Working for a company means more then just doing your job.
It means putting the best interests of the company first. In this lesson we will learn how that happens by means of duty of loyalty.
Definition of Duty of Loyalty
Meet Victor. Victor works for a large corporation in New York. In his current position, Victor is a director for the company and makes many big decisions that have large impacts on the company. While Victor has always loved his job and is good at what he does, lately he has been thinking about quitting to start his own business venture.
But before Victor decides to quit, he needs to think about his duty of loyalty, which is his responsibility of always putting the company first before his own personal interests. Come along as Victor learns whether or not his own business venture is a good idea.Duty of loyalty means that those who make decisions for the company do so keeping the company’s best interest first.
This means directors or other decision makers need to remain loyal to the company and avoid personal gain at the expense of the company. An example might be if Victor hears information about his company that will result in the price of stocks plummeting. To protect himself, he sells his shares before the information is provided to the public.
This would be a violation of his duty of loyalty because he put himself before the company.
The Duty of Loyalty Components
There are three main components of duty of loyalty. These components help ensure the safety of the company and keep employees in line.
1. Avoid using corporate opportunities for your own personal gain.
In basic terms, this is taking an opportunity that should have been given to the company. This means that if Victor hears of a business opportunity that could produce a financial gain to his company, but instead pursues the opportunity personally, he would be violating this component. Another example might be if his company sent him to make a business deal with another company and he decides to make the deal for himself, he again would be violating duty of loyalty.
2. Avoid making business agreements without approval from the employer.
This simply means making deals without letting the company know first. For example, if Victor were to make a decision that involves the financial future of the company but does not get approval from the employer first, he would be violating this component.
3. Avoid jeopardizing the company’s confidential information.
Basically, private information cannot be released to anyone outside the company without permission or by law. For Victor, this might be leaking a company secret to a competitor.
While these are the three main components, keep in mind an employee would also be violating duty of loyalty if he or she competes against the company without letting the company know first. Similarly, if an employee has a personal interest in the opportunity presented, that also must be disclosed.
Relation to Other Laws and Contracts
While it is clear that duty of loyalty explains the responsibility of the employee while working for the company, it may be unclear whether or not this also affects an employee after he or she leaves. Depending on a few types of situations, duty of loyalty might still apply.We’ll first look at Victor’s duty of loyalty in the context of employment law. Victor is thinking about leaving his company and starting his own venture.
After he quits, he technically no longer works for the company, but he may still have responsibilities to remain loyal. This means Victor may not be able to steal employees from his former company. He may also be in jeopardy of violating his duty of loyalty if he decides to work for another corporation and targets his former employer’s customers.Now we’ll look at Victor’s duty of loyalty in the context of non-compete agreements. Non-compete agreements state the restrictions on former or current employees still working in the same industry.
If Victor decides to stay with his current company while also working on his own business venture within the same industry, he might be violating a non-compete agreement and thus his duty of loyalty. Furthermore, if Victor has a non-compete agreement and decides to start his own company in the same town and industry, he again will be violating both the agreement and the duty of loyalty.
Duty of loyalty is the responsibility of an employee to act in the best interest of the company over their own personal interest.
There are three major components of duty of loyalty:
- Avoid taking corporate opportunities for personal gain.
- Avoid making business agreements without permission.
- Avoid leaking confidential information about the company.
While the duty of loyalty certainly applies to all current employees, it may also apply to former employees if they violate any employment laws or non-compete agreements, which state the restrictions on former or current employees still working in the same industry.