Employee disloyalty is a problem that has long plagued employers. Employers naturally expect their employees to be faithful, and to always act in the company’s best interests, however this is unfortunately not always the case. Employees sometimes betray the trust placed in them by engaging in acts that are strictly for their own benefit, and contrary to the employer’s best interests.

Stealing often comes to mind when the topic of employee disloyalty is mentioned, however that is far from the only way this problem manifests itself. Another common type of employee disloyalty is when an employee diverts a business opportunity that properly belongs to the employer. For example, a dishonest telephone operator might relay a reservation to her driver-husband rather than put it through the central dispatch system. As another example, a sales representative may secretly form a competing company and start diverting business to his new entity, all while continuing to draw a paycheck from your company.

Many employees think that if they don’t have an employment contract with their employer, they are free to do whatever they want, and that the company has no recourse against them other than to fire them. Not true. Back in the late 1800s New York’s highest court, the Court of Appeals, adopted what is now known as the “Faithless Servant Doctrine.” This doctrine, which has been adopted in full or in part by a number of other states, holds that employees are bound by a duty of loyalty, and must act at all times in good faith and in the best interests of their employer, especially when they are on the clock. Employees found to have engaged in acts of disloyalty may be required by a court to return the compensation they received from the employer during the period they were disloyal.

At first blush this remedy might seem ineffective. After all, the compensation the employee might have to give back is probably insignificant in comparison to the profit the employee realized from his or her misdeeds and the damage the employer sustained as a result. Fortunately for employers, courts also often award damages for economic losses sustained by the employer during the period of disloyalty as well.

Does this mean employees are prohibited from starting up their own businesses, competing or otherwise? Not at all. Under New York’s and most other states’ laws, employees are permitted to start up their own businesses before leaving their employer. However, they must do so on their own time, and they cannot use their current employer’s information or property (such as customer lists, supplies, telephones, computers, etc.).

When an employee has been found to be disloyal, the extent to which a court will apply the Faithless Servant Doctrine, and the remedy that it will impose (such as requiring that compensation be returned, and/or imposing monetary damages) typically depends upon the employee’s rank and title within the company. The higher the offending employee is in the chain of command, or the more authority the employee has within the company, the more likely more significant sanctions will be imposed. Thus, for example, the Faithless Servant Doctrine is more likely to be applied to disloyal conduct on the part of the company’s vice president than a clerk.

A one-time instance of disloyalty that causes little or no damage will typically not invoke the Faithless Servant Doctrine.

It should be pointed out that disloyal conduct that does not rise to the level necessary to invoke the Faithless Servant Doctrine does not leave an employer without any remedies. Even if the employer cannot get back what it paid the employee in wages and/or damages for any harm the employee caused, an employer is under no obligation to continue to employ a disloyal “at-will” employee with whom it has no contract. Even if there is a contract, same will often contain a clause that permits termination where the employee has engaged in faithless or disloyal conduct (e.g., where the employee has stolen, diverted opportunities, competed while still employed, etc.).

While there is no sure-fire way to prevent employee disloyalty, there are ways to discourage it from occurring in the first place. Perhaps the best way of doing so is requiring each and every employee to sign a confidentiality and non-solicitation agreement as a condition of employment. There is absolutely no reason to rely solely upon the Faithless Servant Doctrine when a written agreement can provide far better protection. Another equally important way to prevent employee disloyalty is to be vigilant. You should always be on the lookout for signs that an employee might be engaged in disloyal conduct, such as the sudden and unexplained closing of multiple accounts handled by a certain employee. Likewise, you should always encourage employees to speak up if they notice conduct that seems to be contrary to the company’s best interests. There is after all no more potent antidote to the problem of employee disloyalty than the watchful eyes of loyal staff members.

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Article by Lawrence I. Cohen

Laurence I. Cohen is a partner with Pike, Tuch & Cohen, LLP, a Bellmore, NY-based law firm.

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