One important employment law principle is that employees owe a duty of loyalty to their employers. This generally means they cannot act contrary to the interest of their current employer. The New Jersey Supreme Court recently explained that an employee who breaches this duty can be required to pay back the salary he received while he was disloyal, even if the breach did not cause the employer any damage. The concept of requiring an employee to pay back his salary based on his misconduct is called “equitable disgorgement.”
Bruce Kaye owned and managed three separate timeshare businesses in New Jersey, Flagship Resort Development Corporation, Atlantic Palace Development, LLC and La Sammana Ventures, LLC. His employee, Alan Rosefielde, is an attorney who served as the Chief Operating Officer and General Counsel for two of those businesses. Mr. Rosefielde’s salary was $500,000 per year.
The trial court ruled that Mr. Rosefielde violated his duty of loyalty to his employers. For example, when he formed a new business to manage the timeshare properties owned by one of Mr. Kaye’s businesses, Mr. Rosefielde gave himself a larger percentage ownership in the new business than he and Mr. Kaye had agreed. Mr. Rosefielde also falsely claimed another new business he formed would manage sales only for one of Mr. Kaye’s businesses, but tricked Mr. Kaye into signing documents authorizing the new company to manage sales for companies all over the world. Mr. Rosefielde’s other misconduct included receiving reimbursement for $4,000 of personal expenses by falsely claiming they were business expenses, directing someone to forge the signatures of defaulting timeshare unit owners who could not be located to transfer their ownership without foreclosure proceedings, and making misrepresentations to an insurance company to provide health insurance to independent contractors working for Mr. Kaye’s businesses.
After Mr. Kaye discovered many of these transgressions he fired Mr. Rosefielde and filed a lawsuit against him.
After a trial, the court found Mr. Rosefielde had committed legal malpractice and fraud. It ordered him to pay $4,000 in damages and over $800,000 in attorney’s fees and costs. It also required him to give up his ownership interests in Mr. Kaye’s businesses. The court further ruled that Mr. Rosefielde had breached his duty of loyalty, finding “[i]t is difficult to imagine the commission by a corporate officer of more egregious conduct.” Nonetheless, it did not grant equitable disgorgement because Mr. Rosefielde’s breach of the duty of loyalty did not cause any actual damages to Mr. Kaye’s businesses.
The Appellate Division reversed portions of the trial court’s ruling, but affirmed the decision denying disgorgement. However, in Kaye v. Rosefielde the New Jersey Supreme Court reversed. It held that the remedy of equitable disgorgement can be available even if the business did not suffer any economic loss as a result of the employee’s disloyalty. But the Court made it clear that disgorgement can apply only to compensation the employee received during pay periods in which he was violating the duty of loyalty.
The Supreme Court indicated that “[w]hen an employee abuses his or her position and breaches the duty of loyalty, he or she fails to meet the employer’s expectation of loyalty in the performance of the job duties for which he or she is paid.” It explained this is true irrespective of whether the employee’s breach of the duty of loyalty caused any economic loss. It concluded that, in determining whether disgorgement should apply, a court should consider, among other things:
- The employee’s level of responsibility with the company;
- The employee’s compensation;
- The number of times the employee acted disloyally;
- The extent to which the disloyal acts placed the business in jeopardy; and
- The degree to which the employee planned out his disloyalty.
The Supreme Court therefore sent the case back to the trial court to apply this new test to determine whether disgorgement is an appropriate remedy for Mr. Rosefielde’s behavior.