Moonlighting Created a Serious Conflict of Interest

A Canada Revenue Agency employee’s moonlighting activities constituted a serious conflict of interest and, along with his subsequent insubordination, gave the employer sufficient cause to terminate the employee, the Public Service Labour Relations and Employment Board recently confirmed in Cavanagh v Canada Revenue Agency.

Facts of the case

Sean Cavanagh worked as a business valuator at the Canada Revenue Agency. As a chartered accountant (CA), a chartered business valuator (CBV) and a certified financial analyst (CFA), he was a member of the professional organizations governing all three professions and was subject to their respective rules and guidelines of professional conduct.

On February 16, 1999, in compliance with the CRA’s Conflict of Interest Policy and his governing boards, Cavanagh disclosed and filed a confidential report that as a CFA he might be involved in some outside activities that could give rise to a real or potential conflict of interest. At the time, he claimed he was not actually doing any of the things he listed as being “outside activities” but it was important to list anything he could be doing.

Normally, the report should have been reviewed by the director of the Toronto Centre Tax Services Offices (TSO) in order to determine whether the outside activity did not raise a conflict of interest or whether it had to be ceased or modified. However, the report was misfiled and was not discovered until June 2003. At that point, Cavanagh was asked by the current TSO director for clarification as to what exactly he was doing in his outside activities.

And so the story began…

Cavanagh’s first response was made on July 3, 2003, as follows:

“In general terms, I could be working on valuing shares, business interests and assets both tangible and intangible. I am a Chartered Accountant and Chartered Business Valuator and this profession extends far beyond CCRA and tax related issues. Actually, a CBV does not get involved in tax-related matters in most instances.

“Where I would be found to practice the profession would be in matters that involve matrimonial disputes where net family property has to be determined. I could be involved in bankruptcy proceedings that require corporate assets to be valued for liquidation. Cash-flow analysis for debt financing and refinancing. Inventory analysis, management and valuation involves the accuracy of reporting inventory amounts. Assistance in compliance with non-tax regulatory issues such as stock exchanges is also a function. The drafting of partnership, shareholder and other contractual agreements involve valuators. Valuing of business interests for sale or purchase.

“There is a myriad of activities that have no relation to tax or the interest of the CCRA that require the expertise I am qualified to offer. The above should provide a general overview that gives you a feel for the activities available that are not in conflict with my employment contract at CCRA.”

It depends what ‘could’ or ‘might’ mean

Cavanagh “emphasized that the fact that he ‘could’ do some of the activities he listed did not mean that he was actually doing them, at least at that time. He maintained that he listed activities that he ‘could’ or ‘might’ have been doing not because he was actually doing them but because his professional code of conduct as a CA, CFA or CBV required him to provide that type of disclosure.”

By 2003, Cavanagh’s outside activities had become substantial enough to require that they be conducted under a corporate umbrella, FS Capital Corporation (FSC), and have a website. He admitted to being a principal in the company but claimed that it was “just a title for one of the bosses,” none of whom he identified. He maintained and insisted that all the work he had listed and was doing was not tax-related.

After some back and forth, the director wrote to Cavanagh on November 5, 2003, and advised him that she had concluded that his outside activities had the potential for placing demands which could be inconsistent with his official duties and responsibilities, or could call into question his capacity to perform his official duties and responsibilities in an objective manner. To that end, she directed him to cease his outside activities by January 1, 2004. She required written confirmation that he had done so, and noted that a failure to comply on his part could result in discipline, up to and including termination.

One would think that this would be the end of the story. However, Cavanagh did not stop. The questions and answers continued for years and Cavanagh continued with his outside activities. In fact, at one point the director was replaced by another one, who continued the questions and continued demanding that Cavanagh stop these outside activities. Cavanagh had his name on websites and was clearly promoting himself performing these outside activities.

Cease and desist – or delay

By October 20, 2006, the director wrote to Cavanagh stating:

“This letter will serve as your final direction to cease these activities immediately and provide me with a written statement by October 27, 2006, confirming that you have done so. Failure to comply with this directive may result in administrative or disciplinary action up to and including termination”

But Cavanagh kept arguing, as noted by the board:

“That quote is representative of the grievor’s response throughout to the employer’s concerns. He provided information concerning his outside activities and then argued with or dismissed the employer’s decision that there was a real or potential conflict of interest. He refused to follow clear directions to cease the activity, arguing that such directions were confusing, lacked clarity or were incorrect because in his opinion, there was no conflict. Rather than follow the rule of ‘work now, grieve later,’ he failed to comply and then tried to negotiate a compromise that suited his purpose.”

This went on.

Progressive discipline

It was not until February 22, 2007, that Cavanagh was disciplined with a 10-day suspension without pay. The letter to Cavanagh indicated that he had been directed to cease his outside activities on the grounds that they constituted a conflict of interest. It also noted that a subsequent investigation had revealed that he had continued to engage in the outside activities.

However, Cavanagh continued to refuse to provide confirmation that he had stopped the activities. Eventually, the director advised that he was prepared to give Cavanagh until March 30 to reconsider his position and to confirm by that date that he would cease and desist his outside activities; failing to do so would constitute grounds for disciplinary action. Although some efforts were made to try to resolve the matter, they were unsuccessful.

On March 5, 2008 Cavanagh was suspended again without pay for 20 days, citing the numerous directions to cease and desist the outside activities and the refusal to do so. The letter concluded by stating that the director expected a written response on or before May 2, 2008, confirming the outside activities had stopped, and that if he did not receive such a response by that date, he would consider Cavanagh to remain in a conflict of interest situation and committing an act of insubordination warranting discipline up to and including termination.

On April 30, 2008, Cavanagh emailed the director and confirmed that he was not employed as a business valuator and he would not accept any employment as a business valuator while employed with the CRA.

Shut down the shell game

However, on May 1, 2008, the director responded and noted that his letter of April 24 had also directed him to shut down his website.

On May 6, 2008, Cavanagh emailed the director and apologized for the delay in response, citing he had back pain, and the pain medicine prevented him from being as attentive as possible. He continued to argue, asking

“On what basis do you have the authority to make me shut down the website.”

The director had to ask more than once for Cavanagh to shut down his business website. Cavanagh responded by saying he was surprised to receive this type of correspondence and that he was puzzled by the demands for information about his outside activities over the past two years. He also said he was scheduled for back surgery.

It was not until June 17, 2008, that Cavanagh received a letter terminating his employment because of the numerous issues involving his outside activities, the decisions that they constituted a conflict of interest with his duties at the CRA, and his repeated failure to comply with the cease-and-desist directions that had been given to him.

In response, Cavanagh brought grievances contesting each of these suspensions as well as the termination.

The CRA insisted that all three disciplinary actions involved Cavanagh performing outside work that was a conflict of interest, and his refusal to stop regardless of the several directions he received to cease and desist.

According to the board, it was unclear as to just what exactly he was doing during the period from 1999 to 2008 and when he did whatever it was he did.

“If this sounds confusing, it is because it was. The best I could make of the grievor’s testimony, both in direct examination and in cross-examination, was that a client would contract with the FSC (that is, Mr. Cavanagh, as principal) to provide one or more of the services being offered under its umbrella. The company (that is, Mr. Cavanagh) would then subcontract the service to—and ultimately pay—someone to perform the service in question. The stable of contractors (assuming there was more than one) would include Mr. Cavanagh.”

Decision

The adjudicator found that the CRA was fully justified in its concerns about Cavanagh’s outside activities and it was legitimate to view them as giving rise to both potential and apparent conflicts of interest. The CRA was entitled to direct Cavanagh to cease and desist the outside activities.

Cavanagh’s refusal to follow the direction constituted insubordination. A finding of insubordination required proof of four things:

• That the employer gave an order
• That the order was clearly communicated to the employee
• That the person giving the order had proper authority to do so, and
• That the grievor did not comply on at least one occasion

In this case, those conditions were met. Given that there was repeated insubordination, discipline was warranted. Both suspensions were appropriate. Given the prolonged and repeated refusals to comply with directions, it was necessary to provide a response in a progressive manner (10 days and 20 days).

As for the termination, in the arbitrator’s opinion it was appropriate. Given the five-year history of refusals and repeated opportunities to provide clarification of the outside activities, and failures to comply with the orders to cease and desist, the termination was justified.

Consequently, the grievances were all dismissed.

Note that an application for judicial review of this case is pending before the Federal Court of Canada (Court File T-295-15).

What can we take from this case?

Outside employment, otherwise known as “moonlighting,” presents a challenge to human resource professionals and employers, who worry—often legitimately as shown here—that moonlighting will lead to divided allegiance, time theft, conflicts of interest and poor job performance.

The main reason employees moonlight is to supplement income. For some, moonlighting is the only way to make ends meet.

Where an employee is moonlighting explicitly to augment her or his salary, employers may have substantial challenges on their hands, whether or not the second job is a conflict of interest. Is the employee’s salary sufficient to cover the costs of living? Does the employee have personal issues that are draining her or his income, like an addiction to alcohol, drugs or gambling? What about family issues like child support or health care not covered by the company benefits plan? Does the employee have substantial debt or trouble maintaining finances?

Employers will have to step carefully to address any of these issues, as they will risk invading the employee’s privacy. However, implementing a blanket prohibition on moonlighting could lead an employee to claim discrimination based on various human rights grounds, such as disability, family status or social condition.

Employers should consider restricting or curtailing moonlighting by identifying and evaluating specific employment settings and business-related concerns. These may include working for a competitor; industry sector; trade secrets or confidential or proprietary business information; image and reputation; normally scheduled work hours; size of the company, nature of employee relationships; agent of the company; solicitation, sales and marketing; compensation, work resources, equipment and benefits; and job performance; among others.

Once identified, the employer should address these concerns in a policy that is clearly communicated to employees and enforced in a uniform and consistent manner.

Employers should perform this analysis to determine whether an employee’s conduct or second job is tied to the employer’s legitimate business interest before acting to prohibit moonlighting. This prohibition should never be based on assumptions.

It’s also recommended to put a process in place so that employees know the need for disclosure and obtaining approval before they can accept or engage in outside work that may pose a conflict of interest.

As can be seen from this case, employers who find themselves in this type of situation and want to enforce their clearly communicated moonlighting policy are encouraged to:

• Document all communications with the particular employee
• Ensure the directions provided are clear, that there was authority to provide the directions, and the employee did not comply with the directions before acting
• Record all evidence, including issues with an employee advertising a conflicting business, so that it can be provided at a hearing
• Listen to the employee’s explanations for non-compliance with the policy and directions and provide a chance and period of time for the employee to comply with the directions
• In cases where an employee does not correct her or his non-compliance, use progressive discipline up to termination; document the use of progressive discipline with written warnings

In short, communicate clearly; be fair and objective; avoid assumptions; record everything; implement and apply good policy; and good luck!