Breach of Fiduciary Duty in Employment Cases
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Generally the relationship between an employee and employer is one of at-will employment. In the absence of an employment contract that says otherwise, both parties are free to terminate the relationship for any lawful reason.
There are some situations, however, where either the employer or the employee owes the other party a heightened duty. This is known as a fiduciary duty or duty of loyalty. It is important for both parties to understand the nature and the limits of this duty. An Employee's Duty to the EmployerThere are certain obligations all employees have to their employers. They have a duty, for example, not to use or disclose the employer's trade secrets. All employees have a duty to exercise reasonable care in matters connected to their employment. If an employee's ordinary negligence causes damage to the employer's property, they may be subject to civil liability for that damage.
Absent an additional duty of loyalty or a non compete agreement, employees are generally free to make plans while on the job to take a competing job. If they do not have an agreement prohibiting this, they are also free to make plans with co-workers to leave together. Employees may owe a duty of loyalty to their employer if they are in a position of trust and confidence on the job. This is sometimes referred to as a duty of good faith, a duty of loyalty, or a fiduciary duty. The result is the same regardless of the term applied. If an employee is in a position that gives rise to a duty of loyalty or a fiduciary duty, he may be limited in his freedom to plan to compete with his employer. Unless you have a non compete agreement, this duty does not prevent you from working for a competitor. It does, however, limit what you can do on your current employer's time and premises before you give notice. It also may prohibit you from trying to get others to leave with you. There is not a bright line test to determine which employees have a heightened duty to their employers. Generally, courts have held that lower level workers who do not have access to decision-making and high-level information do not have this duty. An executive most likely does. That leaves a large number of employees between those two markers. If you are not clearly a "rank and file" employee or an executive, you may want to consult with an employment attorney if you are thinking of leaving to start a competing business or to work for a competitor. |
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An Employer's Duty to Employees
In the employment context, there is generally not a fiduciary duty running from the employer to the employee. One exception to this general rule is where the employee is also a shareholder in a closely held corporation or a partner in a partnership.
This duty is not created by the employment relationship, but by the fiduciary duties owed by all partners and shareholders in closely held companies. Because the ownership interest in these entities is not freely traded like a public stock, the owners are held to a higher standard of behavior to one another.
This can get complicated in the employment context. On the one hand, the employment relationship is at will and the employer has wide freedom to make decisions about employees. On the other, if the employee is also a shareholder, the other owners owe him or her a duty of utmost good faith and honesty.
A decision to terminate an employee-shareholder's employment can sometimes be a breach of fiduciary duty. A management decision that restricts or reduces an employee-shareholder's ultimate compensation may also amount to a breach of this duty.
If you have employees with ownership interests in your business, you need to take extra care when making a decision to discipline or terminate that employee. Similar caution is advisable when changing that employee's compensation structure if the change is not to their advantage.
This duty is not created by the employment relationship, but by the fiduciary duties owed by all partners and shareholders in closely held companies. Because the ownership interest in these entities is not freely traded like a public stock, the owners are held to a higher standard of behavior to one another.
This can get complicated in the employment context. On the one hand, the employment relationship is at will and the employer has wide freedom to make decisions about employees. On the other, if the employee is also a shareholder, the other owners owe him or her a duty of utmost good faith and honesty.
A decision to terminate an employee-shareholder's employment can sometimes be a breach of fiduciary duty. A management decision that restricts or reduces an employee-shareholder's ultimate compensation may also amount to a breach of this duty.
If you have employees with ownership interests in your business, you need to take extra care when making a decision to discipline or terminate that employee. Similar caution is advisable when changing that employee's compensation structure if the change is not to their advantage.
Common Law Duties and Employment Contracts
Massachusetts courts have held that people can define and even narrow their common law fiduciary duties by contract. If you have an employment contract that specifies how and when the company can buy back your shares, you likely will not have fiduciary duty claims if the company acts in accordance with the agreement.
If your contract does not specifically allow a certain action, however, you may still have claims based on the fiduciary relationship. Consider the following examples.
If your contract does not specifically allow a certain action, however, you may still have claims based on the fiduciary relationship. Consider the following examples.
- An employment contract allows termination for cause, and defines the things that amount to "cause" under the contract. The employer terminates a shareholder-employee for one of the things defined as "cause." Assuming the cause was something that actually happened, it is unlikely that employee can maintain a breach of fiduciary duty claim against the other owners for their termination.
- Another example is where the employment agreement does not contain a termination provision, and the shareholder-employee is terminated without a reason or for a reason that does not withstand scrutiny. In this case, the contract itself would not bar a fiduciary duty claim.
How We Can Help
We can help you review your situation and assess whether you may have a fiduciary duty or whether someone has breached a fiduciary duty owed to you. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
