Employer Permitted to Sue Former Employee, 8 Years Later

The case of Ciavarella v. The Atlas Corporation is an ongoing wrongful dismissal action, involving allegations of employee theft.

Mr. Ciavarella was the controller for Atlas since 1996.  (For those unfamiliar with the term, 'comptroller' - pronounced and occasionally spelled 'controller'  is roughly synonymous with the term 'Chief Financial Officer' - it's the top in-house accounting role in a company.)  In 2005, the employment relationship broke down.  Ciavarella says he was fired; Atlas says that he walked away.  In 2007, Ciavarella sued in wrongful dismissal.

The process has moved at what Justice Edwards generously described as a "fairly leisurely pace".  In broad strokes, the ordinary course of litigation means that after the plaintiff makes the claim and the defendant files a defence, there's usually an exchange of documents, followed by oral examinations for discovery, where each lawyer asks the other party questions.  The examinations for discovery usually trigger another round of documentary disclosures by way of 'undertakings' - i.e. when I'm examining a party, it becomes clear that additional records are relevant to the proceedings, and so I ask for an undertaking that the party provide those records.

In 2012, Atlas was putting together it's documents to satisfy the undertakings it gave on examinations for discovery, and in the process came across records which they say establish theft by Ciavarella, in that he allegedly made false expense claims.  Accordingly, they sought to add a counterclaim to the proceeding.

There's a fairly obvious challenge here, when seeking in 2012 to make a claim based on something that happened, at the latest, in 2005:  The Limitations Act generally bars such matters.

However, there's a "discoverability" aspect to the analysis - the 2-year clock only starts when the employer knew or ought reasonably to have known about the underlying facts of the claim.  So it's an interesting question:  Atlas' own records purportedly demonstrate the theft, but they're saying they didn't know about them until 2012.  Can that work?

Maybe.  The question is whether or not, through the exercise of reasonable diligence, Atlas would have discovered the underlying facts earlier.  Would 'reasonable diligence' require Atlas to closely scrutinize the expense claims when they were first made?  Or would a reasonable employer take them at face value?  The Court puts the question in an interesting and compelling fashion:

Is an employer to assume that expense claims submitted by an employee are legitimate unless the opposite is proven, or is an employer to assume that every expense claim submitted by an employee are to be carefully scrutinized so as to ensure that each claim is legitimate?  Ultimately, this will come down to a mixed question of fact and law.

What surprisingly doesn't seem to be an issue here is Ciavarella's own role of responsibility for the company's finances.  It appears that the expense claims were still subject to his boss' approval, and there doesn't appear to be any allegation that he used his role to cover up the transactions.

Justice Edwards found that it's an issue for the trial judge, and allowed Atlas to make the counterclaim.  This is actually somewhat surprising - on Justice Edwards' own summary of the facts, it appears that the breakdown of the employment relationship, however it happened, was triggered by the boss' wife reviewing the company credit card statements and accusing Ciavarella of theft.

Comments on Employee Theft

I never cease to be amazed by employee theft.  I've seen a lot of different types over the years, but they generally boil down to a few classes:

(1) Taking petty cash.  This is a really low-level and unsophisticated type of theft, and is easily caught.  Most larger retailers require cash registers to balance at the end of each shift, but smaller retailers often involve a shared cash register, which is balanced by the manager at the end of the day, and the minimum-wage employees working the cash are often unaware that the cash amounts are even scrutinized.  So any employer doing any due diligence in terms of cash will promptly be aware of theft, and will be able to catch the thief pretty quickly.

(2) Manipulating cash receipts.  This is a little bit more sophisticated than example 1, and basically involves an employee accepting payment from a customer and then not entering the receipt properly into the bookkeeping software.  This can involve sleight-of-hand at the cash register, but that's difficult to pull off safely, and that's still going to be small-scale.  For larger-scale thefts, the challenge is that most companies use invoices, which are entered into the books, which prevents the front-line person receiving the cash from being able to take it without it coming back around to the customer as an unpaid account receivable.  However, where companies don't maintain books in the way they should, they're exposing themselves to risks here.

(3)  Theft by the person tasked with maintaining the books - i.e. the bookkeeper or accountant.  This is by far the worst in terms of scale and the most insidious in that it almost always involves a person who was deeply trusted by the employer...and I know a shocking number of cases where it happened or was alleged.  In one case I know of, it was discovered because the employer's brother insisted on periodically reviewing the books.  In another situation, it was discovered when a second part-time bookkeeper was hired by a related organization.  In another, it was discovered only after the thief was fired for unrelated reasons, and a new bookkeeper stepped in.  (I have a relative who is a senior manager with a major payroll processing company, who tells stories about the various schemes, some more sophisticated than others, which the employer's administrative staff employ to try to steal...of course, the payroll company is wise to such methods, and has developed ways of blocking it.)

In a case where a thief has taken measures to cover up the theft, it would be a relatively solid argument that the employer couldn't have been expected to discover the theft.  However, that doesn't appear to be what's going on in Ciavarella.

I would expect that, in the ordinary course, an expense claim will have an authentication and approval process.  That, in my mind, would generally qualify as 'reasonable diligence'.  If the employee at the top of the authentication/approval pyramid is exploiting the system, or even in a case where there's a higher manager rubber-stamping claims, abuse by that employee could reasonably go undiscovered.  (So if the process for getting an expense approved meant, "Give your receipts to Joe, and he'll process them up the chain for upper management approval", then one could reasonably imagine that Joe could get away with it without being discovered...because he's tasked with reviewing his own receipts.  Conflict of interest.)

But I would have a hard time thinking that there's reasonable diligence where there's no scrutiny of claims in the first place, in general.  Imagine I'm a front-line worker in a large company, and I start submitting expense claims for my mileage to and from work.  In almost every scenario, that will be inappropriate, and even the attempt would be disciplinable.  But if the employer just paid them without a second glance, then I would think that the Courts should be loathe to say, if the employer wanted to recoup them years later, that they acted 'reasonably' in not discovering the claims earlier.

Of course, there's a role for 'trust', in the appropriate case, too, in that an employer might reasonably be able to say that little-to-no scrutiny was applied because one might reasonably expect the employee not to make illegitimate expense claims.

That Justice Edwards considered this a question of 'mixed fact and law' is, in my view, quite appropriate.  There's no hard-and-fast rule to be drawn about how much scrutiny is appropriate.

Still, where the employee has actually been accused of theft, 'trust' is off the table, and as far as historical trust or rubber-stamped approvals go, it simply makes sense for a prudent employer to conduct a thorough review of its books as far as the alleged thief is concerned, and I would have a hard time accepting that an employer who has already raised the issue of theft can let sleeping dogs lie for seven years until more solid evidence is found.

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This blog is not intended to and does not provide legal advice to any person in respect of any particular legal issue, and does not create a solicitor-client relationship with any readers, but rather provides general legal information. If you have a legal issue or possible legal issue, contact a lawyer.