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
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 www.alarmcontracts.com.
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