Conflicts of Interest: Avoiding Sticky Situations

December 6, 2012 | Valerie Dixon

As Toronto Mayor Rob Ford discovered the hard way, sometimes a conflict of interest is the end of the road (well, maybe). While Mayor Ford’s troubles didn’t relate to employment – he was found to have breached the Ontario Municipal Conflict-of-Interest Act – conflicts of interest can result in an employer being in a position to terminate an employee for cause.

In the area of employment law, the term “conflict of interest” really connotes breach of a duty to the employer. For key, management or executive level employees, it may be properly referred to as a breach of fiduciary duty. For regular, non-fiduciary employees, it can be called a breach of the duty of loyalty. Regardless of the label used to describe the activity, the essence is an employee’s failure to place his or her employer’s interests before his or her own interests.

The legislation that required the dismissal of Mayor Ford for what some might perceive as a minor infraction has been described by the media as a “sledgehammer law”. The common law principles applicable to conflicts of interest in the employment setting are much more nuanced. For example, the conflict of interest must be objectively clear, and not just a perceived conflict in the eyes of the employer. However, even where the employer does not actually suffer any demonstrable harm, the fact that the potential for an objectively clear conflict of interest exists may be enough to dismiss the employee with cause.

Most claims for wrongful dismissal where a conflict of interest is alleged relate to competition by an employee with his or her employer. This might include the use of the employer’s premises and resources for the purposes of competition, taking steps to set up a competitive business to be operated post-employment, or having a controlling interest in a competitor of the employer. Other types of conflict of interest include receiving benefits (either directly or indirectly) from suppliers or other third parties to whom the employee has discretion to provide work.

So how does an employer ensure that it can terminate, for cause, an employee who may be in breach of his or her duties? As usual, best practice is to ensure that expectations are clearly communicated through express provisions in either a written employment agreement or policy. Such a provision or policy should describe:

  1. What conflicts of interest actually are (both actual and perceived);
  2. Whether the employee may hold outside employment or operate a business outside of his or her employment;
  3. Whether the employee must disclose to the employer any ownership interest that he or she (or any “related party”, such as a family member) has in a competitor and/or whether the employee is allowed to have any ownership interest in a competitor;
  4. Whether the employee must disclose any interest in any transaction of the employer, including whether the employee will receive any direct or indirect benefit;
  5. The procedure for reporting, investigating and managing conflicts; and
  6. The consequences of breaching the policy.

As soon as a conflict of interest is discovered, an employer should fully investigate before deciding whether it is in a position to terminate the employee for cause. Consideration should be given to the seriousness of the breach, the employee’s position with the employer, any applicable contract or policy provisions and whether the employee was dishonest. As there may be any number of relevant factors to consider, it is always advisable to get legal advice before taking steps that may have serious consequences for the employer.

Disclaimer

This blog sets out a variety of materials relating to the law to be used for educational and non-commercial purposes only; the author(s) of this blog do not intend the blog to be a source of legal advice. Please retain and seek the advice of a lawyer and use your own good judgement before choosing to act on any information included in the blog. If you choose to rely on the materials, you do so entirely at your own risk.