Fraud and frolics - who is liable for employees' bad behaviour?

Employers need to take clear, tangible and pro-active steps to reduce the opportunity for employees to engage in wrongful acts impacting others, given employers may be accountable for the bad behaviour of their employees, even if it is criminal.
 
Two recent court decisions  – one by the Full Court of the Federal Court of Australia and another by the High Court – provide guidance in this important area.
 
Earlier this year, the Full Court of the Federal Court of Australia considered the issue of vicarious liability in Australia in Pioneer Mortgage Service Pty Ltd v Columbus Capital Pty Ltd1, and in particular, whether an employer was vicariously liable for the fraudulent acts of an employee. Last week, the High Court of Australia provided further guidance on the issue in Prince Alfred College Incorporated v ADC2 as it outlined the "relevant approach" to the determination.

What is clear is that employers need to ensure they have checks and balances in place to reduce the opportunity for employees to engage in wrongful acts; consider their policies and procedures carefully to minimise exposure; and, review their liability insurances to ensure they will respond to claims which arise.

The Pioneer decision

Columbus sought to recover from Pioneer for the fraudulent acts of Pioneer's employee. Pioneer's employee had committed acts of fraud between 2006 and 2014, using an electronic system which only authorised staff of Pioneer could access (the employee was an authorised employee). The weakness of the system was that, once a person was authorised, that person could go online and direct payments to a third party account with minimal additional checks and balances. The employee used this system to transfer funds from clients' loan accounts into her husband's account.
 
The Full Court of the Federal Court specifically affirmed the primary judge's findings that Pioneer was vicariously liable for the fraudulent acts of its employee (as well as finding liability for breach of contract and misleading/deceptive conduct).

The Court concluded that the fraudulent acts of the employee were attributable to Pioneer, and the criminal nature of those acts did not prevent the allocation of liability in the current circumstances. This was because the employee committed the fraud whilst doing the very acts that she was empowered to do by her employer. The Court considered that her acts were "performed in the ostensible pursuit of Pioneer's business and in the apparent execution of the authority that Pioneer held [the employee] out as having.3

The Court took the view that "acts can have a close connection with employment even if they are expressly or impliedly forbidden".4 The Court found that there was a very close connection between the employee's acts and her employment, particularly since her fraud was only possible because of the authority she had to use the system. She then perpetuated that fraud through the additional authority and access that came with her role as manager and her authority to supervise the very acts that constituted her fraud.

Prince Alfred College

This case concerned allegations of sexual abuse against a former housemaster at Prince Alfred College. The High Court did not need to decide the issue of vicarious liability, however, due to the differing views expressed by the Court in New South Wales v Lepore,5 the majority sought to provide some guidance to the intermediate appellate Courts. In Lepore, the High Court found a school's non-delegable duty of care did not extend to intentional criminal actions. While the issue of vicarious liability was considered in that matter, and a majority of the High Court considered that vicarious liability might be established, there was no clear majority view or formulation of a test or guiding principles.

Consistent with deliberations in Pioneer, the majority of the High Court in Prince Alfred College confirmed that even if a wrongful act is a criminal offence, liability can still attach to the employer. The High Court indicated, however, that whether that liability does attach to the employer, would depend on the individual circumstances of the case and careful consideration of the role the employee had been placed in by the employer, including an assessment of the following issues (described in the decision as "the relevant approach"):

  • Any special role that the employer has assigned to the employee.
  • The position in which the employee is placed vis-à-vis the "victim".
  • Whether the employee's performance of the role gave the "occasion" for the wrongful act, with features such as the authority, power, trust, control and the ability to achieve intimacy with the victim, being "especially important".6

The High Court did not determine the issue of vicarious liability in Prince Alfred College, as it did not have sufficient evidence to do so. However, at least in cases concerning allegations of abuse, the High Court has emphasised that it is not enough that employment provides an employee an opportunity to commit a wrongful act. Something more is required which links the position of the employee and the relationship with the victim. As a result, the approach outlined by the High Court involves focussing on the "special role that the employer has assigned to the employee and the position in which the employee is placed vis-à-vis the victim".7

The decision provides guidance and clarity to the Courts in respect to the relevant approach to determining whether an employer is vicariously liable for the wrongful acts of an employee. The High Court has confirmed that something more than opportunity to commit the act arising from the mere fact of employment is necessary. However, there remains no hard and fast rule for vicarious liability, as each case will turn on its own facts.

Implications for employers and their insurers

Employers should ensure they have checks and balances in place to reduce the opportunity and occasion for employees to engage in wrongful acts. In particular, those checks and balances should be in place where the employee's role provides authority, power, trust, control and/or the ability to achieve intimacy with a "victim". Further, employers should ensure that their policies, procedures and employment contracts prohibit employees from engaging in wrongful acts, and provide clear boundaries on the scope of an employee's authority and role.

In relation to liability insurances, claims arising from fraudulent or criminal acts are usually excluded from cover unless crime insurance has been taken out as part of the entity's liability insurance package. Even where crime cover has been purchased, deliberate acts by employees can sometimes be excluded. Employers should review their liability policies to ensure the definitions and exclusions within their policies do not have the effect of excluding cover for vicarious liability arising in these circumstances.

Insurers are likely to be more interested in receiving a description of the policies and procedures in place to prevent fraudulent and other criminal activity taking place. The work an employer does in reviewing its policies and procedures may reap a secondary benefit in reduced premiums if the insurer is convinced that risk has been reduced. Conversely, those employers perceived as not taking sufficient steps may see premium increases.


1Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd [2016] FCAFC 78.
2Prince Alfred College Incorporated v ADC [2016] HCA 37.
3Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd [2016] FCAFC 78 [67].
4Pioneer Mortgage Services Pty Ltd v Columbus Capital Pty Ltd [2016] FCAFC 78 [72].
5New South Wales v Lepore (2013) CLR 511.
6Prince Alfred College Incorporated v ADC [2016] HCA 37 [81].
7Prince Alfred College Incorporated v ADC [2016] HCA 37 [83].