The Necessity of Reference and Background Checks

The Treaty Group Inc. v. Drake International Inc. – Ontario Court of Appeal – June 25, 2007

Both employment agencies and employers need must ensure that they act reasonably towards the hiring of potential employees, otherwise they may be held responsible for any negative actions that the employee causes.

The June 25, 2007 decision by the Ontario Court of Appeal in The Treaty Group Inc. v. Drake International Inc. (2007) 86 O.R. (3d) 366 (“Drake”) provides that both employment agencies and employers must act reasonably in ensuring that an employee is a good “fit” for the employer. Specifically, employment agencies need to ensure that they act reasonably by conducting reference and background checks on potential employees, while employers need to safeguard themselves by reasonably supervising their employees.

In Drake, a placement agency (“agency”) suggested the employment of an employee to a company without checking the employee’s references. The company hired the employee, and she worked for the company for two years before resigning. After the employee resigned, the company became aware of the fact that the employee had been defrauding it. The company sued the employee and obtained a civil judgment against her. Additionally, the company sued the agency for negligence on the basis that the agency did not conduct a reference check or a background check on the employee.

At trial, the Trial Judge found the agency to be liable for the company’s loss. However, the Trial Judge found that the company had contributed to its own losses in failing to sufficiently supervise the employee. Therefore, the Trial Judge found the agency to be responsible for fifty percent of the company’s losses. Additionally, the Trial Judge held that the judgment made against the employee in favour of the company did not bar the company from its action against the agency because of the differences in the claims.

The agency appealed this decision to the Ontario Court of Appeal claiming that the Trial Judge erred in the following manner: by finding that the company could claim against the agency notwithstanding the judgment that was obtained against the employee; by deciding that causation existed on behalf of the agency; and, in appointing damages to the agency.

The Court dismissed the agency’s appeal. It was found that the Trial Judge had not erred on any of the three issues raised by the agency.

Firstly, the Court found the Trial Judge held that “on the facts of this case there was no bar to [the company] commencing an action, unless it had actually received the full amount of the loss, which it had not.”

Secondly, the Court decided that the Trial Judge’s inference that the company would not have hired the employee if the agency had performed the reference check “was a proper one”, therefore indicating that the Trial Judge had committed “no palpable and overriding error in finding that [the agency’s] failure to check references before placing [the employee] in [the company’s] employ caused or contributed to [the company’s] loss.”

Thirdly, the Court commented that “Appellate courts will not interfere unless the verdict is so plainly unreasonable and unjust as to satisfy the court that no jury reviewing the evidence as a whole and acting judicially could have arrived at that conclusion”. Considering this, the Court found that the agency had not satisfied this onus and therefore dismissed the appeal entirely, leaving the appointment of damages as the Trial Judge had decided.

The Court’s decision on Drake is an important reminder to both employment agencies and employers. Employment agencies need to ensure that they have reasonably examined potential employees that they plan to suggest to different companies as a good “fit”. If such reasonable steps are not taken when inquiring into a potential employee, thereby not being able to fully inform employers about the potential employee’s employment background, then agencies could be found partly liable for the employee’s actions.

Similarly, employers should take similar reasonable steps to avoid situations like Drake. Employers should safeguard themselves by asking the employment agency if they performed all of the reasonable background and reference checks. Additionally, employers should perform some of their own background and reference checks to help ensure the potential employee is right for the company, as well as reasonably supervise their employees in order to inhibit unforeseeable negative activity from occurring at the workplace.

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