Employer Rights When Employees Breach their Duty of Loyalty
- By Your mom
- •
- 18 Aug, 2017
The duty of loyalty is a common law concept whereby employees owe their employer a
certain degree of allegiance by not competing against them while employed, or obtaining
monetary gains that are rightfully those of the employer. The Connecticut Supreme Court
recently reviewed the obligations employees owe their employer, and the damages available
should employees breach their duty. Wall Systems v. Pompa, 324 Conn. 718 (2017).
Here, the plaintiff, William Pompa, while working as an employee for Wall Systems,
secretly worked as an independent contractor for one of its competitors, and took kickbacks from
some of its subcontractors. The employee was fired and litigation ensued. The trial court found
for Wall Systems, and both parties appealed the amount of damages awarded by the court. The
employer argued that it was entitled to greater damages while the employee claimed the award
was excessive.
More specifically, the employer believed it was entitled to recover all wages paid to the
employee during the term of his employment, as well as any monies paid by his competitor to his
employee (forfeiture), and the amount of any kickbacks received (disgorgement). The trial court
disagreed and instead awarded Wall Systems its provable damages. The Supreme Court upheld
the trial court and found that there is no standard measure of damages, and that the trial court has
equitable discretion in awarding relief.
The Supreme Court went on to discuss the duty of loyalty and the range of potential relief
available when it is breached. The general principle is that an agent must act solely for the
benefit of the principal in matters connected to the agency. This includes a duty to not compete
or disclose confidential information. Also, an employee must refrain from acquiring material
benefits from third parties in connection with transactions undertaken on the employer’s behalf,
including secret commissions or kickbacks. An employee can be found to be disloyal even if the
unlawful acts do not depend on the use of an employer’s confidential information. Further, the
scope of the duty varies based on the nature of the relationship. Employees occupying a position
of trust and confidence owe a higher duty than those performing low-level tasks. Also, greater
access to confidential information increases the duty.
Remedies include actual damages suffered by the employer, forfeiture of compensation
paid to an employee during the period of disloyalty, and disgorgement of any amounts received
from third parties related to the disloyalty, even if an employer has not suffered any actual
damages. In making its award, courts are permitted to consider a wide range of factors,
including the employee’s position, duties and degree of responsibility; compensation; the
frequency, timing and egregiousness of the disloyal acts; the effect the acts have on the business;
and the degree of planning undertaken to implement the disloyal acts.
Employers should consider bringing claims for breach of the duty of loyalty when
employees are found to be working against the company’s interests, especially when there are no
non-compete, confidentiality, or other restrictive covenant agreements in place to otherwise
provide protection.
certain degree of allegiance by not competing against them while employed, or obtaining
monetary gains that are rightfully those of the employer. The Connecticut Supreme Court
recently reviewed the obligations employees owe their employer, and the damages available
should employees breach their duty. Wall Systems v. Pompa, 324 Conn. 718 (2017).
Here, the plaintiff, William Pompa, while working as an employee for Wall Systems,
secretly worked as an independent contractor for one of its competitors, and took kickbacks from
some of its subcontractors. The employee was fired and litigation ensued. The trial court found
for Wall Systems, and both parties appealed the amount of damages awarded by the court. The
employer argued that it was entitled to greater damages while the employee claimed the award
was excessive.
More specifically, the employer believed it was entitled to recover all wages paid to the
employee during the term of his employment, as well as any monies paid by his competitor to his
employee (forfeiture), and the amount of any kickbacks received (disgorgement). The trial court
disagreed and instead awarded Wall Systems its provable damages. The Supreme Court upheld
the trial court and found that there is no standard measure of damages, and that the trial court has
equitable discretion in awarding relief.
The Supreme Court went on to discuss the duty of loyalty and the range of potential relief
available when it is breached. The general principle is that an agent must act solely for the
benefit of the principal in matters connected to the agency. This includes a duty to not compete
or disclose confidential information. Also, an employee must refrain from acquiring material
benefits from third parties in connection with transactions undertaken on the employer’s behalf,
including secret commissions or kickbacks. An employee can be found to be disloyal even if the
unlawful acts do not depend on the use of an employer’s confidential information. Further, the
scope of the duty varies based on the nature of the relationship. Employees occupying a position
of trust and confidence owe a higher duty than those performing low-level tasks. Also, greater
access to confidential information increases the duty.
Remedies include actual damages suffered by the employer, forfeiture of compensation
paid to an employee during the period of disloyalty, and disgorgement of any amounts received
from third parties related to the disloyalty, even if an employer has not suffered any actual
damages. In making its award, courts are permitted to consider a wide range of factors,
including the employee’s position, duties and degree of responsibility; compensation; the
frequency, timing and egregiousness of the disloyal acts; the effect the acts have on the business;
and the degree of planning undertaken to implement the disloyal acts.
Employers should consider bringing claims for breach of the duty of loyalty when
employees are found to be working against the company’s interests, especially when there are no
non-compete, confidentiality, or other restrictive covenant agreements in place to otherwise
provide protection.
