Focus on Risk Management: Part 1

Whether you're a fan or not: side-hustle culture is here to stay. The prevalence of potential conflicts of interest and problems relating to protecting confidential information has been growing with the rising popularity of this new approach to a small business on the side. Clearly defining the parameters for both businesses and their employees is the key to successfully managing risk in the side-hustle era.

The Risks

It's not an uncommon occurrence, and particularly with the rising cost of living, more and more Canadians are starting side-hustles. The proliferation of this new approach to starting a small business is popular way to both make ends meet and strive for success that can have many benefits, but also has potential downsides, too.

In recent news, the Government of Canada faced challenges on this front with the widely reported discovery that the CEO of Dalian Enterprises, which received approximately $7.9 million for its work on the ArriveCan app, was also an employee of the Department of National Defence. 1 An investigation is currently ongoing. This is not the first time (and will not be the last) that an employee has been caught in what appears to be a conflict because of a side-hustle.

The risks and potential consequences are even greater if an employee in a conflict of interest because of a side-hustle is also a found to be a fiduciary at a primary employer. For example, in Canadian National Railway Company v Holmes et al, 2 Canadian National Railway Company's ("CN") CEO received an anonymous letter advising that an employee, Chris Holmes, was causing CN to enter into contracts with his companies. In his role with CN, Mr. Holmes had the authority to hire contractors and approve invoices. While still employed with CN, Mr. Holmes created several corporations, which he then caused CN to hire using the authority that he had in his employment role. He did not disclose to CN that he was involved with the companies. CN commenced litigation against Mr. Holmes, who (along with his companies) was found to be liable to CN for breach of fiduciary duty, breach of contract, breach of confidence, and deceit. 3 Mr. Holmes' spouse, who was a director of the companies, was also found liable for conspiracy. 4 The Court noted, "It is no answer for Holmes to say that CN suffered no damage because it would have had to pay more elsewhere for the wrk Holmes and his companies performed..." 5

Preventing Problems

On the business side, while large institutions and organizations often have policies and procedures to address conflicts of interest and confidentiality (among other considerations), many start-ups, as well as small and medium-sized businesses, do not have the same protective measures in place. A comprehensive approach to prevention, including policies, procedures, and team training, can help to both prevent problems from arising and create parameters for addressing issues when they do occur.

From an employee perspective, it's important to know that the side-hustle that an owner is putting their hard work and limited free time into is not only viable, but also not potentially put at risk through a conflict of interest or other issue which may arise with their primary employer. A review of the side-hustle's scope and procedures as they relate to the owner's primary employment can help ensure a safer future for the small business.

Why Have Policies and Procedures?

While an employee manual or code of conduct might not always be the most exciting topic, they are important documents that every business, no matter how large or small, should have. When tailored for a business' specific needs, these policies, procedures, and best practices help to achieve one or more of the following goals:

    managing potential liabilities and exposure;
  • preventing potential problems, such as reputational risk and civil claims;
  • establishing a culture of transparency and compliance;
  • improving compliance practices by identifying and understanding potential misconduct;
  • setting expectations for employees, contractors, business units, and teams; and,
  • establishing processes and procedures to avoid common pitfalls.

    • Conclusion

    Policies and procedures to address side-hustles, potential conflicts of interest, preservation of confidentiality, protection of confidential information, and other important business considerations can help mitigate potential risks and are essential tools for an effective approach to risk management. They provide businesses of all sizes with peace of mind to address potential issues before they become real problems. With the right roadmap, a bespoke set of policies and procedures create a foundation for the future.

    Footnotes

    1 CTV News, DND suspends contracts with ArriveCan contractor after learning CEO is a DND employee, February 28, 2024, available at: https://www.ctvnews.ca/politics/dnd-suspends-contracts-with-arrivecan-contractor-after-learning-ceo-is-a-dnd-employee-1.6788617.

    2 Canadian National Railway Company v Holmes et al, 2022 ONSC 1682.

    3 Canadian National Railway Company v Holmes et al, 2022 ONSC 1682 at para 11.

    4 Ms. Flynn's attempt to appeal the decision was dismissed by the Ontario Court of Appeal: Canadian National Railway Company v Holmes, 2023 ONCA 800.

    5 Canadian National Railway Company v Holmes et al, 2022 ONSC 1682 at para 12.

    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.

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