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HR MATTERS E-TIPS
THIS WEEK'S E-TIP: Employee Disloyalty and Conflicts of Interest
Published by Personnel Policy Service, Inc.
"Your Policy and Compliance Experts Since 1972"
 
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THIS WEEK'S E-TIP: Employee Disloyalty and Conflicts of Interest

What are your rights when an employee is "disloyal" and is engaged in
an activity that conflicts with your organization's best interests? You
have surprisingly few restrictions when dealing with these situations.
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THIS WEEK'S E-TIP: Employee Disloyalty and Conflicts of Interest

Do you know what you can do if you suspect an employee has a "conflict
of interest"
with your organization? Simply defined, conflicts of interest
normally arise when employees engage in activities for personal gain
that compromise their ability to represent your best interests. Examples
of employee activities commonly viewed as creating such conflicts
include:

-- Having significant financial interests in customers, suppliers, or competitors;
-- Working for a competitor;
-- Self-employment in competition with the organization;
-- Soliciting or accepting gifts or gratuities from suppliers or customers;
-- Using the organization's equipment and supplies for personal gain; and
-- Using inside corporate information for personal benefit.

Fortunately, you are generally permitted to prohibit these activities.
There are few restrictions on this right when the employee competes
with, publicly criticizes, or otherwise embarrasses the organization. In
some cases, however, public policy protects employees who could be
considered disloyal, such as those who report employer illegal activity to
the appropriate authorities. Each of these points is discussed below.

Defining the Conflict – Direct Competition

Most courts have found that employees have a duty of loyalty to their
employers and may be required to disclose conflicts of interest involving
competitors or competition with the organization. This duty is generally
interpreted to mean that employees should not compete with their
employers while still working for them.

For example, in DSG Corp. v. Anderson, 754 F.2d 678 (6th Cir. 1985),
the Sixth Circuit held that an employee violated his duty of loyalty and
faithfulness to his employer when he submitted a competing bid for a
food service contract. The court reasoned that the duty of loyalty
includes:

1. A requirement not to act against the employer's interest;

2. An obligation to disclose any information that can be damaging
to the organization; and

3. A prohibition on establishing a competing interest while employed.

This last point is particularly important to the courts. Typically, an
employee who simply makes plans to enter a competing business while
still employed is not considered to violate the duty of loyalty to the
employer. However, courts generally will find against the employee if the
employee (while still working) actively solicits customers and employees,
misuses confidential information, or misappropriates trade secrets.

Courts are often willing to award injunctions and even monetary
damages to employers injured by their employees' competition. For
example, in Foodcomm Int'l v. Barry, 328 F.3d 300 (7th Cir. 2003), the
Seventh Circuit determined that a beef importer was entitled to an
injunction blocking former sales representatives from competing against
it by providing services to its main customer. The evidence indicated
that the salesmen had breached their fiduciary duty by offering their
services to the employer's main customer, using its resources to develop
a business plan, and forming a competing company, all while still
employed.

And, in Vigoro Indus. v. Crisp, 82 F.3d 785 (8th Cir. 1996), the Eighth
Circuit ruled that a general manager breached his duty of loyalty and was
liable for $75,000 in damages. The court came to this conclusion
because the employee, while still employed, sent a letter to his
employer's customers soliciting their business and secured commitments
from other employees to follow him to a competing firm.

Damaging and Disruptive Conduct

Courts also have held that when an employee's conduct is disloyal,
disruptive, or overall damaging to the work environment, the employee
can be terminated. For example, in Schultz v. Indus. Coils, Inc., 373
N.W.2d 74 (Wis. Ct. App. 1985), a court upheld the employer's discharge
of an employee who had written a letter, published in a newspaper,
criticizing a corporate officer for his handling of the organization's affairs.

Public Policy and "Whistleblower" Claims

The employer's right to loyal behavior is limited, however, and it may be
preempted by public policy considerations. Thus, for example, in Green
v. Ralee Eng'g Co., 960 P.2d 1046 (Cal. 1998), an airplane parts
manufacturing inspector was able to bring a claim for wrongful discharge
when he alleged he was discharged for reporting that defective parts
were being shipped to airplane manufacturers. And, in Bishop v. Fed.
Intermediate Credit Bank, 908 F.2d 658 (10th Cir. 1990), the Tenth
Circuit allowed an employee to bring a wrongful discharge claim after he
was terminated for testifying against the employer in a congressional
hearing.

In addition to protections for public policy considerations, many federal
statutes protect employees who report their employer for what they
reasonably believe are violations of certain statutes. For example, Title
VII of the Civil Rights Act prohibits discrimination
against employees or
applicants who have opposed any practice that is an unlawful
employment practice under the statute, or who have made a charge,
testified, assisted, or participated in an investigation, proceeding, or
hearing under the statute. And, the Sarbanes-Oxley Act of 2002 protects
employees of publicly traded companies from retaliation for complaining
about or disclosing certain kinds of fraud by their employers.

Tips to Prevent Conflicts

Of course, as with most employment-related disputes, relying on court
action to settle employee conflicts usually is not the best way to resolve
these problems. It is much more effective to prevent disputes by
educating your employees about potential conflicts.

For example, a written policy can help employees avoid conflicts by
explaining their obligation to be loyal and by giving examples of
inappropriate conduct. In addition, the policy should encourage
employees to consult with management on any questions about
appropriate activity and require them to report any potential conflicts.

Many organizations also include a statement requiring employees to act
in an ethical manner. Some organizations further reinforce the policy by
requiring all employees who have contact with outside suppliers and
customers to sign a special form acknowledging that they have read and
understand the policy on conflicts of interest.

And, finally, you should also consider using confidentiality and
noncompete agreements that clearly spell out what "inside" information
should be protected and whether employees are allowed to work for, or
become, competitors.
 
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Subscribers to the Personnel Policy Manual and HR Policy Answers on
CD
can find more information on conflicts issues in Conflicts of Interest,
Chapter 806.
 
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YOU CAN TRUST PPS
Information provided in HR Matters E-Tips is researched and reviewed
by the HR experts at Personnel Policy Service as well as employment
law attorneys. However, it is not intended as legal advice. Readers are
encouraged to seek appropriate legal or other professional advice.

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in a newsletter?

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Service, Inc., to request permission. You can contact her by email at
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