When Should You Sue Rogue Employees? A R33m Example

Employers, ever mindful of the comprehensive legal rights and protections provided to employees by our labour laws, need to know that on the other side of the coin they too have rights, and that our courts will come to their aid where employee misconduct causes them loss.

We discuss your employees’ obligations to you in the context of a recent High Court case involving a trusteed employee who, over a four year period, ran a R33m scheme to enrich himself at his employer’s expense.

The case

Employees have very strong rights in our law, but employers also have effective remedies when employees “go rogue”.

A recent case of Sime Darby Hudson and Knight (Pty) Ltd v Lerena (9293/2013) [2018] ZAWCHC 94; (2018) 39 ILJ 2413 (WCC); [2018] 4 All SA 446 (WCC) , in which an employee was ordered to repay his employer R33m in “secret profits” including R9m in damages, provides a good example.

Diverted sales opportunities and secret profits

A manufacturer employed a “Key Accounts Manager” as its agent in dealing with customers. He was trusted with an “almost unlimited discretion” and minimal management oversight to act in his employer’s interests.

His employer sued him in the High Court on allegations that he breached both his employment contract and his duty to his employer, firstly by selling product to customers at below-minimum prices, and secondly by selling through his own companies to secretly profit thereby.

The employee’s denials of wrongdoing cut no ice with the Court, which held that he “was clearly under a general obligation to do his best for his employer and to conduct the plaintiff’s business in good faith and for its benefit” but “was in breach of his fundamental obligation of loyalty and good faith which he owed to … his employer”.

The secret profits claim – Ordering the employee to “disgorge” his secret profits of R33,291,599.24 (less any “amounts paid in making such profits” which the employee is able to prove), the Court held that the employer had proved the three elements needed to succeed in such a claim –

  • The employee owed it a “fiduciary obligation” (a duty to act honestly and in utmost good faith),
  • In breach of that obligation he placed himself in a position where his duty and his personal interest were in conflict, and
  • He made a secret profit out of corporate opportunities belonging to the employer.

The damages claim was for losses on product sold to customers at prices well below the employer’s base price “in order to further [the employee’s] secret profit-making activities.” Finding that but for the employee’s wrongdoing the customers would have bought product at no less than the base price, the Court awarded the employer R9,407,651.05 in damages (to be allocated, when paid, to the R33m claim).

Rubbing salt in…

To really rub salt into the employee’s wounds, he was ordered to pay costs, and the bill will be a big one, including –

  • Costs on the punitive “attorney and client” scale, an appropriate order said the Court “given the secret and unlawful nature of the scheme which the defendant ran for four years at the expense of his employer”,
  • The cost of audio visual equipment used in the trial, and
  • The (no doubt substantial) travel and subsistence costs of both the employer’s legal team and its six witnesses, all of whom travelled from Gauteng to Cape Town for the trial.

Original article: Ashersons Attorneys

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