The “faithless servant doctrine” may sound old-fashioned, but it can be a powerful tool for employers that are the victims of disloyal employees. This 19th century remedy allows companies to get back the salary and other compensation paid to the bad apple. Why? The courts have reasoned that the wrongdoer didn’t really “earn” that compensation.
A unanimous state supreme court recently ruled that an employer can recover the salary of an employee who breaches his duty of loyalty to the employer. Here’s what happened.
Alan Rosefielde was hired to act as Chief Operating Officer for three related companies that sold and managed timeshares at vacation spots on the Jersey Shore, at the hefty salary of $500,000. Over the next two years, Rosefielde committed serious misconduct by, among other things: giving himself a 10% interest in one of the three companies, when it should have gone to another employee; hoodwinking the companies’ principal by telling him that the signature page he was executing was for a trust for the owner’s son, instead of an agreement giving Rosefielde a 10% management fee on top of his salary; lying to an insurance company by telling it that independent sales reps were employees, so they could be put on the health insurance plan; billing his employer for trip to Las Vegas where he did no business, but rather stayed in a hotel suite with three women who were adult film stars; forging signatures on quitclaim deeds from timeshare owners who had defaulted on payments; and, making sexual advances to two female subordinates. When Rosefielde’s misconduct was discovered, he was fired.
The employer then sued Rosefielde, alleging claims for breach of the duty of loyalty and seeking to recover the salary it had paid Rosefielde, also referred to as the remedy of equitable disgorgement. In a unanimous opinion, the New Jersey Supreme Court ruled in favor of the employer, explaining that when an employee abuses his position, he fails to meet the employer’s legitimate expectation of loyalty in the performance of the job duties for which he is paid. The justices also noted that disgorgement has the valuable deterrent effect of telling employees that there can be severe consequences for breaching of their duty of loyalty, and clarified that disgorgement of a disloyal employee’s salary should be limited to the period during which the employee breached the duty of loyalty. Kaye v. Rosefielde, N.J. (Sep. 22, 2015)
What this case means to you:
In appropriate situations, disgorgement can be a powerful remedy for a deceived employer. Disloyal employees are now on notice that forfeiture of their prior compensation is fair game for their employers.
Information here is correct at the time it is posted. Case decisions cited here may be reversed. Please do not rely on this information without consulting an attorney first.