Theft or Fraud by an Employee: Management Rights and Legal Action
Synopsis of legal concepts and references
Statistics show that fraud by employees is a significant problem for Canadian businesses. For example, 25% of internal fraud cases result in losses of a million dollars on average1 – even though, with advances in technology and computer science, fraud should be much easier to eliminate, given the new resources available to employers for investigating and proving it. While this article does not purport to be an exhaustive treatment of the subject, it provides a tool that employers can use to stay abreast of the resources available to them that can be used to respond to these kinds of situations.
We begin by describing various scenarios that can be characterized as fraud, and the relationship between an employee’s obligations and their rights and freedoms in a labour relations context. We then explain the steps that make up the investigative process leading to dismissal or disciplinary action, and the lines that the employer must not cross in disciplining an employee. We conclude with a discussion of the factors that an employer can consider in deciding what type of sanction should be imposed on an employee who has committed fraud.
Scenarios that may be characterized as fraud
Fraud is a broad term, and fraud can come in several forms. The classic cases may involve theft of time or of money, for example. More recently, fraud can take the form of misappropriation of confidential information belonging to the employer, use of the company’s identity to defraud third parties, or receiving bribes or commissions from suppliers and/or customers of the company.
Employee’s obligations vs. employee’s rights and freedoms
On the one hand, an employee must act faithfully and honestly2 toward their employer, and must also exercise discretion in dealing with information obtained in the course of their work. Since the decision of the Supreme Court in Bank of Montreal v. Kuet Leong NG,3 it has been settled law that the intensity of those obligations varies, depending on the nature of the employee’s responsibilities and duties. The more similar an employee’s duties are to those of a senior officer, the higher their duty of faithfulness and discretion to the employer will be.
In practice, it is common for some aspects of the duty of faithfulness to be incorporated into a non-competition, non-disclosure or non-solicitation clause. Article 2089 of the Civil Code of Québec addresses these types of clauses; it provides that a non-competition stipulation must be limited as to the length of time and geographic area covered and the type of employment that the employee may not engage in, to protect the legitimate interests of the employer. Article 2095 of the Civil Code of Québec also provides that an employer may not avail itself of a non-competition clause where it is the employer who has resiliated the contract without a serious reason.
An employee must also obey and follow the work instructions given by the employer, because there is a relationship of subordination between them. That relationship of subordination is defined in the literature as “the ability of the person who became recognized as the employer to determine the work to be performed, and to control and monitor the performance”.4 By virtue of that power of subordination, the employer therefore has control over the work performed by its employees and may also require that they be accountable to it for their actions.
On the other hand, an employee is entitled to privacy and to respect for their reputation. The Charter5 and the Civil Code of Québec6 both apply here, and both guarantee that protection. The employer must also abide by a degree of procedural fairness when it decides to take disciplinary action against an employee.
On the question of the employee’s right to privacy, it must be noted that workplaces are public places where employees are not entitled to privacy, subject to certain exceptions. Outside the workplace, their expectation of privacy will rise based on where they are: their privacy will be less protected on the lawn of their home than it is inside it. Whether an employee’s privacy has been violated will depend on whether the place where it occurred was public or private, and the type of investigation being conducted. As will be discussed in a subsequent section, we believe there are three main categories of investigations, each involving a different degree of privacy infringement. They are: search, surveillance and wiretapping.
An employee’s right to their reputation clearly might be violated when an employer accuses an employee of committing fraud while the investigation is still underway and the employer is not yet satisfied that the employee is guilty. We believe that during that period, the employer must take all necessary precautions to protect the integrity of the employee targeted by the investigation, in order to avoid a wrongful accusation. The employer must also act with diplomacy when the investigation has concluded and discloses that an employee has committed fraud. Even then, the employer should weigh its words carefully to avoid damaging the reputation of the employee who committed the fraud, since even if fraud has occurred, the employer may not broadcast the news, as that will inevitably damage the employee’s reputation.
On the question of the employee’s right to a degree of procedural fairness, the Supreme Court7 has held that the level of procedural fairness an employee must be afforded varies, depending on the nature of the decision made by the administrative body, the relationship existing between the parties and the effect of the decision. While these three criteria cannot be transposed into the private labour relations context, and procedural fairness must be examined primarily on the basis of the employment contract,8 an employer will still be well advised to look to administrative law principles when deciding to discipline an employee. Some judges have also held that employers must follow a procedure that is respectful of their employees. We therefore believe that it is to the advantage of an employer who wishes to discipline or dismiss an employee who has committed fraud to meet personally with the employee in order to explain what the allegations are and allow the employee to respond to them, since this way the employer will also be in a position to gather more information and cross-check the information initially obtained.
As an example, in Sauvé v Banque Laurentienne du Canada9 the Court of Appeal reiterated the importance of observing the employer’s prior practice and ordered the employer to pay $35,000 to compensate for the pain and suffering caused to an employee who was dismissed for advancing money without having an opportunity to explain himself to the employer. Justice Proulx’s comments on this point were as follows:
[Translation] “The respondent’s decision is particularly unacceptable in these circumstances in that the appellant was not even afforded an opportunity to explain himself and the respondent turned a deaf ear when he described the previous practice that had been tolerated until then.”10
It is also important to note that an employee who has admitted to fraud in an investigation conducted by the employer can also be charged with the criminal offence of fraud. The protection against self-incrimination set out in section 13 of the Canadian Charter of Rights and Freedoms does not prevent a prosecutor from laying fraud charges against an employee who has already been punished by their employer for the same conduct.
Uncovering the truth
We would first note that we believe an employer needs to have a confidential disclosure system to encourage employees who witness fraud to report the persons responsible. The system can be modeled on what we see in the United States, where it is regarded as whistleblower protection11 under which no reprisals may be taken against an employee who discloses information. There is some legislation of this kind in Quebec. For example, section 122(7) of the Act Respecting Labour Standards12 and section 32 of the Anti-Corruption Act13 bar the employer from taking disciplinary action or reprisals against an employee who has made a disclosure or cooperated in an investigation.
An initial disclosure like this is particularly useful for the employer, since it enables it to initiate an investigation under those laws.
We would divide the investigative methods available to an employer into three broad categories: search, surveillance and wiretapping.
First, even though an employee has virtually no expectation of privacy in the workplace, there is a right to privacy in relation to things that are personal to the employee. The Supreme Court of Canada held in 2012, in R. v. Cole,14 that an employer may legitimately search the contents of an employee’s laptop computer if it has reason to believe it holds inappropriate content. An employer is entitled to search an employee’s office on the same basis as a computer, but must still avoid documents of the employee’s that are identified as “personal” since there is a higher right to privacy in them.
Second, it must be noted that there are several types of surveillance that do not infringe on an employee’s privacy in the same ways. Surveillance of an employee when they are at home is more intrusive than surveillance at the grocery store or on the ski slopes. Since the decision of the Court of Appeal in Bridgestone/Firestone de Joliette,15 it has been recognized that although surveillance necessarily violates employees’ privacy, it is permissible if it is justified by reasonable grounds and is carried out in the least intrusive manner possible. An employer must therefore give surveillance in public places preference over private places and avoid engaging in surveillance over long periods. To determine whether surveillance is reasonable, the courts must consider whether the person targeted could have expected it and whether a prudent and diligent person in the same circumstances could also think that the kind of surveillance in question is reasonable in the circumstances.
And third, on the question of wiretapping and interception of telephone conversations, the Court of Appeal held in Mascouche (Ville) v. Houle16 that an employer recording an employee’s telephone conversations when the employee was at home was illegal and the evidence inadmissible because the recording violated the employee’s privacy rights. The Court was of the opinion that the fact that none of the interlocutors participated in the call raises the level of the privacy violation. However, the courts have held that in some cases an employer may record an employee’s telephone conversations. In Ste-Marie v. Placements JPM Marquis inc.,17 for example, the Court of Appeal ruled that the recording of a foreperson’s telephone conversation, where it took place in the workplace, could be permitted on the ground that the information in issue relating to the commission of a theft from a customer’s premises justified the violation of the employee’s privacy rights. In light of these decisions, we believe that the risk of violating an employee’s privacy by recording their telephone conversations is high when the employer is not a party to the conversations, since there is an inevitable risk of encountering personal conversations. Each case will therefore turn on its facts, and must be examined having regard to the information in hand and the place where the conversations took place.
Suspension for investigation
Suspension for investigation is a significant tool for an employer that must be used carefully so that it remains effective. To be acceptable, it must be carried out in three steps, which will have to meet certain criteria. Before examining those steps, it is important to note that suspension for investigation is an option when an employer has reasonable doubts about an employee and the employee’s presence in the workplace may be damaging to the business. The suspension must also be for a short period and the employee must be paid for the entire time they are suspended.18
The first step is when the employer informs the employee that they are being suspended for investigation. This is the simplest step, but it must also be taken relatively quickly, since the employee should not suspect that they may be the subject of an investigation and have time to destroy evidence. When the employer informs the employee, it must have determined what form the fraud took, since it will have to block access to the means by which the employee committed the fraud. This is also the point at which the employer has to think about coordinating any legal action with outside resources if the situation makes this necessary.
The second step is when the employee has gone home and the employer conducts its investigation. At this point, the employer may bring in experts in order to obtain access to evidence that has been concealed, in computers or smart phones, for example.
The third step, once the investigation is completed, is an interview at which the employer meets with the employee in order to confront them. It is important to note that the employee has no right to counsel at that meeting, nor can the employee invoke their right against self-incrimination. At this stage, no criminal charges have been laid that would trigger those protections.19 The employer is also entitled to hold the meeting by virtue of its management rights and an employee may not refuse to attend.
We believe it is important for the employer to plan the timing of the meeting and the people who will attend carefully. It is wise not to inform the employee too long in advance and to take advantage of whatever element of surprise there may be. However, if the employee belongs to a union, the notice requirements in the collective agreement will of course have to be met. It is also important for the employer to invite the human resources manager, the person in charge of the investigation, the union representative (if the company is unionized) and the investigators (where applicable) to the meeting.
We believe it is equally important for the employer to plan the questions to be put to the employee in order to determine the extent of the fraud and flesh out the information to be used against the employee. This step is therefore an important tool by which the employer can gather evidence against the employee, or come to the conclusion that there has been no fraud or there is no evidence of the fraud.
Once the investigation has been completed, disciplinary action may be taken against the employee, or the employee may be dismissed.
Although fraud by an employee is synonymous with a rupture of the relationship of trust or a serious violation of an employee’s duty of faithfulness, the courts are not of the opinion that all types of fraud deserve the ultimate sanction, dismissal. In McKinley,20 the Supreme Court held that the principle of proportionality must guide the employer in choosing what sanction to impose, and that the sanction must necessarily take the conduct into account. In other words, dishonest conduct, embezzlement or wrongful acts must not lead directly to dismissal and the employer must assess the employee’s actions having regard to context and circumstances.
In determining the sanction to impose, the employer must therefore consider both mitigating and aggravating circumstances. For example, aggravating factors include premeditation, lack of remorse or desire to mend their ways, repetition or continuation over time, the number of people the employee involved in their scheme, lack of seniority, and the extent of the employee’s disciplinary record. Conversely, a clean disciplinary record, lengthy seniority, the fact that the company has not punished similar behaviour in the past, the nature of the employee’s duties and the employee’s desire to repent or expression of sincere regret will be considered to be mitigating factors.
We would also note that in imposing a sanction, an employer must consider the firm’s assets and decide how it can recover the money or property that was stolen.
The information we have presented here demonstrates that situations where fraud may be involved call for tact and require that the employer proceed carefully and respectfully.
The deterrent effect of taking effective measures to deal with a wrongdoer is nonetheless an important consideration in preventing fraud in the workplace and implementing a fraud prevention plan.
1 According to a study by the Association of Certified Fraud Examiners (ACFA), 2012.
2 Article 2088 of the Civil Code of Québec.
3 Bank of Montreal v. Kuet Leong NG,  2 S.C.R. 429.
4 Robert P. Gagnon and Langlois Kronström Desjardins, S.E.N.C.R.L., Le droit du travail du Québec, 7th ed., Cowansville, Yvon Blais, 2013, at para. 93.
5 Sections 4, 5, 24.1 and 46 of the Quebec Charter of Human Rights and Freedoms.
6 Articles 3, 35, 36 and 2087 of the Civil Code of Québec.
7 Knight v. Indian Head School,  1 S.C.R. 653.
8 Dunsmuir v. New Brunswick, 2008 SCC 9.
9 Sauvé v. Banque Laurentienne du Canada,  R.J.Q. 79, AZ-99011042.
10 Supra, note 9, at p. 7.
11 Sarbanes-Oxley Act of 2002, Public Law 107-204, 107th Congress, Sections 806 & 1514A.
12 Act Respecting Labour Standards, R.S.Q., c. N-1.1, section 122 subs. 7.
13 Anti-Corruption Act, R.S.Q., c. L-6.1, section 32.
14 R. v. Cole, 2012 SCC 53, at para. 62.
15 Syndicat des travailleuses et travailleurs de Bridgestone/Firestone de Joliette (CSN) v. Trudeau,  R.J.Q. 2229 (C.A.).
16 Mascouche (Ville) v. Houle,  R.J.Q. 1894.
17 Ste-Marie v. Placements JPM Marquis inc., 2005 QCCA 312.
18 Cabiakman v. Industrial Alliance Life Insurance Co., 2004 SCC 55, at para. 62.
19 See sections 10 and 13 of the Canadian Charter of Rights and Freedoms.
20 McKinley v. BC Tel,  2 S.C.R. 161.