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THE "FAITHLESS SERVANT" DOCTRINE: CAN A COMPANY RECOVER WAGES AND BONUSES PAID TO A "DISLOYAL" EMPLOYEE?
When an employee commits illegal acts, and the company is required to pay damages because of those acts, does the company have any basis for recovery against the employee who committed the underlying illegal acts? A recent decision of the Supreme Judicial Court of Massachusetts applying New York law holds that under New York’s "faithless servant" doctrine, a former CEO must pay back to the company more than $5 million of salary and bonuses paid to the CEO during the period of his misconduct.
The CEO of Astra USA was accused and ultimately found to have committed a plethora of improper acts. The evidence showed that he had engaged in repeated acts of aggravated sexual harassment and financial irregularities such as charging the company for personal sailing trips, hiring and charging the company for "escorts" for himself and others, and directing Astra to reimburse him for $16,000 of legal expenses incurred fighting a speeding ticket. In 1995, the CEO learned that Business Week was investigating allegations of sexual harassment at Astra, most of which centered on him. In response, he set up a "task force," not to investigate the allegations, but to control and manage the Business Week investigation. He then told the parent company about the investigation, did not disclose that it centered on him, and stated that Astra was "positive there is no basis for such a story." When asked for more details, he told the parent company that Astra had a very good record on sexual harassment, again failing to disclose that he was the focus of the investigation. Through outside counsel, Astra conducted its own investigation, and asked the CEO to cooperate and also not to discuss the investigation with any present or former Astra employees. The CEO did neither and actually spoke to former employees, asking that they deny that he committed any inappropriate conduct. Based on the investigation, the CEO was suspended and replaced.
Astra then sued the CEO in Massachusetts trying, among other things, to recover all salary and bonuses paid to the CEO during the period of his misconduct. The Supreme Judicial Court found that this issue had to be decided under the law of New York. The court then addressed New York’s "faithless servant" doctrine, under which an agent is held to "utmost fidelity" in his dealings with his principal, and if he acts adversely to his employer or omits to disclose any interest which would naturally influence his conduct, he has committed an effective fraud on the principal and forfeits any right to compensation for services. The court then found that "in the circumstances of this case," the CEO was required to forfeit over $5 million of wages and bonuses paid to him during the period of his misconduct. Reversing three findings made by the lower court, the court held that: 1) the New York forfeiture law is not limited to wages due but also requires forfeiture of wages and bonuses already paid; 2) that it applies to all employees, not just to low-level employees; and 3) that the agent must forfeit all wages and bonuses paid, not just wages and bonuses in excess of the value of his services.
We should note that the precedential effect of this case may well be limited by several factors, including the egregious nature of the CEO’s misconduct and the fact that the decision was not rendered by a New York court. Nonetheless, the case does illustrate that there are circumstances in which companies may be able to recover damages against employees if they act as "faithless servants."
