Is Disloyalty Its Own Reward?

May a disloyal employee keep the compensation his employer paid him, even while he was betraying his employer’s trust? In a recent case, the Connecticut Supreme Court said “yes, at least in some circumstances.”  Here’s the story.

The employee – we’ll call him Bill – worked for a building contractor – we’ll call it W Co. – as the head of a division. After company ownership changed, Bill became dissatisfied with his compensation, and he started moonlighting for another company (a maker and applier of stucco) to which W Co. sometimes subcontracted work, and which sometimes competed with W Co. in bidding for certain jobs.  Bill did estimating for the stucco firm.  Some of the jobs he estimated were jobs on which the two companies competed for bids.

Bill also began demanding cash kickbacks from subcontractors in return for awarding them work. One of the subcontractors reported his demands to Bill’s boss, and Bill was fired.  W Co.  then sued Bill over the kickback scheme, subsequently learned about the moonlighting as well, and added those allegations to the suit.  As damages, W Co. sought an order from the court requiring Bill to forfeit all of the compensation he had earned from both W Co. and the stucco firm during the time that he was disloyal.

Every employee owes his or her employer a fiduciary duty of loyalty. That means the employee must “exercise the utmost good faith, loyalty and honesty toward his … employer [and] act solely for the benefit of the [employer] in matters connected with the agency.”  An employee breaches this duty when s/he competes with the employer during employment, or uses his/her position to obtain material benefits (such as kickbacks) from third parties in connection with transactions undertaken on the employer’s behalf.

There are a variety of remedies available when an employee breaches the duty of loyalty. The employer’s precise damages may be difficult to prove (how can you be sure which jobs you lost, or how much more productive the disloyal employee could have been if s/he hadn’t been spending work time on tasks for your competitor?), but in many cases the employee has been required to disgorge any profit or benefit received as a result of the disloyalty, and/or to forfeit the compensation received during the period of disloyalty.

In Bill’s case, the trial court declined to order Bill to give back the compensation he had been paid by W. Co. The court found that W Co. had not proved that it suffered any actual losses as a result of Bill’s moonlighting, and had not proved many of its allegations about the kickbacks.  Nor was there a showing that Bill performed services for the competitor during hours he was expected to be working for W. Co.  Although W Co. had claimed that Bill should pay it $500,000, the court determined that Bill had received $14,400 in kickbacks, and ordered him to pay that amount to W. Co., tripled for statutory theft.

On appeal, W Co. argued that when an employee breaches the duty of loyalty, forfeiture of compensation is a mandatory remedy.  Why, it asked, should an employee be entitled to keep any compensation he was paid while he was in the course of breaching his duty?  But the Connecticut Supreme Court held that this is a matter that is within the trial court’s equitable discretion to determine.  Every case is different, and the court should consider all of the relevant facts and circumstances, some of which are: the employee’s position and responsibilities; his/her level of compensation; the frequency, timing and egregiousness of the disloyal acts; the extent to which those acts were “willful”; the degree of the employer’s knowledge of the disloyal acts; the actual or potential harm to the employer’s business; and the adequacy of other remedies.  In Bill’s case, the Supreme Court found that the trial court had not abused its discretion in limiting W. Co’s recovery to the proven fruits of the kickback scheme.  The Supreme Court noted that Bill had also made a claim for unpaid compensation, which the trial had denied; thus neither party recovered what it though it was owed.  Perhaps this influenced both Courts’ views of the fairness of the result.

So, if you are an employer betrayed by a disloyal employee, do not assume that you can recover all the compensation you paid during the employee’s bad behavior – you will have to convince the court that forfeiture of compensation is fair under all of the facts and circumstances in your particular situation. And if you are unhappy in your job, think twice before you start moonlighting for a competitor – it could not only cost you your job, but also require you to return compensation you thought you had earned.

The case is Wall Systems v. William Pompa, and you can find a copy here.