Sometimes it happens that an employee turns on his employer and bites the hand that feeds him. This can involve going into competition with the employer, theft, or engaging in other kinds of underhanded conduct.
Kaye v. Rosefielde, recently decided by the NJ Supreme Court, just took us into new territory in breach of loyalty cases, holding that an employer may be able to recover the compensation paid to a disloyal employee, but only for the period of time that he was actually disloyal.
Kaye builds upon the Court's 1997 opinion in Cameco v. Geddicke. Cameco holds that a disloyal employee may be liable to his employer for a variety of monetary remedies:
Generally, to recover money damages, the employer must establish that the employee's breach proximately caused the requested damages. In the present case . . . . the record does not establish that Gedicke's alleged breach caused Camecoto suffer any money damages. Finally, in addition to more traditional damages, an employer may seek forfeiture of its employee's compensation. As with other aspects of breach-of-duty cases, the facts color an employer's right to recoup compensation.
And that is pretty much where things stood on this subject for 18 years. Then along came Kaye.
The defendant's disloyal conduct was rather egregious, as is summarized in the Court's opinion. The trial court awarded a variety of remedies to the plaintiff, but rejected his request that the court require the defendant to disgorge is compensation, largely because the plaintiff did not prove that the defendant had actually caused any damage.
The Supreme Court made clear that disgorgement was a proper remedy in this case, and that proof of actual harm is not required. Consistent with Cameco, just as a trial court must balance a variety of factors to determine whether a breach of loyalty has been committed, so too it must balance equitable factors to decide whether disgorgement is an appropriate remedy, and if so, in what amount. What seems to be clear is that when a good employee turns bad the employer can recover the employee's compensation only for the period of “badness.” (If you care to, turn to another eminent jurist, Judge Smails of Caddyshack, for a discussion of badness.)
There are no bright lines here, but employees (especially highly placed ones) who are thinking of stealing from their employer or engaging in other misconduct, should consider the fact that they may have to give back their pay, in addition to risk other penalties. The best advice for employers who think they have been the victim of foul play is to consult as quickly as possible with their friendly neighborhood employment lawyer.