Employees Owe a Duty of Loyalty to Employers | Attorney Aaron Hall
Minneapolis Business Attorney Aaron Hall, Minnesota

Employees Owe a Duty of Loyalty to Employers

Employees in Minnesota owe their employers a duty of loyalty. This is undisputed in Minnesota law.

Duty of Loyalty for Partners vs. Employees

A surprising number of people (including attorneys) find it hard to believe that employees owe a “duty of loyalty” to their employers.

The thinking is, employees can do whatever they want on their own time because they are not owners of the company. They wrongly believe fiduciary duties only apply to partners/owners of a company. As Judge Cardozo said in the famous case of Meinhard v. Salmon, partners owe each other an utmost duty of loyalty: “Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.”

While the duty of loyalty an employee owes an employer may not be “the punctilio of an honor the most sensitive,” employees still have a duty of loyalty to their employer.

Examples of Employee’s Duty of Loyalty

An employee’s fiduciary duty of loyalty is significant, for example, when an employee is thinking about acting in her own self-interest or preparing to compete with the employer.

For example, in one unpublished Minnesota Court of Appeals decision, the court held “Employees owe a duty of loyalty to their employers.” (Schmidt v. Blue Lily Farms LLC, No. A08-1398, 2009 WL 2151135 (Minn. Ct. App. July 21, 2009) citing Marn v. Fairview Pharmacy Servs., 756 N.W.2d 117, 121 (Minn. Ct. App. 2008); Rehab. Specialists, Inc. v. Koering, 404 N.W.2d 301, 304 (Minn. Ct. App. 1987) (stating that employee’s duty of loyalty prohibits employee from competing with employer while employee is employed)).

In Schmidt, the court noted, “We have held that an employee breaches the duty of loyalty, and thus engages in employment misconduct, by encouraging a third party to terminate a contract between the employer and the third party.” (citing Marn, 756 N.W.2d at 120-22).

Attorney V. John Ella wrote an excellent article on duty of loyalty claims in Minnesota.

Aggravated Employment Misconduct

The court held that this breach of the duty of loyalty to an employer constituted “aggravated employment misconduct” under Minnesota Statutes section 268.095 subdiv. 6(a).

Minnesota Statutes section 268.095 subdiv. 6(a): Aggravated employment misconduct defined.

 

(a) For the purpose of this section, “aggravated employment misconduct” means:
(1) the commission of any act, on the job or off the job, that would amount to a gross misdemeanor or felony if the act substantially interfered with the employment or had a significant adverse effect on the employment; or
(2) for an employee of a facility as defined in section 626.5572, aggravated employment misconduct includes an act of patient or resident abuse, financial exploitation, or recurring or serious neglect, as defined in section 626.5572 and applicable rules.

 

(b) If an applicant is convicted of a gross misdemeanor or felony for the same act for which the applicant was discharged, it is aggravated employment misconduct if the act substantially interfered with the employment or had a significant adverse effect on the employment.

 

(c) The definition of aggravated employment misconduct provided by this subdivision is exclusive and no other definition applies.

Duty of Loyalty Lawsuits

Here are a number of examples of employers being harmed by employees breaching their duties of loyalty:

  • An employee organizes other employees to quit their jobs to launch a startup and compete with the employer
  • An employee makes copies of the employer’s computer files before resigning
  • An employee fails to tell her employer about a business opportunity the company could take advantage of because the employee wants the advantage for herself
  • An employee tells clients he is leaving his employer and asks the clients to go with him after his departure (see Meehan v. Shaughnessy, 535 N.E.2d 1255 (Mass. 1989) (holding that attorneys, “through their preparation for obtaining clients’ consent, their secrecy concerning which clients they intended to take, and the substance and method of their communications with clients, obtained an unfair advantage over their former partners in breach of their fiduciary duties”))

Related Claims

A lawsuit involving an employee who breached the duty of loyalty often has other claims. These may include

  • employment misconduct
  • violation of the Minnesota Trade Secrets Act
  • fraud or misrepresentation
  • misappropriation
  • negligence

The fact that employment is “at will” in Minnesota has no legal effect on an employee’s fiduciary duties. While people may incorrectly assume “at will” means employees can do whatever they want when they are not on the job, that merely means employees can resign without providing a reason (assuming they are not subject to an employment contract). Employment in Minnesota inherently includes an employee’s duty of loyalty to the employer while the employee is employed.

This article was written by attorney Aaron Hall.