Good News for Employers: Requiring an Employee to Pay Back Salary is a Possible Remedy Against Disloyal Employees

On September 22, 2015, the New Jersey Supreme Court held that employers may recoup salary from disloyal and recently terminated employees even when the employer has not suffered any economic loss. In Kaye v. Rosefielde, the defendant, an attorney, was retained as outside counsel in connection with the plaintiff’s management of several timeshare business entities. Rosefielde was later hired as General Counsel and Chief Operating Officer for the company. During his tenure, he participated in six separate instances of serious misconduct including: the misallocation of interests in the formation of a new entity, the creation of a new entity under false pretenses and unbeknownst to Kaye, billing expenses incurred during a personal trip to Las Vegas, and multiple inappropriate sexual advances towards two female employees. Upon discovery of the misconduct, he was terminated and the company sued him alleging that that he was an “unfaithful servant” by willingly aiding and abetting competitors, he breached his fiduciary duty and engaged in civil fraud, legal malpractice and engaged in the unlicensed practice of law.  The company also sought equitable disgorgement, including the return of his salary as well as all payments, profits and disbursements that resulted from his misconduct.

The trial court found that the former employee breached his duty but declined to order disgorgement for the former employee’s compensation during the period of disloyalty.  The Appellate Division affirmed the lower court’s holding that the remedy of disgorgement was not available because the company was unable to prove actual harm.

On appeal, the New Jersey Supreme Court set forth a non-exclusive list of factors that should be analyzed determining whether or not equitable disgorgement of an employee’s salary is an appropriate remedy: (1) the existence of contractual provisions relevant to the employee’s actions; (2) the employer’s knowledge of, or agreement to, the employee’s actions; (3) the status of the employee and his or her relationship to the employer; and (4) the nature of the employee’s conduct and the effect on the employer.

The New Jersey Supreme Court determined that if the trial court finds in favor of the employer, the employer may then be entitled to an apportionment of the employee's compensation but only for the time period of disloyalty; an employer may not be entitled to recover all of the employee’s total wages. In allowing a trial court to grant this type of remedy, the New Jersey Supreme Court suggested it will have a deterring effect on disloyal employees who blatantly disregard their fiduciary duties, particularly those operating in a senior capacity that adverse consequences will follow if they are found to have breached their fiduciary duties.

For more information regarding this decision and to learn if your company may seek the remedy of equitable disgorgement, please contact John C. Petrella, Director of the firm’s Employment Litigation Practice Group at jpetrella@genovaburns.com or Dina M. Mastellone, Esq., Director of the firm’s Human Resources Practice Group, at dmastellone@genovaburns.com or 973-533-0777.