Your organization has just discovered or come to suspect that an employee is copying sensitive information, or appears to be sending it to themselves or some third party. Perhaps there is reason to believe they have been coordinating with a competitor, or have been gathering items to start up their own rival business. Or perhaps some argument led to a declaration that this individual was planning to walk away with “their” creation or customer relationships.
In the wake of discovering a wrongdoing, many businesses feel a keen desire to immediately eject the individual or individuals in question. I recommend holding back this impulse for, at a bare minimum, several days and weeks. In short, don’t just fire them.
There are multiple legal and tactical benefits to preserving an individual’s status as employee, certainly on an interim basis. The two I wanted to touch on here are the utility in:
- preserving an employee’s ongoing legal obligations of good faith, loyalty, and fidelity to the employer, which end along with the employment relationship; and
- conducting an investigation and other damage control activities while the suspected wrongdoer is still employed with the organization.
Many similar thought processes can, with some modification, apply to fraud or financial wrongdoing cases. For the purposes of this post, however, I am assuming the root issue is the suspected misappropriation of trade secrets and confidential information or unfair competition.
The Rationale
Even if an employee refuses to cooperate or unilaterally departs anyway, a bona fide attempt to investigate while the suspected wrongdoer is still employed tends to put an employer in a better position. This is true both respecting an employer’s range of options as well as legal liability. Further, while I have certainly seen situations where things turned out to be every bit as bad as it initially seemed, many investigations genuinely do turn up new information or provide additional context. There are also real benefits to seeking to preserve oversight of and access to a suspected wrongdoer during damage control and investigative activities. For all these reasons and more, it is prudent to keep one’s mind and options open before having any sort of axe irrevocably fall.
Preserving Employment Obligations
From a legal perspective, the driving force behind this recommendation is that the position of an employee vis-à-vis their employer is radically different during the course of their employment compared to after it. Terminating an employee lifts many of the barriers that makes certain conduct wrongful while also ending ongoing access to and control over that individual.
(a) Good Faith, Loyalty and Fidelity
During an employment relationship the employee owes a duty of good faith, loyalty and fidelity to their employer. Unpacking the nuances of this pillar of employment law is more than can be achieved here. That said, I personally find it helpful to view the duty of good faith and fidelity as an umbrella principle capable of holding more specific legal obligations within it rather than a discrete legal duty per se. Regardless, while the specific content of employee duties may vary, it is often worth giving thought to how to best preserve and actively enforce protections located in an employment agreement, employer written policies, and duties implied by the common law.
Private employers often want to act to remove problem employees from the organization quickly, often for reasons relating to morale or interpersonal issues. In the wake of a more serious wrongdoing, however, I would suggest the greater imperative becomes damage control and the strengthening of one’s hand if and when one needs to actively enforce legal rights.
(b) The Right to Compete Post-Termination
It is, at minimum, well established that an employee’s duty of good faith includes an obligation not to compete with their employer while still employed. In contrast, and as the Supreme Court of Canada has emphasized, once the employment relationship ends this prohibition converts into an employer’s ex-employee enjoying a robust right to compete with their former employer. This right to compete includes during any notice period following a termination.
If the concern is that the problem employee is unlawfully communicating confidential information to actual or potential competitors, or is seeking to set up a competing operation themselves, it can be simpler and more effective to keep the individual in question ring-fenced by their continuing employment obligations. I am not saying that this is a cure for intentionally wrongful behaviour. Rather, the point is that it is often more effective to take other steps to assess or cut off further wrongful behaviour through careful investigation while the individual is still employed. If, in due course, a problem employee responds to a bona fide investigation by failing to cooperate or unilaterally departing, that may itself be telling.
(c) Unfair Competition: Confidential Information, Fiduciary Duties, and Restrictive Covenants
There are three exceptions to the general rule that a departing employee may lawfully compete against their former employer: (1) a former employee’s misuse of confidential information, (2) a time-limited obligation of a fiduciary not to compete with or otherwise harm the interests of their former employer, including by (mis)appropriation of business opportunities, and (3) to the extent they are in fact enforceable, restrictive covenants such as non-compete or non-solicitation clauses.
The duty of confidence is one of the only post-employment obligations that continues for normal – if potentially highly skilled – individuals after their employment has concluded. As I discussed in my post on the significance in Ontario’s Employment Standard Act’s new Non-Compete provisions, I anticipate that confidentiality claims will become increasingly important as such clauses become increasingly unavailable. For present purposes, however, note that “bare” allegations of breach of confidence tend to be insufficient to launch this sort of claim (again, see my post), much less receive an interim injunction prohibiting unlawful activity. It is important to seek an evidentiary basis for a confidentiality claim through what an investigation uncovers, and, potentially, an employee’s reaction to such reasonable and procedurally fair steps.
(d) The Circumstances of Departure
Conversely, if a termination is handled hastily or poorly, this tends to complicate enforcing other legal protections such as restrictive covenants or injunctions aimed at restraining unfair competition.
As discussed, the baseline is that most employment duties simply end post employment (the duty of confidentiality representing a rare exception). The topic is more complicated, but there is case law to the effect that wrongful or otherwise improper termination of fiduciary employees, or employees who have entered into a non-compete or non-solicitation covenant, can mar efforts to restrain post-employment competition. Courts are respectful of procedurally fair investigations into employees. It is a much harder sell to seek to restrain allegedly unfair competitive behavior if the individual in question can plausibly say they have been pitched out the door without being provided an opportunity to explain themselves and now need to earn a living.
Damage Control and Conducting an Investigation
The initial reaction following the discovery of a suspected wrongdoing is critical. And by initial, I mean the first few hours and days after discovering something amiss. A week or two at the most. A separate decision will need to be made in the medium term regarding the status of the employee in question. For present purposes, keep in mind that the problem with terminating someone shortly after a (suspected) wrong comes to light is that (1) the step is irrevocable, (2) your organization may lose the access and control over the individual in question they may have otherwise had, while (3) potentially weakening or limiting its legal rights and options.
(a) Involving Experts in Damage Control
To be clear, an organization should make every effort to assess and limit further damage right out of the gate. In the context of trade secrecy and confidentiality, this includes taking steps to assert physical, organizational, and computer system-level control over areas where information is stored or communications occur. This includes efforts at detecting and continuing to monitor for signs of information misappropriation or planned for or existing competitive activity.
This is not everyday stuff. Where possible, it is usually prudent to seek the guidance of various “forensic” experts at an early stage to advise regarding how to assess or gain control of various systems and identify or preserve evidence. Information technology experts tend to be most pertinent in breach of confidence cases, along with accountant experts when there are signs of financial wrongdoing. While I obviously have some self-interest here, I would also recommend involving an employment or trade secrecy lawyer at an early stage to provide guidance respecting the human and legal side of the investigation.
(b) Procedural Fairness and Honesty
One reason I recommend seeking guidance from a lawyer at the earliest possible stage is that the boundary line between conducting a procedurally fair investigation versus “constructively” (being legally deemed to have) dismissed the employee under investigation can be an ambiguous one. This type of situation tends to be not only context-specific but, if and when the employee in question obtains their own legal advice, hotly contested.
It is not possible to give a one size fits all answer in this area. I will say, however, that the courts place a high value on, and prefer to see demonstrations of, procedural fairness. This includes providing a suspected wrongdoer with an opportunity to respond to allegations and provide their side of the story prior to any kind of termination. Procedural fairness also requires the investigating employer to behave honestly. Honesty in this context does not necessarily require spilling the beans regarding the investigation mid-process, particularly if the nature of the suspected wrongdoing is severe and the individual in question does not appear to realize they have been detected. Procedural fairness does, however, preclude actively misleading the individual being investigated or falsely denying that an investigation is occurring.
To reiterate, a procedurally fair investigation can be pursued in tandem with damage control measures, such as efforts to monitor or trace the flow of confidential information or detect improper competitive activities.
(c) Some Rules of Thumb
To briefly touch on some general rules of thumb, pay and benefits should continue during the investigation. It is, legally speaking, preferable to continue to give the employee in question real employment duties, particularly during the initial investigation phase. I recognize this can sit at tension with other objectives, but, pay or not, simply sending someone home has a good chance of being interpreted as a constructive dismissal, particularly if no timeline has been identified for their return. It is also advisable to seek a statement from the employee suspected of wrongdoing if, not as the very first thing, then within a few days of the discovery or event. Specifically, it is preferable if the employee in question has an opportunity to provide their statement – i.e., a chance to respond and provide their version of events – prior to any sort of suspension period or, it should go without saying, outright termination.
If an individual has any plausible reason to doubt their standing as employee, I recommend directly confirming with them that they continue to be employed. Particularly if there has been friction with the employee, if they began to lose access to systems or people they had previously interacted with as part of their job duties, or were outright sent home, there is a real risk that the employee will say or genuinely believe that they were effectively fired or could not otherwise carry on with their employment duties. It also should be clearly communicated that the initial investigation (or, where applicable, a suspension) is time limited, and what the timeline is.
(d) Access and the Employee’s Response
One of the main benefits of conducting an investigation while an individual is still employed is that they continue to have a positive legal obligation to cooperate as part of their employment duties. And, as a practical matter, it is challenging to obtain information from someone once they are no longer in your organization’s employ.
If an employee refuses to comply with an investigation or requests to provide information, this may itself provide more robust grounds for a just cause termination than the initial suspicions and may also act as an important, if circumstantial, piece of evidence regarding the wrongdoing itself.
(e) Out Routines for Confidential Records
Even if the decision is made that someone must go, from a confidentiality perspective I recommend spending sufficient time on the process to incorporate out-procedures dealing with, among other things, information technology devices, accounting for and affirming the return or deletion of records, including from personal spaces or devices, and other final reporting procedures.
Such processes have been ideally incorporated into the employment contract or related policies. Even where present, it is important to actively pick up and carry out any processes referenced, or risk a “well, no one reminded me” response. Again, the failure or refusal to follow such out procedures especially once actively requested may prove significant.
End Game Outcomes
It is, on this front, important to assess the employment contract and policies to gain a clear sense of the mechanisms relating to investigation, suspension, and termination. Nonetheless, I did want to sketch out some common end-game outcomes in terms of the problem employee’s status:
- Retaining the Employee: I put this one first because it tends to be rejected out of hand in the wake of discovering an impropriety. But where it makes practical and commercial sense, continuing to keep an employee on with an organization can be one of the most effective ways to put the risk of information leaks or unfair competition back in the box.
- The Employee Unilaterally Leaves: The employee may choose to depart unilaterally despite their employer’s request that they cooperate with an investigation, particularly if they were already on the cusp of leaving anyway. Someone may also depart or simply fail to show up once it is clear they are under investigation. While generally not as beneficial as preventing or accurately assessing the problem, this result does compare favourably to liability for wrongful dismissal. This circumstance can also lead to a “wait and see” period before it becomes fully apparent what, if anything, the individual in question is up to.
- Suspension: A lawful suspension of an employee must be clearly time-limited, so this is an intermediate step to some other outcome. It may also be beneficial to allow time while conducting further investigations while preserving some measure of oversight and control over the employee. There is a risk that the employee departs anyway. Note that unless the employment contract sets out suspension as a disciplinary procedure, there is a significant risk that the suspension will be treated as a constructive dismissal.
- Working Notice: Providing “working notice” of a termination following a full and fair investigation where the employee works during some or all of the notice period has some of the benefits of retaining the employee. Of course, the problem employee knows the relationship is ending and will continue to be around during this period.
- Summary Dismissal for Cause: Courts tend to be suspicious of an employer alleging dismissal for cause without compensation. I would suggest that there is always a risk of liability, or at least a legal battle, if this route is taken. Nonetheless, a just cause termination is easier to defend following a procedurally fair investigation where there are solid grounds to believe that a wrongdoing has occurred. An employee who avoids or refuses to comply with an investigation may also generate additional and more clear-cut grounds for dismissal with cause.
- Summary Dismissal with Payment in Lieu: Providing a severance package with an appropriate lump sum payment may be done as of right. With negotiation, it is possible to blend this outcome with other settlement mechanisms. Note, however, that the now former employee does have a prima facie right to compete. I would also recommend insisting on a unilateral release of actions to the benefit of the employer rather than a mutual release.
The Bottom Line
Like the break shot in pool, it is typically not possible to tell precisely how things will turn out after discovering and reacting to a suspected breach of confidence or misappropriation of a trade secret. Most potential outcomes, however, benefit from attempting to investigate the matter while the suspected wrongdoer continues to be an employee. And so, again, don’t just fire them!