I have been told that I have breached a duty of loyalty, what does this mean?

It is well established that employees owe a duty of loyalty to their employers. If you have been accused of breaching your duty of loyalty, it is important to seek legal advice to assist you in understanding the sources and scope of this duty. As explained below, this often depends on the circumstances surrounding the employment relationship and of the alleged breach.

What is a breach of loyalty?

Since the 19^th century, the requirement for loyalty by employees has manifested through various legal duties including the duty of fidelity, the duty of good faith and the duty not to misuse or disclose confidential information of an employer. Each of these duties, although distinct in some respects, imposes an underlying obligation of loyalty on employees.

A breach of the above duties is most commonly alleged in the context of an appropriation of an employer’s clients, money or a business opportunity – for instance, the use of a client list or a trade secret that was obtained by virtue of one’s status as an employee to gain a competitive advantage in establishing one’s own rival business. The scope of the duty of loyalty, however, regularly extends beyond this to other conflicts of interest.

Some statutory duties requiring loyalty similarly apply to employees. For example, the misuse of confidential information by employees is prohibited under the Corporations Act 2001 (Cth), as are reckless or intentionally dishonest breaches of the duty of good faith, which constitutes a criminal offence.  Special statutory duties of loyalty also apply to company directors under the Corporations Act 2001 (Cth). On the other hand, employees may not be liable for disclosing confidential information in the public interest under statutory whistle-blower protections (read more here).

Duty of loyalty under the employment contract

Virtually all employees owe a contractual duty of loyalty to their employer. This applies regardless of whether the employment agreement was made verbally or in writing and whether such a duty was expressly included in the agreement or not. An employee’s obligation of loyalty may be excluded from the contract of employment only in very limited circumstances where the employment agreement clearly and unambiguously provides for this.

The content of an employee’s contractual duty of loyalty requires an assessment of the scope and nature of the employment contract.  The duty will only apply insofar as the employee’s powers, discretions and obligations under the employment contract necessarily require the observance of the employer’s interests. In University of Western Australia v Gray (No 20) [2008] FCA 498 it was found that a university professor had not breached a contractual duty of loyalty by selling the rights to technologies he had developed in the course of his research at the university. The Court held that, in the absence of any obligation to invent under his employment contract there was no subject matter over which a duty of loyalty (to hold the invention on trust) could attach.

An employer who is able to establish that an employee has breached a contractual duty of loyalty may seek remedies including damages to compensate them for loss suffered or an injunction to prevent further breaches of an employee’s contractual duty of loyalty.

Duty of loyalty in Equity

In addition to their contractual duties, employees may also be found to have an equitable duty of loyalty as a fiduciary of their employer. The existence of a fiduciary relationship is highly dependent on the character of the employment relationship as well as the nature and extent of the obligations imposed upon the employee. Employees with a significant level or responsibility, autonomy and discretion, or who have the ability to take advantage of their position to the detriment of the employer are more likely to be found to owe a fiduciary duty of loyalty than employees who are closely supervised and do not possess knowledge or information that may render the employer vulnerable to abuse.

In general terms, an employee’s fiduciary duty differs from their contractual obligations of loyalty in that it requires that the employee to act with exclusive and undivided loyalty in the paramount interests of the employer. This includes avoiding any conflicts of interest so as to preclude the risk that the employee may act in their own interest. In contrast, the contractual obligation is largely confined to the scope and purpose of the employment contract which does not necessarily require the employer to disregard their own interests where they may conflict with the interests of their employer.

The stricter requirements of an employee’s fiduciary duties are also accompanied by a broader range of remedies for breach. This includes an account of profits which requires an employee to disgorge any profit made in breach of their fiduciary duty, as well as proprietary remedies that may entitle the employer to an interest in property obtained by the employee by virtue of their breach.