Employees' Duty of Loyalty
Generally, an employee owes a duty of undivided loyalty to his or her employer. Courts take varying approaches to the issue of an employee's duty of loyalty. Some jurisdictions do not acknowledge a separate cause of action for an employee's breach of loyalty unless there is a fiduciary relationship between the employer and the employee. The claim is usually pleaded as a breach of a fiduciary duty. Some jurisdictions recognize a separate claim for an employee's breach of the duty of loyalty but also acknowledge its relationship to a fiduciary breach. A common thread in all jurisdictions is that employees who occupy a position of trust and confidence owe their employers a higher duty of loyalty than lower-level employees. The scope of the duty of loyalty depends on the particular fact circumstances and the nature of the employment relationship.
A claim for breach of the duty of loyalty can encompass misappropriation of property, business opportunities, and trade secrets. The claim can also involve direct competition with an employer's business competitor or rendering substantial assistance to the employer's business competitors. For example, a New Jersey Supreme Court case stands for the proposition that an employee may breach the duty of loyalty if he does not tell the employer of his plans to start up a personal business that could compete with the employer's business. The duty of disclosure increases commensurate with the potential for conflict with the employer's business. Employees may also be vulnerable to breach of loyalty claims if supplemental second jobs interfere with the employer's business.
An employer has the right to be concerned about an employee's personal conflicts of interest and is "not required to retain an employee while awaiting the commission of a tort." Whether an employee's personal activities outside the business justify termination depends on the facts of each case. Courts typically afford some deference to managerial decisions in this regard. For example, the California Court of Appeals upheld an employer's termination of managers who had access to confidential company information and who had taken active steps to establish a business that competed with their employer's business.
The Restatement (Second) of Agency states that an "agent is entitled to no compensation for conduct which is disobedient or which is a breach of his duty of loyalty." The employer may be entitled to legal or equitable relief depending on the facts of the case and the egregiousness of the breach. An agent is also liable for the principal's loss that is caused by a breach of the duty of loyalty. When a breach is established, an employer is entitled to recover any money or profits reaped by the employee or diverted from the employer's business as a result of the breach. The employer has the burden to prove damages to the business and also must establish that those damages were proximately caused by the employee's breach.
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