An Employer’s Vicarious Liability for Employee Fraud

Employee fraud most commonly occurs when an employee commits fraud against their own employer. For example, an employee might use a corporate credit card for personal expenses or submit unearned overtime hours for payment. However, there are some cases where an employee might use their position with their employer to commit fraud against a third party.

In cases like this, when is an employer vulnerable to being held partially or vicariously responsible for its employee’s fraudulent activity? Is it even a possibility? The answer is a resounding yes. The courts accomplish this through the concept of vicarious liability.

Employers & Vicarious Liability

Vicarious liability is less of a moral judgment and more a method for apportioning financial responsibility for losses suffered due to fraudulent activity. Where an employer has permitted (usually through negligence) a risky enterprise to reach the community,  the law considers it only fair to make the employer vicariously liable for loss or injury experienced by affected members of the public. 

Traditionally the courts have imposed vicarious liability in any of the three following scenarios:

1. Enterprises in furtherance of the employer’s business goals;
2. Where the employer allows for friction, confrontation or intimacy within its business (creates a poisoned environment which leads to loss); and
3. Theft or fraud by a dishonest employee.

Blackwater v. Plint: The Leading Case in Canada

In 2005, the Supreme Court of Canada (SCC) considered a vicarious liability in Blackwater v. Plint which involved the liability of the Catholic church for the sexual abuse of minors in their care. The SCC noted that:

1. The court may impose vicarious liability where there is a significant connection between the conduct allowed by the employer or the controlling agent and the wrong itself;
2. Having created or enhanced the risk of the wrongful conduct, it is appropriate that the employer or operator of the enterprise be responsible, even though the wrongful act may be contrary to its desires;
3. That wrongful acts may occur is the cost of doing such a business;
4. Faced with two faultless parties, a much stronger justification exists for placing the risk of loss on the party who introduced the risk and is better able to control that risk.

A Recent Case on Point

In a recent unreported case called Pallotta v. Cengarle, a real estate lawyer employed a clerk to manage his real estate transactions. The employee had been with the lawyer for a good number of years and was a senior member of his team. As a result, she was given a fair amount of authority and autonomy in terms of her work assignments. These included client signings, closing deals, drafting documents etc. The lawyer’s trust in the employee was violated when the clerk committed fraud against one of the lawyer’s clients.  The clerk advised the client that her $200,000.00 was being loaned to a real estate developer as an investment. It was in fact diverted and used by the clerk to feed a failing investment she had made. 

The client sued the lawyer to recover her lost investment. He denied liability. The client was ultimately successful in court, with the finding that there was a very significant connection between the risk of the fraud happening and the failure of the lawyer to better supervise the clerk and her activities. It was also found to be a breach of trust.

Bottom Line for Employers

While it may be impossible to completely safeguard a business from employee fraud, there are steps employers can take to reduce their risk and liability:

1. Check to ensure your business is sufficiently insured against such risks both in terms of coverage and limits;
2. Have your accounting firm or someone they recommend conduct a review and audit of your internal controls;
3. Review the assignments of key employees, especially those with access to financial resources and records;
4. Consider an internal review by human resources to investigate any issues within the work environment relating to condoned misbehaviour.

For Unparalleled Legal Representation in Employee Fraud Matters Contact Milosevic & Associates 

If you require legal guidance with an employee fraud matter, contact Milosevic & Associates. Our team of highly knowledgeable litigation lawyers help our clients see through the dense forest of even the most complicated disputes. We excel at cutting through the underbrush and guiding clients to a creative, cost-effective solution.  Call us at 416-916-1387 or contact us online to learn more about how we can help.