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How Employers Can Get Money Back for Employee's Breach of Employment Contract

Granted, this doesn't occur very often, but employers do have some recourse against former employees who collect a salary while not living up to their end of the deal.

The employer can sue them and get (at least some of) their money back.

Yes, you read that correctly.

The New York Rule

The rule in New York is that when an employee breaches the employment contract by refusing to perform, the employer is entitled to recover the difference between the contract wage and what the employer was required to pay to replace the employee, Triangle Waist Co. v Todd, 223 NY 27, 119 NE 85; Valentine Dolls, Inc. v McMillan, 25 Misc2d 551, 202 NYS2d 620.

Mitigation of Damages

Naturally, this also means that if the employer promptly replaces that disloyal, or non-performing, employee with someone else at a lower salary, it is unlikely the employer can recover any damages under this particular prong. See, e.g., Marcus v Liner, 85 Misc 368, 147 NYS 458 (employer not entitled to recover damages where employee designer is replaced within two weeks by another designer at a lower salary).

But what if the employer doesn't replace the employee? What, if anything, can the employer recover?

Employee Infidelity Can Result in Employer Recovering Wages Paid During Period of Disloyalty

Infidelity is a defense that will bar the employee from recovering his or her compensation, whether commissions or salary, regardless of whether the services were beneficial to the principal and regardless of whether the principal suffered damage as a result of the breach of fidelity, Feiger v Iral Jewelry, Ltd., 41 NY2d 928, 394 NYS2d 626, 363 NE2d 350 (1977); see G.K. Alan Assoc., Inc. v Lazzari, 44 AD3d 95, 840 NYS2d 378 (2d Dept 2007), aff'd, 10 NY3d 941, 862 NYS2d 855, 893 NE2d 133 (2008); Miller v Brown Harris Stevens, Inc., 209 AD2d 171, 617 NYS2d 773 (1st Dept 1994).

In fact, in National Bank of Pakistan v Basham, 148 AD2d 399, 539 NYS2d 347 (1st Dept 1989), the Appellate Division, First Department held that an employee who is fired for misconduct is not entitled to wages during the period of disloyalty nor to vacation pay, nor any other fringe benefits or payments pursuant to a pension plan that provided for forfeiture upon the employee's discharge for misconduct.

"But what about lost profits?"

Although lost profits are generally not recoverable in simple breach of employment agreement cases, there are some limited instances, such as when the employee breaches his or her fiduciary duty to the employer, when New York's courts may allow such claims to proceed. See, e.g., E. W. Bruno Co. v Friedberg, 28 AD2d 91, 281 NYS2d 504, aff'd, 23 NY2d 798, 297 NYS2d 302, 244 NE2d 872; see Weinrauch v Kashkin, 64 AD2d 897, 407 NYS2d 885; McRoberts Protective Agency, Inc. v Lansdell Protective Agency, Inc., 61 AD2d 652, 403 NYS2d 511 (i.e., profit plaintiff would have made, not the profits defendant did make).

This kind of claim would typically arise in the non-compete context, in which case courts have held that the measure of damages is the loss sustained by reason of the breach, including the net profits of which plaintiff was deprived by the defendant's acts, World Auto Parts, Inc. v Labenski, supra; Borne Chemical Co., Inc. v Dictrow, 85 AD2d 646, 445 NYS2d 406 (2d Dept 1981).

An Important Caveat

Of course, all of the above assumes that, as a threshold matter, a judgment ultimately entered against the disloyal employee is collectible; if the employee is judgment-proof (such as, if they have no attachable assets or wages), pursuing them to get a money judgment may prove to be a significant waste of time and money.

 


Jonathan Cooper
Non-Compete, Trade Secret and School Negligence Lawyer