty. Duguay brought an action for damages for wrongful dismissal.

The court, referring to long-standing English case law, held that an actual conflict of interest doesn’t have to be established to justify a dismissal, nor does it have to be shown that the employer actually suffered prejudice as a result of an employee’s disloyal conduct. The court held that it is the loss of trust and confidence in an employee who shows infidelity, underhandedness, and secrecy that justifies the dismissal. Further, that Duguay used his long association with Maritime Welding in an attempt to gain benefits for himself to the exclusion of Maritime Welding and in his incorporation of a company that could compete with his employer, was further conduct justifying dismissal.

The case stands for the principle that an employer need not suffer actual prejudice as a result of an employer’s disloyal conduct; rather, what justifies the dismissal is the loss of trust and confidence in an employee who has shown disloyalty and infidelity toward his employer.

What type of conduct has been found to be a conflict of interest justifying dismissal?

Conduct giving rise to just cause termination for a conflict of interest include:

  • An employee’s termination was upheld after he successfully competed with one of his employer’s customers on a contract for floor installation. Garrett v. Fiberglas Canada Inc.;
  • A vice-principal appointed dean of the Greater Victoria School District’s International Student Program was dismissed after it was discovered he was using his experience, position and school board letterhead to run lucrative holiday programs serving foreign students through his own company was terminated for just cause. His termination was upheld first at the Supreme Court of British Columbia, and later by the British Columbia Court of Appeal: Rupert v. Greater Victoria School District No. 61.
  • City workers who solicited and performed private sewer repair work that they learned of while working for the city, contrary to the conflict of interest policy of the city, were terminated when the city found out. They privately contracted with the homeowners to provide the appropriate repair and personally benefitted from the knowledge they obtained while in the course of their employment as city workers. Their terminations were upheld: City of Toronto v. Toronto Civic Employees Union Local 416, (Brackett Grievance).
  • An employee who was running his own business on his employer’s company property was terminated after his employer found out. In addition, he devised a scheme to deceive the employer regarding the personal business he was operating, which scheme was designed to create misunderstanding to keep the truth from the employer. The court upheld his just cause dismissal: Smith v. Reichhold Ltd.

What can employers do?

Employers can protect themselves by having a conflict of interest policy that defines "conflict of interest" and that sets out examples of what the company considers to be conflicts of interest in relation to its business and industry. Further, indicating that should it be discovered that an employee has engaged in a conflict of interest, discipline up to and including termination will result, and that depending on the nature of the conflict no warning may be given. Of course, no policy has any value unless employees are aware of it, so be sure to educate your employees on your policies and have them acknowledge having received, reviewed and understood it.