Duty of Loyalty
September 15, 2020
By: Colin A. Walker
In most states, some employees—regardless of any contractual obligations—owe a duty of loyalty to the employer, which is similar to a fiduciary duty, but not identical. The duty of loyalty includes the duty not to compete against the company, not to solicit employees to leave the company, and the duty to refrain from usurping corporate opportunities. Some of the duties, such as the duty not to misuse trade secrets, continues after the end of the employment relationship, while others, such as the duty not to solicit co-workers (absent a non-solicitation agreement), end upon termination of employment.
Not all employees have a duty of loyalty. Low-level employees, in most cases, do not. C-Level employees almost always do. Whether a particular employee has a duty of loyalty depends on the facts and the law of the jurisdiction. Companies should, however, try to ensure that their C-Level executives have a duty of loyalty by specifically stating that the executive is undertaking a strict duty of loyalty to the company, promises to devote his/her best efforts and experience to the performance of his/her duties, and agrees to give his/her full and complete attention to furthering the company’s business.
In some cases, a C-Level executive may want to have the ability to deviate from a duty of loyalty and, in some cases, that may be appropriate and acceptable to the company. For example, if the C-Level executive holds an important position with a charity, which requires a significant amount of the executive’s time and attention, the executive should disclose this to the company and request a carve-out from the duty of loyalty and contractual obligations to the company. In some cases, this may not significantly impact the executive’s duties to the company. In some cases, the company may see value in work of this sort because it may enhance the company’s reputation or foster valuable business relationships. Another example is an executive who has a side-business that is not competitive with the company. The executive might not be willing to accept the C-Level position unless he/she can continue to participate in the side-business and, with sufficient assurances that the executive will perform his/her duties for the company, the company may agree to this.
As with many issues discussed in this blog, these points are subject to negotiation between the executive and the company. It is important to discuss issues such as these before the employment relationship is formed and reach a clear agreement which is acceptable to both the company and the C-Level executive.