Extra Edition / Business Management

Take Steps to Ensure Fiduciary Duty

February 18, 2008
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Richard D. Alaniz

For people who have even heard of it, “fiduciary duty” is usually a term reserved for bankers, chief financial officers, and members of boards of directors. However, all employees owe a duty of loyalty to the organizations they work for, even if they do not handle money or make major decisions. In an era of outsourcing and job-hopping, some people may question the idea of loyalty between employees and employers. But it exists from a legal perspective - and it can be very costly for employers when employees breach their fiduciary duty.

There are different ways to define fiduciary duty, but employees in every jurisdiction have at least some obligation to their companies. An employee has a duty, according to the law in Maryland, for example, to “act solely for the benefit of his employer, avoiding all conflicts between his duty to his employer and his own self-interest.”

Some breaches in fiduciary duty are obvious. Employees can’t compete against their employer; they can’t profit from their position without their employer’s consent; and they can’t do anything that might damage their employer’s business. Unquestionable breaches can include stealing customers away, refusing to pass on critical business intelligence, or holding side jobs that conflict with their main employment. But the law can be murky as well, especially when it comes to an employee looking to leave his job and join a direct competitor, or when an employee has a second job with a company that goes into direct competition with the original employer. These are growing problems for employers with certain employees in white-collar occupations.

For example, if an HVAC service company dispatches full-time workers to service air conditioners at its customers’ homes or businesses, those workers cannot offer to repair the unit “on the side.” Nor can a repairman make his own deal to receive a spiff directly from certain manufacturers for using a certain brand of parts.

In one recent case, a project manager set up a secret side business that obtained contracts from his full-time employer, J.V. Industrial Cos. Under the terms of his employment agreement, W. Clayton Rush was supposed to start and manage an Oklahoma division for the company that would inspect, repair, and maintain oil refineries and power plants. The contract required Rash to devote his “full work time and efforts” to his employer. While employed by J.V. Industrial, Rash set up several subcontracting businesses that were bidding on business from J.V. Industrial. Several years after setting up the contracting businesses, Rash quit and sued his employer, claiming it underestimated his bonuses. J.V. Industrial counter-sued, claiming breach of fiduciary duty, among other things. The U.S. Court of Appeals for the 10th Circuit found that Rash had, indeed, violated his fiduciary duty to his employer.

“The duty of an agent is to disclose to the principal what the principal should rightly know,” the court ruled.

Employees who breach their fiduciary duties can cost companies directly, by stealing business away, and indirectly, by spending time and energy on work other than what their employer is paying them to do. Companies should take several steps to ensure their workers understand what their fiduciary duty is and how they must comply.

Know the Relevant Laws
Fiduciary duty laws vary from state to state, so it’s important to understand what the laws are in each jurisdiction where your employees are based. If you have employees who are in positions where they could violate their fiduciary duty, it may make sense to meet with knowledgeable attorneys who can educate you about the applicable rules.

Understand the Differences in Employee Status
An employee’s fiduciary duties can vary based on his or her employment status. A full-time, salaried employee will generally have different fiduciary duties than a part-time contractor who implicitly is working for another company, for example.

Obtain Disclosure
When employers do allow workers to hold down side jobs, they may want to consider a process for how employees report those jobs to their supervisors. This is particularly applicable to today’s production workers who may feel the need to supplement their income by seeking other part-time work.

An employee’s duty can go beyond disclosure, though. Workers also have a duty to make sure their employer understands the nature of their work, not just the fact that they are doing work. As the court said in the case involving J.V. Industrial, employees need to tell their employers what employers would want to know. It’s part of the duty to act fairly and reasonably.

Explain the Rules
Since the law is not always clear, employees may be inadvertently putting themselves in positions where they breach their fiduciary duty. For example, an employee may be working part-time for another company that could develop competing interests with the original employer. Most commonly, the time demands of a second job may impact the interests of the primary employer.

Employers should educate their employees and supervisors about what they expect when it comes to fiduciary duty.

Consider Non-Compete Agreements
Laying out expectations in a non-compete agreement for white-collar employees in critical positions can help avoid much of this murkiness. Of course, some employees in sensitive positions may have signed these agreements when they join the organization. Companies should check, though, that these agreements are still up-to-date and relevant regarding the employee’s position, and that they have obtained agreements for employees who may be in a position to breach their fiduciary duties.

When it comes to fiduciary duty, the rules are not always clear. By staying current with laws and regulations and ensuring they educate employees as much as possible, employers can feel more comfortable that they do, indeed, enjoy the benefit of their workers’ loyalty.

Publication date: 02/18/2008

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