Canada: Poor Reference Check Results In Damages

Recruiting capable talent is challenging at the best of times. The demand for solid candidates remains strong while the available talent pool seemingly keeps shrinking.

As a result employers often turn to new, imaginative ways to recruit talent. Some offer financial incentives, others concentrate on the allure of work-life balance, while others still follow a more traditional means by relying on the services of personnel agencies and recruiters. Sometimes employers end up getting more (or less, depending on one's perspective) than they asked for.

A case in point is the recent, as yet unreported decision of the Ontario Superior Court in The Treaty Group Inc. v. Drake International Inc. The Treaty Group, which carries on business as "Leather Treaty", was experiencing exponential growth in 1996 and needed help. On the advice of a trusted business advisor it looked to Drake International Inc. (Drake), a global personnel and training firm, to assist in filling its human resources needs. Drake was retained to find the best possible candidate and provide the "highest calibre of professional screening, evaluation and reference-checking."

Drake referred Beverly Simpson to Leather Treaty, which eventually hired her to assist with bookkeeping tasks. Simpson was responsible for bookkeeping generally, doing bank reconciliations, managing petty cash, processing and issuing cheques and paying accounts. She was given a great deal of independence and seldom would the owners of Leather Treaty review her work.

It turns out Leather Treaty got more than it bargained for. Simpson defrauded the company of $263,324.20. It also turns out that she had been twice criminally convicted of defrauding former employers prior to joining Leather Treaty.

Leather Treaty sued and obtained a civil judgment against Simpson and her spouse, which remained uncollected. It then sued Drake for breach of contract, negligent misrepresentation and negligence to recover monies stolen and other damages. After all, Drake had promised to perform the "highest calibre of professional screening, evaluation and reference-checking" and, presumably after having done so, recommended Simpson to Leather Treaty.

The court found that Drake had failed to do any meaningful references checks on Simpson. Had those checks been properly done, Simpson's prior fraud convictions would have been uncovered and Leather Treaty would presumably not have offered Simpson employment. Thus, the court found Drake had breached its contract with Leather Treaty and ordered it to pay damages for breach of contract.

In addition, however, the court also found Drake liable for negligent misrepresentation and negligence. Drake had falsely represented its services and, by extension Simpson, to Leather Treaty. It had failed to properly investigate Simpson's past and Leather Treaty relied on Drake's representations to its obvious detriment.

The court’s assessment of the standard of care that Drake owed to Leather Treaty in the circumstances is interesting. To support its allegation of negligence, Leather Treaty called an expert witness to testify as to the standards for checking references in the placement industry. The expert testified that, when checking references, the industry standard is to check the candidate’s last five years of employment and/or the last three references. The expert also testified that it was important to verify the candidates’ dates of employment, positions held, reason(s) for termination and eligibility for hire. Drake failed to do these checks on Simpson.

In the end, Drake was found responsible for 50% (i.e. $131,662.10) of the amounts Simpson had defrauded Leather Treaty. Drake would have been ordered to pay 100% of the funds stolen but for the court’s finding that Leather Treaty had been equally negligent in failing to supervise and initiate internal controls to minimize its exposure to fraud.

While “contributory negligence” is a well-accepted principle in assessing damages in negligence claims the same cannot be said about claims for breach of contract. However, after closely reviewing the case law, the court ruled that Leather Treaty’s breach of contract claim could equally be discounted on the basis of “contributory fault.” In other words, Leather Treaty’s breach of contract claim was discounted based on its own actions that served to increase its damages.

This case serves a clear reminder to placement agencies of their obligations and potential liabilities in referring candidates to their clients. In addition to their contractual obligations, such agencies must adhere to a reasonable standard of care in performing their duties or face damages under tort law. The decision also serves to remind employers of their exposure to potential liabilities for misrepresenting former employees to employers during reference checks.

Should you have any questions about this decision or your obligations and potential liabilities in providing misleading references, please do not hesitate to contact any member of our Employment and Labour Relations Group.

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2006 McMillan Binch Mendelsohn LLP

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