Legal Updates

On September 22, 2015, the New Jersey Supreme Court held that when a court determines that an employee breached the duty of loyalty owed to his or her employer, the employer may recover from the employee the amount of his or her salary paid during the periods of disloyalty. In such an instance, the employer does not have to show that the employee’s breach caused the employer to suffer economic damages. 

On September 22, 2015, the New Jersey Supreme Court held that when a court determines that an employee breached the duty of loyalty owed to his or her employer, the employer may recover from the employee the amount of his or her salary paid during the periods of disloyalty. In such an instance, the employer does not have to show that the employee’s breach caused the employer to suffer economic damages. 

In Kaye v. Rosefieldei, the court determined that a chief operating officer (COO) of an Atlantic City company engaged in multiple acts of misconduct and disloyalty during his employment when he forged documents, made misrepresentations on company applications, sought reimbursement for non-business-related expenses, and made inappropriate sexual advances towards other employees.  As a result of these acts of disloyalty, the court found that the COO’s employer may be able to collect from him the amount of compensation it paid him during the times he was acting in a disloyal manner, even though it did not sustain economic damages.

In the court’s opinion, disgorgement is an appropriate remedy because “compensation during a period in which the employee is disloyal is, in effect, unearned.”  As a result of the employee’s betrayal, it is unjust to allow the employee to retain the portion of his or her salary that was paid during the periods of disloyalty.  

The decision serves to warn employees that acts of disloyalty to one’s employer may result in adverse consequences to the employee, regardless of whether those acts cause the employer to lose money.  Moving forward, when an employer files a lawsuit for breach of the duty of loyalty, it may be significantly easier for the employer to recover damages from the employee because there is no requirement to show that the employee’s disloyalty caused the employer economic harm.  

Employers should take this opportunity to revise their employee handbooks and non-compete agreements to emphasize the repercussions of breaching the duty of loyalty.  Please feel free to contact Connell Foley’s employment law attorneys for guidance on drafting and enforcing these policies in light of the Rosefielde decision.