Mastering the Faithless Servant? Reconciling Employment Law, Contract Law, and Fiduciary Duty

Abstract

The quaintly-named “faithless servant” doctrine requires employees subject to it not merely to pay damages for their derelictions but also to disgorge the compensation paid during the period of his faithlessness and without any right to recover in quantum meruit for the value the employee may have provided during that time. The net result is that an employer can recover substantial amounts of compensation paid and otherwise due without proof that it suffered any damage whatsoever and, indeed, even if it is established that there were no such damages.Such a result is startling to those who approach the question from the perspective of contract law, which normally would limit the victim of a breach to expectation damages. While those who come to the doctrine from the perspective of an agent’s fiduciary duty will not be surprised by the remedies for breach of the “duty of loyalty,” they will be startled by how broadly the doctrine sweeps. In some jurisdictions it not only reaches all employees, but the automatic forfeiture remedy is more draconian than trust law requires of the quintessential faithless fiduciary, the faithless trustee.Further, while the doctrine has typically been invoked against higher-level employees, it has more recently been deployed defensively in response to lower-level employee suits for violations of antidiscrimination statutes and wage/hour laws. The natural consequence has been to up the ante for such plaintiffs, which seems likely to discourage their suits.The question of the appropriateness of enhanced remedies for some or all “faithless” employees takes place in an environment in which abuses by corporate executives are front and center in public policy debates. At the very least, however, one might anticipate that the reach of the “faithless servant” doctrine would be well-defined and its harsh consequences well-justified. Neither turns out to be true. Nor could a reconsideration of the question be timelier. In its current Restatement of Employment Law project, the American Law Institute will focus on whether the doctrine should be part of the employer’s arsenal of remedies for misconduct in the employment relationship. This will compel it to decide whether to accept, reject, or modify the Institute’s approval of the faithless servant rule in its earlier Restatements of Agency. Arguing that “employees” are different from other agents, this Article contends that at the least the doctrine should be inapplicable to lower-level workers and suggests reframing it even as applied to “key” employees.