When Can an Employer Sue an Employee? (2024)

When Can an Employer Sue an Employee?

1 Situations Where an Employer Can Sue a Current or Former Employee

1.1 Negligence

1.2 Violating Non-Compete Clauses

1.3 Violating Non-Solicitation Agreements

1.4 Breach of Fiduciary Duty

1.5 Violating No Raid Provisions

Situations Where an Employer Can Sue a Current or Former Employee

Employee vs. employer lawsuits are incredibly complex. Every state has its own rules regarding vicarious liability, non-compete, and non-disclosure. Thus, going after a current or former employee is challenging. However, here are some examples of when an employer can or should sue an employee.

Negligence

Typically, an employee is not held liable for ordinary carelessness or negligence in the performance of their duties. However, if an employee acts outside the scope of reasonableness, causing damage or injury to either property or persons, an employer may be able to sue an employee for negligence.

Depending on the circ*mstances of the case, extreme negligence of an employee, acting outside the normal scope of reasonableness or outside the duties of their job, could allow an employer to sue an employee on the legal basis of negligence.

An example of this in Texas comes from the case St. Anthony’s Hosp. v. Whitfield. In this situation, the employee’s negligence led to the hospital being sued. Consequently, they paid damages to the victim of that negligence. Afterwards, the hospital sued the employee. Eventually, the Texas Court of Appeals ruled that, because the hospital’s liability was completely vicarious, the employee had to pay damages to the hospital in the form of indemnity.

Violating Non-Compete Clauses

As an employer, you may have established legally binding clauses in your employment contracts that prevent an employee after termination of employment from working in a particular field or area of business, for a specified period of time, within a specified geographic area. While some states, such as California, have issued a complete ban on non-compete clauses and rendered them unenforceable, many other states still legally enforce these contractual agreements between employers and employees.

Across the nation, a trend is moving toward limiting broader restrictions in a non-compete clause; however, if a court finds that the agreement was reasonable, not overly restrictive, and made in good faith by all parties, many state courts will uphold the legally binding agreement and allow an employer to sue an employee for breach of contract.

RELATED: Texas Breach of Contract Law

Violating Non-Solicitation Agreements

Non-solicitation agreements are different than non-compete clauses. Even in states where non-compete clauses are unenforceable, non-solicitation agreements are generally allowed. This agreement will prohibit an employee from soliciting and taking customers from their current employer to obtain the contract in a new job or as an independent contractor after they leave employment. Some of these agreements prevent employees from soliciting companies and businesses for a specific period of time after leaving employment.

Employees have a duty to their employer to act solely in the best interest of the company. This common-law duty exists whether or not there is any kind of employment contract. The typical standard for analyzing whether a non-solicitation agreement should be enforced is reasonableness. Attempting to take the top 10 customers with you when you leave is different than finding new customers in new locations that had no prior business relationship with your previous (or current) employer. One path involves the investment of time, money, and effort to market one’s services to new prospective clients and the other relies on piggy-backing on the investments and efforts of their former employer.

Breach of Fiduciary Duty

Employees owe a fiduciary duty to their employer while they still are employed to act in the best interest of their employer, and with a duty of loyalty. Taking a business deal as an employee (or former employee) that should have been presented to your employer instead is called “usurpation of corporate opportunity.”

For example, if an employee holds onto prospective leads and, rather than presenting them to their current employer, brings those prospects to a new employer or their own new entrepreneur venture, they have taken away an opportunity that should have belonged to their former employer. Saving up prospective sales or clients is called “warehousing” and may constitute a breach of fiduciary duty.

Therefore, no solicitation or manipulation of contracts or clients before an employee’s departure is legally allowed. Some employment contracts will include a non-solicitation agreement, preventing an employee from soliciting these sales or clients for a specified period of time after employment ends.

If an employee takes these opportunities that belong to their employer away, the employer may have a case against them. These types of cases where an employer sues an employee typically rest on intentional interference with contractual relations or intentional interference with advantageous business relationships.

Other examples of breach of fiduciary duty.

Not all breaches of duty involve working with competitors or for individual financial gain. Some cases involve less conspicuous violations, including:

Failing to follow proper financial procedures;
Improper use of employer funds;
Not disclosing conflicts of interest; and
Theft of company funds.

All of these cases, no matter how small, have the potential to negatively impact a business.

Violating No Raid Provisions

It is common in many industries for an employee to leave a company to go work for a competitor. However, if two or more employees leave an employer to work for a competitor all of a sudden, it may be that one of the employees persuaded or solicited co-workers to terminate their employment and move as a group to the new company.

Oftentimes, an employer will have a “no raid” clause in the employment contract, which prohibits any type of solicitation of other co-workers to terminate their employment and move to another competing employer. If this type of action is discovered, an employer may have legal grounds to sue the employee responsible for the sudden exodus of employees under breach of contract.

Failure to Provide Reasonable Notice of Resignation

If a higher-level employee leaves a company with no notice, they can be leaving the company in a devastating situation as they attempt to locate a suitable replacement. The laws regarding failure to provide reasonable notice of resignation vary widely from state to state. Some states, like California, do not require that an employee give any amount of reasonable notice of resignation. Other states will allow an employer to sue an employee that left without reasonable notice even if no revenue was lost. The courts’ decisions land different in every state, so it is important to seek legal counsel regarding the ability of an employer to sue an employee for failure to provide reasonable notice of resignation in your state.

Employee Theft

If an employee has stolen a computer, printer, or other tangible equipment, an employer is able to sue an employee for theft. An employer may also file suit against an employee who destroyed property or equipment.

In some cases, an employee will retain employee property after their termination or resignation. If an employee feels that they did not get the amount of severance pay they deserved, or correct wages after their employment ended, they may be holding the employee property hostage until they receive the compensation they say they deserve. This is illegal and could be considered some form of misappropriation, conversion or theft, and an employer would have grounds to sue a former employee based on these actions.

Theft of Trade Secrets

While everyone can easily see how the theft of tangible property would be considered illegal, it is important to note that trade secrets are also considered property of the employer. If an employee has taken company documents, proprietary information, thumb drivers, or any other types of data, this is also considered theft. In these cases, the trade secrets are considered to be misappropriated by the former employee.

Non-disclosure of proprietary information and trade secrets is typically required in employment contracts. The Defend Trade Secrets Act defines misappropriation as “the acquisition of the trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means,” or “the disclosure or use of the trade secret without express or implied consent.” In cases where a former employee takes trade secrets from a former employer, an employer may sue that employee.

Defamation

Defamation is more than just he said/she said conversations or frustrated talk about a previous employer. Defamation includes statements that are made by a previous employee that they knew to be false, and somehow harmed the employer’s reputation and business.

The defamation does not have to actually cause any monetary loss if it is damaging to the employer’s reputation. If a former employee goes on social media announcing some fabricated information about a company, or an employee tells a reporter what they know to be false statements regarding their previous employer, the employer may have grounds to sue.

Using Company Resources to Find New Employment

While many employees will utilize breaks and lunch hours to attempt to find new employment or go on interviews, using company email addresses, company funds, or company property to attempt to secure new employment may constitute a breach of contract and possibly theft. If an employee uses a company email address, which somehow proves detrimental to the company, or takes travel funds from the company to attend a job interview, the employer will easily have a cause of action against the employee.

Can an Employer Recover Losses from an Employee?

In certain circ*mstances, yes. However, even if an employer is successful in their litigation against an employee, the employee may simply not have the funds to satisfy the judgment against them. Nevertheless, it may be important to the employer to pursue the claim in court regardless of the ability of an employee to repay them, as it will establish a strong message to their other employees that wrongful acts are pursued to the full extent of the law.

Having an Employee Dispute? Wood Edwards LLP Is Here to Help

At Wood Edwards LLP, our team has extensive experience navigating complex business litigation. We are dedicated to providing a thorough assessment of your employee dispute and offering guidance on how to proceed. With recognition from past clients and industry organizations, we know how sensitive business litigation is.