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The Employment Relationship and Fiduciary Obligations

Document Cited authorities 19 Cited in Related
Vincent
Pages198-209
Date01 May 2012
DOI10.3366/elr.2012.0103
Published date01 May 2012
INTRODUCTION

One of the current controversies concerning the law of the employment contract is whether the contract gives rise to a fiduciary relationship and, to the extent that it does not, whether it should.1

See L Clarke, “Mutual trust and confidence, fiduciary relationships and duty of disclosure” (1999) 30 ILJ 348. On the law in general see M Conaglen, Fiduciary Loyalty: Protecting the Due Performance of Non-Fiduciary Duties (2010).

The orthodox view is that entry into an employment contract, of itself, does not give rise to such a relationship,2

University of Nottingham v Fishel [2000] IRLR 471.

 a position recently confirmed so far as Scotland is concerned by Lord Glennie in Samsung Semiconductor Europe v Docherty.3

[2011] CSOH 32, 2011 SLT 806.

 There are, though, weighty dicta to the contrary; such as the opinion of Lord Jauncey in Neary v Dean of Westminster.4

[1999] IRLR 288.

 Again, in Attorney-General v Blake, Lord Woolf stated that:5

[1998] Ch 439.

There is more than one category of fiduciary relationship, and the different categories possess different characteristics and attract different kinds of fiduciary obligation. The most important of these is the relationship of trust and confidence, which arises whenever one party undertakes to act in the interests of another or places himself in a position where he is obliged to act in the interests of another. The relationship between employer and employee is of this character. The core obligation of a fiduciary of this kind is the obligation of loyalty. The employer is entitled to the single-minded loyalty of his employee. The employee must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third party without the informed consent of his employer.

 Such dicta have the undoubted potential to form the basis for a judicial reformulation of the law. In addition, the prevailing orthodoxy notwithstanding, some commentators assert that classification of employees as fiduciaries would be a positive development which would enhance the content of the employment contract.6

Clarke (n 1) at 359.

As matters stand it is undoubtedly the case that, in some circumstances, the employee may come under fiduciary obligations. For instance, an employee should not accept a bribe and, in the event that he does so, he will have to account for it to his employer.7

University of Nottingham v Fishel [2000] IRLR 471.

An employee who is employed as an agent will, in the ordinary course of things, owe the normal fiduciary obligations inherent in that relationship such as the duty not to make secret profits. It also appears to be the case that, in some jurisdictions including England, some senior employees are regarded as fiduciaries.8

Shepherds Investment v Walters [2006] EWHC 836 (Ch), [2007] IRLR 110.

 The scope of the contractual obligations undertaken may impact on the extent to which fiduciary obligations are owed by the employee. The Australian case of University of Western Australia v Gray dealt with a claim that the contract contained an implied obligation to invent.9

[2009] FCAFC 116.

 For a variety of reasons this was unsuccessful but had it been the employee would have become subject to fiduciary obligations. Gray reminds us of the employer's ability to increase the significance of such obligations by extending the scope of express contractual ones. It should be noted that the “corporate opportunity” doctrine does not necessarily apply to employees given that they are not fiduciaries. It may be relevant, however, depending upon what the employee is employed to do.10

Samsung Semiconductor Europe v Docherty [2011] CSOH 32, 2011 SLT 806.

 Where the employee's responsibilities include the procuring of business on the employer's behalf the doctrine will then be applicable. An employee engaged in a different capacity would, though, be perfectly entitled to divert a corporate opportunity: “the employee does not in general promise to give his employer the benefit of every opportunity falling within the scope of its business”.11

Fishel at 485.

 SCOPE FOR CONFUSION

It should be said that the fact that, from time to time, the employee may owe some fiduciary obligations may lead to the erroneous assumption that the employment relationship is fiduciary in nature. The emergence of the implied obligation of mutual trust and confidence, and in particular the manner in which it is expressed, may also serve to confuse. In University of Nottingham v Fishel Elias J referred to:12

Fishel at 483.

the use of potentially ambiguous terminology in describing an employee's obligations, which use may prove a trap for the unwary. There are many cases which have recognised the existence of the employee's duty of good faith, or loyalty, or the mutual duty of trust and confidence – concepts which tend to shade into one another.

 The existence of the obligation of fidelity (a duty owed by all employees) further complicates things. In CRC-Evans Canada Ltd v Pettifer it was observed that that duty requires: “the employee to act in the best interests of his employer at all times. The employee shall not follow a course of action that harms or places at risk the interests of the employer”.13

1997 CanLII 14943 (AB QB) at para 45. And see R Flannigan, “The (fiduciary) duty of fidelity” (2008) 124 LQR 274.

 Expressed in such broad terms the obligation appears to be highly contiguous to a fiduciary obligation; the obligation to “act in the best interests of his employer at all times” is particularly significant in this regard. It is not the case, however, that the obligation of fidelity goes this far: “the hallmark of a fiduciary duty is a requirement that a person pursues the interests of another at the expense of his own: but an employment relationship does not in itself require an employee to pursue his employer's interests at the expense of his own”.14

Lonmar Global Risks v West [2010] EWHC 2878 (QB), [2011] IRLR 138 at 156.

 Whilst the employee must further the employer's interests he need not do so exclusively and, for instance, is entitled to take limited steps by way of preparation (prior to his leaving the employment) to compete with the employer without falling foul of the obligation of fidelity WHERE NEXT?

There does appear to be some evidence that the obligations arising under the employment contract are moving closer to those owed by a fiduciary; the implied obligation of fidelity, for instance, may demand more by way of propriety where a senior employee is concerned.15

Collidge v Freeport [2007] EWHC 1216 (QB).

More fundamentally, but perhaps questionably, some jurisdictions now hold that senior managers are fiduciaries.16

This is the case in Canada, for example.

 The way in which an employee's obligation of disclosure has evolved is also of relevance. An employee is not obliged to disclose his own misconduct whether that misconduct arises before the commencement of the employment relationship or during its existence; Bell v Lever Bros remains good law.17

[1932] AC 161.

By way of contrast, fiduciaries “come under an open-ended duty of disclosure”.18

S Deakin and G S Morris, Labour Law, 5th edn (2009) para 4.110. The extent of a director's duty of disclosure under Scots law is unclear: Commonwealth Oil & Gas v Baxter [2009] CSIH 75, 2010 SC 156.

The Bell case has been distinguished in Sybron Corp v Rochem19

[1984] Ch 112.

 where it was held that, in certain circumstances, an employee holding a managerial role may be under a duty to report the misconduct of fellow employees. Crucially, where such a duty arises the employee is still obliged to report even where he will incriminate himself. It is submitted that the stance adopted in the Sybron case is well-founded. Such obligations may well be inherent in the role undertaken by the employee and hence essential to proper job...

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