Canada: $250 False Business Expense Costs President His $1 Million A Year Job

Up until 2001, our Court of Appeal held that dishonesty would always be just cause to dismiss an employee summarily. Unfortunately for employers the Supreme Court of Canada modified the law of just cause to say that dishonesty won't always be cause for dismissal; rather the court must embark on a "contextual" approach to see if the misconduct is sufficiently egregious to constitute cause: McKinley v. BC Tel, 2001 SCC 38.

A recent case of the B C Court of Appeal provides an example of where dishonesty in respect of fraudulent business expenses can in and of itself constitute cause.

The employee TM was employed as President of Operations of a large used car dealership and RV dealership in the Lower Mainland and on Vancouver Island. While on a business trip to Parksville the Plaintiff and his wife had dinner. TM wrote the names of two employees on the receipt and submitted for payment by the company. The next morning he and his wife had breakfast and he wrote the name of another employee on the receipt and submitted for payment. The total amount for which the Plaintiff was reimbursed was $250 ("Parksville expenses"). The employer's policy was that the name of the employee had to be written on the receipt.

A week later TM was having dinner with the owner and TM picked up the tab. He then submitted the bill for payment claiming the owner had agreed it was a "team building event" and was justified as a business expense. The owner denied that she agreed it was a business expense.

The owner then did a spot audit and learned of the Parksville expenses. She confronted TM and instead of admitting the fraudulent expense claims he said could not recall any discussion of the Parksville expenses in that meeting. He also claimed that he was told by the CFO controller to put the names of the employees on the receipts "to keep it simple". The CFO who approved expenses testified that he was unaware that the Parksville Expenses were for dinner and breakfast with TM's wife.

The trial judge found that the Plaintiff's conduct with respect to the Parksville Expenses constituted just cause. The Plaintiff appealed.

The Court of Appeal described the trial judge's findings as follows at paragraphs 19 and 20:

The judge then turned to the issues of dishonesty and just cause. He found on the evidence that Mr. Mechalchuk submitted the Parksville restaurant receipts as business expenses when he knew they were personal in nature, and tried to deceive Galaxy Motors into thinking they were for a business purpose. He was also dishonest about the expenses when he was confronted by Ms. and Mr. Jones about this during the July 11, 2022 meeting.

[20] The judge observed that Galaxy Motors bore the onus to establish just cause, and concluded it had done so. He noted that dishonesty does not automatically comprise just cause for dismissal, but in these circumstances where Mr. Mechalchuk was in the most senior management position at the company, that position commanded authority, responsibility and trust, and he breached that trust. Accordingly, "his conduct was such that the defendant's loss of faith and trust in him was justified": at para. 65.

The employer had relied on a pattern of conduct broader than the Parksville Expenses but only proved the events regarding those expenses. The Court of Appeal held that Parksville Expense evidence was sufficient in and of itself to prove just cause.

In dismissing the appeal the court held that the trial judge did not err when he found:

[65] I agree with the submissions of counsel for the defendant that the facts in Roe are analogous to those before me in this case. Although the total amount of the Parksville restaurant dinner and breakfast receipts (approximately $250) was relatively small, the misconduct went to the very root of the plaintiff's employment relationship with the defendant. He was in the most senior management position at the defendant. His position commanded a high level of authority, responsibility, and trust. He breached that trust by submitting false expense receipts and thereafter being untruthful about them when given an opportunity to explain them on July 11, 2022. Moreover, he failed to "come clean" when he had a second opportunity to do so during the meeting on July 13, 2022. His conduct was such that the defendant's loss of faith and trust in him was justified.

The court of appeal concluded:

[39] In conclusion I am of the view that there is no principled basis upon which this Court could or should interfere with the judge's conclusions, in particular that Mr. Mechalchuk's conduct was such that Galaxy Motor's loss of trust and faith in him was justified. The judge correctly applied the contextual analysis which was required in considering Mr. Mechalchuk's position and level of responsibility. He assessed the severity of the misconduct, that is submitting false expense receipts and being untruthful when given a chance to explain and found that in all the circumstances, termination of employment for cause and without notice was a justifiable response by the employer.

The lesson to be learned for senior employees and owners is fairly obvious. Cheating on expense accounts and then lying about it is not the same thing as telling a little white lie. There are consequences for dishonesty regardless of the amount involved. Here the Plaintiff's income in the year in which his termination occurred "was between $750,000 and $1,000,000". For the value of $250 it cost TM up to a $1 million a year income plus the legal fees in pursuing is claim as well serious mental stress and finally significant reputational damage.

END NOTE

When I first began practicing I juniored a senior lawyer as he prepared to defend a wrongful dismissal action. It was a without cause termination. Shortly before the trial the employer for some reason late in the day decided to look in the employee's desk. It found a blank receipt book that matched many of the expense receipts submitted by the employee. Senior counsel invited the opposing counsel over for coffee with us—the case was settled for a nominal amount shortly thereafter.

Employers are wise to do their due diligence following termination with or without cause. That includes ensuring all IT information and any business records are retained, reviewed and preserved.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.