Senior employees: a directorial debut?

As the recent Equitable Life litigation shows, company directors, who are placed in a position of trust and relied upon by both company and shareholders to behave correctly, often find themselves the target of criticism and even legal action for alleged breach of duty. But what about senior employees? They may have considerable autonomy and power too. What are their duties and can a company seek redress against them as well?

Company directors v senior employees

When one thinks of company directors, one thinks of individuals having great power over the affairs of the company, charged with controlling its assets and the operation of its business. Not surprisingly, given the level of trust placed in them, we think of them owing special fiduciary duties to the company over and above duties owed by employees.

However, when we look at the responsibilities of directors and senior employees more closely, the similarity between the harm that they both can cause is striking.

For example (first four examples taken from a talk by Sean Jones, barrister, 11 King’s Bench Walk Chambers):-

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  • A director may harm a company by prioritising his interests above those of the company, so may an employee;
  • A director may harm a company by assisting a competitor, so may an employee;
  • A director may harm a company by failing to perform his duties with the requisite skill and care, so may an employee;
  • A director may harm a company by disclosing its confidential information, so may an employee;
  • A third party may, in dealings with a company, rely on statements and/or actions of a representative of that company irrespective of whether the representative is a director or an employee.

Therefore, although instinctively we may feel that directors owe significantly higher duties than employees, it is perhaps not altogether unexpected to discover that, in fact, generally they don’t.

The duties of directors v the duties of senior employees

Of course contracts of employment for senior employees today contain a multitude of express clauses specifically designed to contractually imbue employees with duties more traditionally the domain of directors. So, for example, there are clauses stipulating that the employee is to devote the whole of his time and attention to the business, use his best endeavours to promote the interests and reputation of the company giving at all times the full benefit of his knowledge, expertise and skill; there are detailed clauses concerning conflicts of interest, confidentiality, and often lengthy provisions regarding the circumstances when the company can terminate the employee’s employment.

But what happens where there are no express contractual duties? Does the law impose implied duties on employees in these circumstances?

There is one way in which directors clearly have additional duties to those of employees - i.e., their specific statutory duties (for example as laid down by the Companies Act). However with the exception of these specific duties, it is interesting to see how often the law matches directors’ duties with parallel implied duties on employees.

For example:-

Directors must not place themselves in a position where there is conflict between their personal interests and their duties to the company

The mutual duty of trust and confidence, implied into every employment contract, essentially places employees in the same position as directors regarding any conflict between their personal interests and their duties to the company. The breadth and flexibility of this duty to be used by the courts to control employees to ensure they protect and further the interests of their employer is potentially enormous. In the 1998 Court of Appeal case of Attorney General v Blake, Lord Woolf went so far as to comment as follows:-

“There is more than one kind 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. 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”.

Even if the Courts choose not to go so far, but instead (as other judges have been keen to do) keep the duty of trust and confidence separate from any notion that a fiduciary relationship between employee and employer exists, the ideas of good faith and fidelity which the duty of trust and confidence implies will act to allow employers to take action against many activities of their employees.

For example, in the same way that a director cannot expect to work both for his company and for a competitor without explicit permission, in the 1947 case of Hivac Limited v Park Royal Scientific Instruments, the Court of Appeal held that employees who worked for a competitor in their spare time and who had persuaded colleagues to do the same were acting in breach of the implied duty of good faith and fidelity. The Court were concerned not to establish a general rule that working for a competitor would always amount to a breach as this could prevent employees from making a living. Accordingly they decided that whether or not to impose the duty might depend on the seniority of the employee.

A director is under an obligation to exercise reasonable skill and care in discharging his functions

In the same way, employees have no less a duty. A contract of employment is deemed to contain an implied warranty of reasonable competence and an implied obligation to take reasonable care in the performance of duties.

Confidential information

The law does not distinguish between a director and an employee. Any party entrusted with confidential information will be liable for breach of confidence.

So where does this leave employers?

Employers should not underestimate the importance of their senior employees, and their ability to harm the company even though they may not be directors.

Comprehensive employment contracts should be drawn up for senior employees contractually giving them specific duties so that at least the employer has a contractual remedy in the case of a breach by the employee, causing harm to the company.

However in a worst case scenario where no such contract exists, employers should not despair. It may well be that by virtue of implied duties the employer has a remedy against the harm caused by the employee, particularly where it can show the employee to be in a position of significant autonomy and power.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.