Most employers share a concern that employees may be disloyal.

Disloyalty of course spans a wide spectrum, from merely intentionally

failing to perform tasks, accepting benefits personally that rightfully

belongs to the employer, to dishonesty and theft. Disloyalty can also

follow an employee who leaves the employer's employment taking with him as

much business as he can along with what the employer considers proprietary

and confidential information.

What then can an employer do to guard against this possibility?



First let's review what consequences a disloyal employee can expect.

Federal courts apply what they believe to be the law of the state as

annunciated by the states highest court. A Federal Court in New York court

therefore found itself addressing what it believes is the law in New York.

The facts of the case [Phansalkar v Andersen Weinroth & Co., LP] need not

be reviewed.

The court held that New York's faithless servant doctrine requires an

employee to forfeit all compensation received after his first disloyal act.

New York's law regarding the disloyal or faithless employee is grounded on

the law of agency. An agent is obligated to be loyal to his employer and

prohibited from acting in any manner inconsistent with his agency or trust

and is at all times bound to exercise the utmost good faith and loyalty in

the performance of his duties. This covers salaried as well as commission

employees. The employer is entitled to return of salary, compensation or

commission paid, and it does not matter that the services were beneficial

to the employer or that the employer suffered no provable damages as a

result of the breach of fidelity by the agent employee.

New York's policy developed over a century ago. The first decision held

that a disloyal employee forfeits promised compensation only when the

misconduct and unfaithfulness substantially violates the contract of

service and permeates the employee's service in its most material and

substantial part. Disloyalty would not be substantial where it was a single

act or where the employer knew of or tolerated the behavior. Later a second

standard developed, where the agent employee was said to owe the highest

good faith duty to the employer, and if he acts adversely in any part of

the transaction, or omits to disclose any interest which would naturally

influence his conduct in dealing with the subject of the employment, it

amounts to such fraud upon the employer as to forfeit any right to

compensation for services.

Thus, the Second Circuit concludes that New York maintains a strict rule

against limiting a faithless servants forfeiture, and misconduct by an

employee that rises to the level of a breach of duty of loyalty or good

faith is sufficient to warrant forfeiture. The law is clear that an

employee is prohibited from acting in any manner inconsistent with his

agency or trust.






Absent an agreement from the employer, an employee who makes a profit or

receives a benefit in connection with transactions conducted by him on

behalf of his employer is under a duty to give such profit or benefit to

his employer, whether or not is was received by the employee in violation

of his duty of loyalty.

There is an exception to total forfeiture.

Forfeiture may be limited to the time of the disloyalty where compensation

is apportioned, meaning that the employee is paid on a task by task basis,

commission basis, engaged in no misconduct at all with respect to certain

tasks, and the disloyalty with respect to other tasks did not taint or

interfere with the completion of the tasks as to which the employee was

loyal. In such case the disloyal employee would forfeit only the

compensation earned in connection with the specific task as to which he was



Things you should be doing as an employer.

You should be using employment contracts. I offer a standard form where you

can fill in the duties and compensation. The contract clearly spells out

that the employee is not permitted to compete or have outside business

interests. The contract identifies confidential and proprietary information

and contains a restrictive covenant, non compete agreement for both during

and after employment. Certainly all salespeople and key personnel should

sign an employment contract. The contract will serve to better define the

employee's duties and your expectations, and specify prohibited conduct,

the violation of which would be considered disloyal. You can order the

contract from my web site at

Regarding the enforcement of the restrictive non compete provision, always

an interesting topic, that is beyond the scope of this article. However,

the inclusion of such provision will give your employee, or ex-employee,

more than a moment of pause, before violating it, and courts will generally

enforce the provision to the extent of protecting the employer's legitimate

business interests.