Employee Duty of Loyalty

Orange County, CA – What is the duty of loyalty?  Does it apply to a employee?  Employer?  What is California’s rule regarding the duty of loyalty?

These are all extremely valuable questions for both the employer and the employee to have answers to.  First, the employee duty of loyalty basically means this: An employer has the right to the undivided loyalty of its employees. The duty of loyalty is breached and may give rise to a tort cause of action on behalf of the employer when the employee takes action hostile to the employer’s best interests.  Stokes v. Dole Nut Co. (1995) 41 CA4th 285, 295.

What on earth does that mean?  It means that an employee isn’t supposed to compete with his or her employer while he or she is employed.

Well, what does “compete” mean?  Easy answers after the jump….

An employee violates his or her duty of loyalty when he or she becomes engaged in a business which necessarily renders him or her a competitor, no matter how much or how little time he or she devotes to it.  Fowler v. Varian Associates, Inc., 196 Cal. App. 3d 34, (Cal. Ct. App. 1987).  In Fowler, an employee breached his duty of undivided loyalty to his employer when he became closely involved with the start-up of a competing business.

An employee is permitted to seek other employment and even to make some preparations to compete before resigning, but the law does not authorize an employee to transfer his loyalty to a competitor.  Huong Que, Inc. v. Luu, 150 Cal. App. 4th 400 (6th Dist. 2007).

Cal.Labor Code § 2863 – “An employee who has any business to transact on his own account, similar to that intrusted to him by his employer, shall always give the preference to the business of the employer.”

If an employer sues a employee or former employee for breach of the duty of loyalty, how much could the employee potentially lose?  That depends, of course, on each individual case.  For example, if an employee competes with his employer, and steals $1,000,000 worth of business away from the employer, he may be liable up to that amount, plus any statutory damages.  However, if an employee competes with his unaware employer, but steals only $1 away from the employer, that may be all that is at stake.