The Duty of Loyalty in the Employment Relationship: Legal Analysis and Recommendations for Employers and Workers

By Cavico, Frank J.; Mujtaba, Bahaudin G. et al. | Journal of Legal, Ethical and Regulatory Issues, January 1, 2018 | Go to article overview

The Duty of Loyalty in the Employment Relationship: Legal Analysis and Recommendations for Employers and Workers


Cavico, Frank J., Mujtaba, Bahaudin G., Muffler, Stephen, Journal of Legal, Ethical and Regulatory Issues


INTRODUCTION

This article examines the duty of loyalty in the employer-employee relationship. The focus is on the duty of the employee to act in a loyal manner while being employed by the employer. This duty of loyalty was created by and principally today based on the common law, that is, judge-made decisions that interpret and apply the duty of loyalty to employment cases and controversies. As such the article analyzes common law decisions which illustrate and explicate this fundamental employment obligation. The article also reviews current legal and management commentary that further explain the duty of loyalty.

After this brief introductory section, the authors state the limitations of this article. Next, the article provides an extensive legal analysis of the topic by initially covering an overview of the duty of loyalty and why it is an integral part of a fiduciary relationship. Next, the authors discuss and supply illustrations for several key factors that the courts cite in determining whether an employee has breached his or her duty of loyalty to the employer, to wit: Whether the employee has engaged in direct or indirect competition against the employer, whether the employee has engaged in competition as opposed to mere business preparation, whether the employee's allegedly disloyal acts were done in secret or known by the employer and the rank of the employee, that is, whether the employee is a high-level executive or managerial employee or merely a rank-and-file employee. Then the authors discuss and illustrate several problem areas that arise in this area of the law, to wit: The employee hiring co-workers, contacting customers and clients of the employer, using and taking customer lists and criticizing his or her employer, including on social media. Next, the authors state and illustrate the remedies available to the employer when the employee breaches the duty of loyalty, including contractual, tort and equitable remedies as well as forfeiture of salary or compensation. We review three related legal doctrines that could impact duty of loyalty situations, to wit: Covenants-not-to-compete which may be found in the employment contract, the tort of intentional interference with contract or contractual or business relations and civil as well as criminal wrong of misappropriation of trade secrets. The next major section of the article is the discussion of the practical and legal implications of the duty of loyalty as explicated by the case law and legal and management commentary. The authors discuss the implications of these legal principles from the perspectives of both the employee and the employer. Next, based on the aforementioned legal analysis and the discussion of implications we supply recommendations to the employee on how to avoid liability pursuant to the duty of loyalty and also to the employer on how to protect its legitimate interests yet without unduly burdening the employees' right to make a livelihood and to better him or herself economically. The article concludes with a brief summary and conclusion followed by a bibliography.

LIMITATIONS

This article focuses on the duty of loyalty as created by the common law, that is, judgemade, case-law decisions. The article consequently does not cover duties of loyalty which are set forth explicitly by statutes, for example, the duty of loyalty imposed on employees pursuant to the federal Computer Fraud and Abuse Act (For example, Tech Systems, Inc. v. Pyles, 2015; Instant Technology, LLC. v. Elizabeth DeFazio, 2014; Dodson, 2012). Also, this article is presented as a general overview of the law for the benefit of employers and employees. As this body of law is state-specific any duty of loyalty controversy that arises in a particular state will have to be resolved by the specific law of that state, especially any pronouncements from the state's highest court-the state supreme court and thus reference to that discrete state corpus of jurisprudence must be made by the parties involved and their legal counsel. …

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