Employer Suing a Disloyal Employee

Faithless Servant Doctrine

The New Jersey Supreme Court in its 2015 decision in Kaye v. Rosefielde confirmed that an employer suing a disloyal employee could recover the compensation paid to the employee during the period of disloyalty, even if the disloyal conduct did not actually damage the employer. The court found that “disgorgement” is an equitable remedy derived from a principle of contract law, that where the employee breaches the duty of loyalty, which is “at the heart of the employment relationship”, the employee may not be entitled to keep the compensation paid by the employer during such breaches. It noted that disgorgement serves a deterrent purpose, letting a disloyal employee know that there is a serious financial consequence.

The Court noted that the following factors should be considered for a claim of disgorgement:

• The employee’s degree of responsibility and level of compensation
• The number of disloyal acts
• The extent to which those acts placed the employer’s business in jeopardy and
• The employee’s degree of planning to undermine the employer.

It clarified that if “an employee has been disloyal during all pay periods, it may order disgorgement of all of the employee’s salary”.

For employers faced with employee disloyalty, pursuing a claim for disgorgement as part of an overall litigation strategy makes good sense and can help make the employer whole.

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