Fiduciary duties, with your choice of chips or salad

When it comes to my favourite things, I never really could get into raindrops on roses, or whiskers on kittens.  Fiduciary duties and chicken schnitzels, however, are pretty high on my list.  So you can imagine my delight when I saw that these two of my favourite things had been brought together in a recent case in the Federal Circuit Court of Australia.

The case concerned a hotel chef who was responsible for buying various foodstuffs (including chicken schnitzels and quiches) for the hotel kitchen.  The chicken schnitzels were acquired through the chef’s family business, and were invoiced to the hotel at between $2.80 and $2.90 per schnitzel.  However, in a plot twist unlikely to make an appearance on Masterchef, the true cost of the schnitzels was between $1.80 and $1.90.  Unbeknownst to the hotel, the chef was making a tasty secret profit.

The ruse was discovered and the chef was dismissed.  The chef sued to recover his unpaid annual leave, and also claimed that he was entitled to a bonus for improving the profitability of the hotel.  (Given the extent to which the profits of the hotel were being diverted to the chef’s family business, some people might describe the bonus claim as involving more hide than a team of elephants). The hotel counter-sued to recover the amount of the secret schnitzel profits, based on the argument that the chef had breached his fiduciary duties.

So what is a fiduciary duty?  In an employment context, it means a duty not to prefer the employee’s own interest over the interest of the employer.  In this case, the hotel’s interest was to obtain schnitzels at the best possible price, whereas the chef’s interest was to inflate the price to make profits for the chef’s family business.  The Court held that the undisclosed inflation of prices was a breach of the chef’s fiduciary duty, and ordered the chef to pay compensation substantially exceeding the amount of the unpaid annual leave.

Not all aspects of an employment relationship require the employee to put the employer’s interests first.  For example, when negotiating their own employment terms, an employee is entitled to look after their own interest (in getting the best deal) rather than the employer’s interest (in paying a lower wage).  But where a fiduciary duty does exist, and it is breached, the employer will nearly always be entitled to summarily dismiss the employee, and to sue to recover compensation.

Of course, the only thing better than suing to recover compensation for loss is not suffering the loss in the first place.  Frauds by trusted employees who have the power to purchase for the business can be difficult to guard against, because of the very fact that the employees who commit these frauds occupy positions of trust.  Regular auditing is part of the solution, although it is also important to look at the way that purchasing processes are designed.  Is the same one person responsible for obtaining quotes, deciding on suppliers, receiving all the invoices and signing the cheques?  That can be a warning sign, as can the employee who is vociferously reluctant to  take annual leave.

Courts apply fiduciary duties strictly, but this does not mean that suspicion of conflict is enough.  It is necessary to establish a “real conflict”, which means establishing that the employee has an interest which conflicts with the interest of the employer (or conflicts with some other duty which the employee owes).  The fact that fiduciary duties are strictly construed by courts does not relieve an employer from the need to properly establish, if the employer claims to have been wronged, the evidence which supports that claim.

The importance of getting the evidentiary case right was illustrated in the claim by the hotel.  Remember those quiches I mentioned before?  Part of the hotel’s clam against the chef was a claim that the hotel had been invoiced, and had paid, for more quiches than were actually delivered.  However, the hotel did not succeed on this claim – on the evidence, the Court was not satisfied that the chef had been involved in the preparation of any fraudulent invoices.  Real fiduciaries, it seems, don’t cheat quiche.

For more on our employment law capabilities, contact Angus Macinnis

March 21
Employment Law