Canada: Never Too Late: Court Rejects Employee’s Attempt to Avoid Liability for Theft

By Stringer LLP

December 20, 2018

What options are available to an employer who, after signing a mutual release releasing an employee from liability, finds out that the employee embezzled a large amount of money?

A recent Ontario court case suggests that the employer may still be able to pursue the employee for the amounts wrongfully taken, as well as invalidate a severance agreement.

In York University v Markicevic, the Court determined that an employee had misappropriated nearly a million dollars from his employer and diverted it to himself and certain co-conspirators before being terminated.

Although the employer had received vague reports about misconduct, including bullying and harassment, as well as financial improprieties, no witnesses were willing to come forward.  Finally, a whistleblower came forward and provided some documentation of some of the schemes in which the employee was involved.

Shortly thereafter, the employee and employer agreed on a mutual separation agreement, whereby the employee was terminated without cause and would receive a sizable severance package.  In addition, the employer and employee executed mutual releases.

Over a year later, investigations by the employer concluded that the employee had engaged in the embezzlement scheme, which was significantly larger than the initial, vague reports had suggested.

The employer brought a legal action against the employee, seeking recovery of the stolen money and the money paid to the employee as part of the severance package.

The Court found that the embezzlement scheme had occurred as ultimately uncovered by the employer and rejected the employee’s denials.

That did not end the matter, however.  The employee argued that the employer could not pursue him for damages for two reasons.  First, that the limitations period for the claim had expired before the legal action was commenced.  Second, that the employer had released the employee from liability as part of the severance agreement.

The Court rejected both arguments.

The Limitations Act requires that actions be commenced within two years of the day a reasonable person would have known of the loss and that it was caused by the defendant.  The employee argued that the employer ought to have known about the claim when it first received the anonymous reports of financial impropriety.  Since that date was more than 2 years prior to the commencement of the action, the action should be dismissed.

The Court disagreed.  The Court found that it was only once the whistleblower brought particularized documents and allegations to the employer that the employer could possibly be aware of the loss.  Since that date was less than 2 years prior to the start of the action, it could proceed.

The Court also rejected the employee’s claims that the release precluded the employer from pursuing him for the stolen money.  The Court found that the employee’s consistent claims of innocence prior to executing the severance agreement amounted to a material misrepresentation.  Given the employee’s senior position, he had an obligation to disclose his misconduct before entering into the severance agreement.

The Court found that there was no chance that the employer would have agreed to the severance agreement, with its generous financial payment to the employee, absent the misrepresentation and had it known of the full depth of the employee’s misconduct.  As a result, it set aside the severance agreement.

The Court ordered repayment in full of the stolen money, the return of the money paid to the employee in the severance package, and that the employee pay the employer’s full legal costs.  An appeal by the employee to the Court of Appeal was rejected, and the employee was required to pay the employer’s full legal costs of the appeal as well.

It should be noted that criminal charges against the employee were stayed as being without a reasonable prospect of success.  Nonetheless, the employer was successful in civil court as a result, in part, of the lower burden of proof in civil matters.

The case is both an encouraging sign for employers who are victims of employee theft, as well as a warning.  While the Court determined that the level of misconduct, and the circumstances by which the employer became aware of it, invalidated the severance agreement and entitled the employer to take legal action against the employee, it is easy to imagine that an employer with more knowledge of an employee’s misconduct or suffering from a less egregious theft might not have been successful.  Employers should be extremely cautious about entering into agreements with employees they suspect of theft, as they could forfeit their right to recover their property.  Legal counsel should always be consulted in such situations.