Recently, the New Jersey Supreme Court decided an important case that further protects employers from disloyal or “faithless” employees. The central issue in Kaye v. Roseflelde is whether “a Court may order the equitable remedy of disgorgement of an employee’s compensation when the employee has breached their duty of loyalty to the employer, but the employer had not sustained any economic loss.” The Kaye decision is an extension of Cameco Inc. v. Gedicke, 157 N.J. 504(1999), which allowed Courts to disgorge (or give back) compensation earned if the employee caused their employer to suffer damages.
The facts of Kaye are fairly simple and straightforward. Kaye hired his former attorney, Mr. Roseflelde, to work directly for his timeshare companies. During the course of a twenty-plus day trial, Kaye was able to demonstrate that Mr. Roseflelde committed many serious acts of misconduct during working hours when he acted on his own behalf instead of his employer’s best interests.
Moreover, the trial court found that Mr. Roseflelde’s breach of fiduciary duties exposed his employer to potential liability. For example, the trial court found that Mr. Roseflelde:
- Forged documents;
- Made misrepresentations on insurance applications;
- Sexually harassed other employees; and,
- Used company funds for a personal trip.
In other words, the court found Mr. Roseflelde to be a “faithless servant.”
Employees owe their employers certain “fiduciary duties.” During the course of their employment, these duties mean that an employee must not act contrary to their employer’s interest.
The New Jersey Supreme Court held “depending on the facts of the case, an employee’s breach of the duty of loyalty can give rise to either equitable or legal relief.” Moreover, the Court held equitable discretion is not governed by fixed principles and definite rules. Rather, “implicit in the exercise of equitable discretion is conscientious judgment directed by law and reason and looking to a just result.”
Based upon the same, the New Jersey Supreme Court held that “the equitable remedy of disgorgement is derived from a principle of contract law: if the employee breaches the duty of loyalty at the heart of the employment relationship, he or she may be compelled to forgo the compensation earned during the period of disloyalty. The remedy is substantially rooted in the notion that compensation during a period in which the employee is disloyal is, in effect, unearned.”
The Kaye decision is extremely important on many levels. First, it broadens trial court’s discretion in using disgorgement to rectify disloyal, dishonest, and faithless employees. Moreover, it sets forth a well-reasoned, historical overview of fiduciary duties employees owe to their employers. Finally, it empowers trial courts to use their equitable powers to come up with fair and reasonable remedies to address issues brought before them.