Tuesday, September 27, 2016

Do mere employees owe their employers a duty of loyalty?

In short, yes, mere employees do owe a certain degree of loyalty to their employer.  Illinois is an “at-will” employment state.  This means that an employer or employee can terminate their employment relationship at any time, without any reason (except an illegal reason), with or without notice.  Independent of any contractual or statutory provisions, the rule in Illinois is that an employment relationship at will can be terminated for ‘a good cause, a bad reason, or no reason at all.” Hogge v. Champion Laboratories, Inc., 190 Ill.App.3d 620,629, 137 Ill.Dec. 912,917, 546 N.E.2d 1025 (1989).  Although Illinois has a rather lenient standard for termination or resignation of employment, Illinois law does impose certain (fiduciary) duties on employees that protect the rights of employers.  Employees are required to conduct themselves lawfully while employed and when considering new employment.

While acting as an agent or employee of another, one owes the duty of fidelity and loyalty.  There has been debate whether mere employees (non-officers) owe such duties to their employer.  Illinois courts have held that employees can be held liable for breach of fiduciary duties, however they are held to a different standard for fiduciary duties than corporate officers.  Aurora Internal med., Ltd. v. Moore, 2011 Ill.App. Unpub. LEXIS 2614 at 69Generally, an employee owes a duty to their employer not to directly compete with their employer while still employed.  Under Illinois law, the duty of loyalty requires that an employee act solely for the benefit of the employer in all matters related to their employment.  That said, employees are not prohibited from ever competing with their employer. You cannot prohibit competition in a free economy and doing such would contradict the “American Dream.” An employee’s duty of loyalty, however, restricts the extent of their competitive activities prior to their resignation.

In Illinois, the timing of an employee’s arguably competitive behavior is important.  Exhibit Works Inc. v. Inspired Exhibits, Inc., 2005 U.S. Dist. LEXIS 34909 at 7.  Absent a restrictive covenant (an agreement in an employment contract not to do certain things, usually an agreement not to compete), an employee does have a right to enter into competition with their former employer immediately upon leaving such employer.  Radiac Abrasives, Inc. v. Diamond Technology, Inc., 177 Ill.App.3d 628,637-638, 126 Ill.Dec. 743,748, 532 N.E.2d 428 (1988).  An employee may even go so far as to form a rival corporation and outfit it for business while still employed by the prospective competitor.  An employee crosses the line when they begin to take certain actions that directly compete with their employer’s business.  Illinois has adopted the “preliminary stage doctrine” which permits an employee to plan, form and outfit a competing corporation while still working for the employer so long as he does not commence competition.  Lawter Int’l, Inc. v. Carroll, 451 N.E.2d 1338,1349 (Ill.App.Ct. 1983).  It’s when activities extend beyond the “preliminary” planning activities and the employee commences business as a rival while still employed that courts find a breach of duty of loyalty has occurred. Id.

So what happens when you realize your employee (or former employee) has been forming a competing business or moving to a competing company while still employed by you? If an employee takes active steps to compete with their employer prior to their resignation you may have a claim for a breach of duty of loyalty.  Examples of active steps, or activities that extend beyond preliminary activities, include:

  • Diverting potential clients to a competing business;
  • Competing with their employer while still employed by that employer;
  • Taking their employer’s customer lists for their own use (Courts have held that lists of customers compiled in the course of business are valuable assets and protected against improper use by employees who have gained knowledge of them by virtue of their employment);
  • Soliciting fellow employees to join new employer; and
  • Taking employer’s property or information (including trade secrets) for their own benefit or benefit of their new employer.

Keep in mind that employees are permitted to engage in preliminary activities such as:

  • Purchasing equipment, machinery, uniforms and other supplies for their new position or company
  • Creating letterheads, business cards or business plans for their new position or company (courts have even gone so far as to hold that creating these documents on their former employer’s computers did not rise to the level of a breach of duty)
  • Obtaining trademark registration; and
  • Incorporating their competing business.
If you believe your employee has breached their duty of loyalty you may be entitled to certain remedies. In order to state a claim for breach of fiduciary duty you must allege that: 1) a fiduciary duty exists; 2) the fiduciary duty was breached and 3) such breach proximately caused your damages. If you are successful with your breach of fiduciary duty claim, you may be entitled to the following:

  • Money damages, including lost profits and punitive damages;
  • The right to withhold the employee’s unpaid commissions;
  • Injunctive Relief (a remedy in place of monetary damages, specifically a court order for the employee to stop a specified act or behavior);
  • Disgorgement of wrongful gains (giving up profits gained from the breach)
  • A Constructive trust to collect the profits received by the employee as a result of the breach; and
  • Recovery of bonuses paid during the time period in which the employee breached their duty.
It should be noted that the fiduciary of duty as it pertains to employees varies from state to state.  Illinois’ employment laws are constantly changing and it is important to have your employment contracts and restrictive covenants reviewed annually by an attorney to ensure they are compliant with these laws. 

The information in this article is for informational purposes only and does not constitute formal, legal advice.  Contact Danielle S. McKinley at Roberts McGivney Zagotta LLC, (312) 251-2292, if you would like to further discuss the duties owed by employees to their employers and recommendations for protecting your business.