By Matt Epp and Sarah Lulman (With thanks to Raymond Bastedo)
The risk posed by ‘rogue’ personnel is an issue for any organization. In the industry of Exempt Market financing, the relationship between an Exempt Market Dealer (EMD) and its Dealer Representatives (DRs) is not legislated through the Alberta Securities Act (Act) or through National Instrument 31-103 (NI 31-103).
This gives rise to the issues as to when an EMD will be liable for the actions of its DRs and what it can do to minimize the risk. The purpose of this article is to address both these issues by setting out the applicable legal principles and providing some practical advice.
Employee vs. Independent Contractor
An independent contractor is an individual who is in business for herself or himself. While an employee is just that: employed in someone else’s business.
The distinction can be critical as an EMD will normally be responsible for the actions of its employees but may not be liable for the actions of independent contractors. This is discussed below.
In practice, it can be difficult to determine when an individual is an employee or an independent contractor. Courts use one of several tests to determine whether an individual is considered an employee and may consider: First, whether the worker is limited to working exclusively for the company. Second, whether the company controls the worker and what product the worker sells and when, where, and how it is sold. Third, whether the worker has an interest in the ‘tools’ relating to his or her service. Fourth, whether the worker expects a fixed commission, or has undertaken risk in the business and expects a profit from their efforts. And finally, whether the worker is part of the business organization, or is performing the services in business, on his own account.
The Supreme Court of Canada has held that no one test is determinative. Rather, the Court noted that various factors should be considered such as whether the person provides their own equipment or hires his or her own assistance; the degree of financial risk taken on by the worker; the degree of responsibility of the worker; and the worker’s ability to profit from the performance of the work. Some of the other factors which the Courts may consider in order to determine whether the relationship is that of an employee/employer are as follows:
- whether the worker receives additional remuneration as well as commissions;
- whether the worker is incorporated into the business and paid through the business;
- whether the worker is referred to in the company’s promotional materials as part of a team within the company;
- whether the individual makes use of office space and administrative services;
- whether the worker is required to attend sales meetings;
- whether competitive lines or products can be sold by the worker; and
- whether the worker’s activity is part of the company’s business organization.
Some workers have been found to be independent contractors when they receive no instruction as to when, where, or how to work and there is no requirement to work a certain number of hours. Where the worker supplies their own tools, remits monthly invoices for service rendered, and is free to work for others, the Court is more likely to find an independent contractor relationship.
EMD’s Liability for Rogue Employees
If the DR is an employee, the legal principle of vicarious liability will apply. This principle holds employers accountable for the negligent or intentionally wrongful acts of their employees while they are acting in the course of their employment. As result, the EMD may be held vicariously liable for the DR’s illegal actions even if the EMD did not want or authorize the DR to act wrongfully.
This will be the case where there is a sufficiently strong connection between the wrongful act and the duties of the employee.
The Supreme Court, in the leading case on vicarious liability, stated that a number of factors should be considered to determine whether the connection is strong enough to justify vicarious liability on the part of the employer. The factors will vary depending on the circumstances, a partial list may include:
- the opportunity afforded the employee to abuse his or her power;
- the extent that the wrongful act may have furthered the employer’s aims and so made it more likely that the employee would commit the wrongful act;
- the extent that the wrongful act was related to “friction, confrontation or intimacy” that was a part of the employer’s enterprise;
- the extent of the power given to the employee in relation to a victim; and
- the vulnerability of the victim to the wrongful exercise of the employee’s power.
Though the above principles give some direction, it may be difficult to know how the Court will determine any particular case. For example, in a recent Alberta case, an employer was found liable for the actions of its employee when the employee forged a necessary document in order to facilitate the purchase of a commercial property after a request was made by the company’s CEO. The Court held that the employee’s wrongful conduct was sufficiently connected to what was authorized by the employer, particularly since the employer had emphasized the urgency of obtaining the required documents on a ‘no questions asked’ basis.
Employers have also been held vicariously liable for the actions of ‘rogue’ employees who have harmed others without the apparent or explicit authorization of the employer, and have found liability for the off-duty wrongful actions of an employee where the scope of employment included functions outside the workplace.
EMD’s Liability for Independent Contractors
Employers are generally not held liable for the actions of independent contractors. However, courts have often attributed liability to the employer, by finding that a principal-agent relationship exists and holding the employer, as principal liable for the acts of the independent contractor as its agent.
An agent is empowered by another party, usually called a principal, to deal with the principal’s rights and obligations with a third party. Similar factors are used to determine whether a principal is vicariously liability for the wrongful act of an agent as those used when determining the liability of an employer for the wrongful acts of an employee.
Liability may attach to the principal where its agent has acted wrongfully and has actual, apparent or usual authority to act. Actual authority occurs when the principle confers express authority on the agent. Apparent authority will arise when the agent acts in a way which would lead a reasonable person to think that the agent is acting on the principle’s direction. Usual authority arises when a person with knowledge of the trade would expect the agent to have certain authority. Importantly, the authority must flow from the principal to the agent; in other words, an agent cannot claim to have authority when it is clear that the authority has not been conferred by the principal.
Although courts will look to any contract between the parties to see whether the terms of any agreement state that the DR is an independent contractor, courts will consider whether the relationship of the EMD and DR amount to that of principal-agent. For example, where the EMD confers authority on a DR to deal with its legal rights as they apply to a client or investor, and the DR then acts wrongfully but within his or her actual, apparent or usual authority, vicarious liability may attach to the EMD.
What to Do
It is clear from the factors above that many EMD-DR relationships would be characterized by a court as that of employer and employee, despite the fact that many EMDs and DRs may consider themselves in an independent contractor relationship and have organized their affairs in that manner.
For example, DRs are required to attend sales meetings, required to sell products which are supplied by the EMD, and are expected to follow the EMD’s directions on how, when and where to sell the securities. Often, the DR is incorporated into the business structure of the EMD and works as part of a team within the EMD. These factors may lead to a finding that an employer, employee relationship exists.
Importantly, these same factors would suggest that even if the EMD and the DR are found to be in an independent contractor relationship, the principles of agency, discussed above, would apply so as to make the EMD liable.
Given this, what should an EMD do in order to mitigate the risk of a rogue DR?
The prudent EMD will use pro-active strategies to mitigate the risk of liability from the wrongful acts of its employees or independent contractors. Some of the strategies may include:
For employer/employee relationships:
- follow the requirements of NI 31-103 (which include several of the points, below);
- before hiring a DR, verify their references and conduct a criminal record check on the prospective DR, especially if his or her duties will involve the handling of money, or contact with vulnerable clients;
- enter into a clearly drafted employment contract with the DR which spells out the rights and obligations between the EMD and DR;
- train and oversee DRs properly;
- create clear internal policies and ensure that all employees are aware of the complaints process and how complaints will be dealt with; and
- if a DR has acted wrongfully, consider dismissing them.
EMDs will also need to consider how and when to terminate DRs who act outside of their authority. It may be necessary to contact an employment lawyer in order to receive advice on drafting contracts, setting internal policies and terminating DR employees.
For Independent contractor relationships, the following is a non-exhaustive list of some of the risk-mitigation strategies that an EMD may consider:
- enter into a clear contract which ensures that the DR understands their duties, responsibilities and the limits of their authority;
- be clear that the DR cannot act beyond the limits of their authority without prior express (preferably written) permission; and
- be aware of situations where others may reasonably assume that the DR has the EMD’s authority and take steps to ensure third parties dealing with the DRs understand the scope of the DR’s authority.
It is clear that, in many circumstances, EMD’s will be liable for the actions of the DRs regardless of how the relationship is structured.
Most DRs will be considered employees or agents of the EMDs (no matter how the relationship is structured) which will mean that, in addition to the DR being sued or sanctioned personally, there is a significant risk that the EMD may be held responsible for what the DR says or does, and may be liable for the DR’s bad behavior.
The key is to avoid these issues before they arise by following the requirements of NI 31-103 and the suggestions set out earlier in this article.
 Securities Act, RSA 2000, c S-4
 Spencer v Tim Hortons (1995), 10 CCEL (2d) 298 (ABPC); Co-Operators Insurance Assn v Kearney (1964), 48 DLR (2d) 1 (SCC)
 Montreal v Montreal Locomotive Works Ltd,  1 DLR 161 (PC)
 Doyle v London Life Insurance Co (1984), 25 ACWS (2d) 369 (BCSC), affd 23 DLR (4th) 443 (BCCA)[Doyle]
 671122 Ontario Ltd v Sagaz Industries Canada Inc (2001) 11 CCEL (3d) 1 (SCC)
 Bachynsky v Block Bros Realty Ltd (1989) 14 ACWS (3d) 304 (BCSC)
 MacPhail v Tackama Forest Products Ltd (1993), 50 CCE 136 (BCSC)
 Jaremko v AE Lepage Real Estate Services Ltd (1987), 59 OR (2d) 757(OHCJ), affd 69 OR (2d) 323 (ONCA)
 Spurway v Royal Lepage Real Estate Services Ltd (1987) 77 NSR (2d) 156 (NSSC) [Spurway]
 Spurway, supra at footnote 11
 Doyle, supra at footnote 6
 Doyle, supra at footnote 6
 Dyck v HL Powell Ltd (1996), 24 CCEL (2d) 219 (ABPC)
Alberta v XI Technologies Inc, 2013 ABCA 282; http://www.lawnow.org/vicarious-liability-legal-responsibility-of-employers/#sthash.bpGuN1cC.dpuf
 Bazley v Curry, 2 SCR 534
 Ibid at para 41
 Hay v Platinum Equities Inc 2012 ABQB 204
 Fullowka v Pinkerton’s of Canada Ltd, 1 SCR 132
 Cimpean v Payton  OJ No 2665
 Fridman, Law of Agency 7th Ed. (Toronto: Butterworths, 1996) at p. 315
 Saturley v CIBC World Markets Inc, 2013 NSSC 300
 PDQ Financial Services Inc (Re), 2013 LNCMFDA 100
 Jin v Canada Everich Real Estate Group Inc, 2011 ABQB 524 at para 13