Fiduciary duties are not a substantial component of employment law in the same way they saturate other areas of law like securities law or trust law; however, they play an important role in specific issues in employment such as employee benefits and issues involving employee competition with the employer. Employees should understand the interplay between fiduciary duties under federal and Colorado law and their employment, both on behalf of the employer and employee. As this can involve complex legal issues, employees should talk to a Colorado employment lawyer for advice about specific situations.
What is a fiduciary?
A fiduciary is a person or entity that holds a legal relationship of trust with another. Two common ways a person can become a fiduciary to another is by:
- Creating an agency relationship; and/or
- Acting as the trustee of assets.
A party becomes a trustee by holding the assets of another when the trustee is entrusted with the care and control of the beneficiary’s assets. For example, when you deposit your wages in your bank account your bank is a trustee of the account and therefore a fiduciary to those funds. It must act with care to your account and not use your money for its own purposes.
An agency relationship also creates a fiduciary relationship. Agency merely means there is a principal-agent relationship. The agent is a fiduciary to the principal in the relationship. An agent is a person empowered by the principal to act on its behalf as though the principal acted itself. For example, if you hire a lawyer to represent you in an employment lawsuit then the lawyer is your agent in the legal proceedings and must act with care in dealing with your case and pursue the case for your interests rather than her own.
What is a fiduciary duty?
A fiduciary has fiduciary duties to the principal (for an agency relationship) or beneficiary (to a trustee). Fiduciary duties are primarily the duties to act in good faith and loyalty to the person owed those duties. Courts across the country deem fiduciary duties as the highest duties imposed upon a party under the law. In practice courts do not always hold parties to the soaring rhetoric used to describe these duties but at least they tell us they should.
Most people think about fiduciary relationships with relationships between business and consumer such as a bank and its customers or consumers and professionals such as lawyers or real estate agents. These are definitely fiduciary relationships under federal and Colorado law. Fiduciary relationships also exist in other forms of asset entrustment and agency relationships. This is definitely true in the employment relationship. Employers can owe fiduciary duties to their workers and vice versa.
It’s important to point out that fiduciary duties can arise from various legal relationships within the employment context. For example, an employer may have statutory fiduciary duties to employees under the federal Employee Retirement Income Security Act (ERISA) to employee benefit plans protected by ERISA and the employee may have fiduciary duties to the employer under Colorado common law. The specific fiduciary duties owed differ under these relationships and sources of law. Even across states the fiduciary relationship and fiduciary duties can vary significantly.
Defining the specific fiduciary duties in a given situation can be complex and require specific legal analysis under federal and Colorado law. Do not rely upon general information to assess the parameters of a fiduciary relationship or fiduciary duties involved.
What is an employee’s fiduciary duty to his or her employer?
The employee-employer relationship is an agency relationship which means the employee has a duty as the employer’s agent as a fiduciary. An employee’s fiduciary duty primarily revolves around the duty of loyalty. The duty of loyalty of an employee is not really a single duty but rather a collection of duties to the employer. Forgetting the issues of law for a moment, it makes common sense. No sane employer would hire an employee expecting the employee to use the position to harm the employer or compete against the employer. It does not mean the employee is at all times a slave to the employer; but the employee has a responsibility to deal fairly with the employer.
Courts at times disagree with what exactly an employee’s duty of loyalty entails. Often courts hold that an employee’s duty of loyalty is commensurate with the employee’s job duties and level of trust extended by the employer. For example, a front line employee might have a minimal duty of loyalty to the employer; however, a sales executive likely has a greater duty because she has access to confidential client lists, product knowledge and could easily use that information with a competing business.
Broadly an employee’s duty of loyalty to the employer can be broken up into two sub-duties:
- Duty to exercise job with care; and
- Duty not to compete with the employer.
Duty of care by the employee
The duty to fulfill job duties with care is very simple. An employee is reasonably expected to perform the job duties with diligence and without intentionally causing waste or harm to the employer’s business or property. That does not mean every time an employee underperforms the employee has breached a fiduciary duty to the employer; however, when an employee intentionally performs the job in a manner that is harmful to the employer then the employer may have an argument for a breach.
In practice, this often becomes an issue when an employee with access to valuable property willfully causes its destruction or loss of value. Most employers do not want to endure the time or cost to hire employment lawyers and pursue a lawsuit against an employee.
Employee’s duty not to compete with the employer
Fiduciary duty claims against employees are far more likely when the employee uses his or her position to compete against the employer. In fact, most breach of fiduciary duties in any fiduciary relationship arise from the fiduciary self-dealing. Employees management positions, sales staff and employees responsible for developing new products or services are most likely to have access to resources that allow them to compete with the employer. Common ways employees compete against the employer include:
- Taking confidential customer or client lists to use at another employer;
- Using one employer’s proprietary sales techniques for another employer;
- Making sales or purchases for the employer that produce a side benefit for the employee;
- Taking or selling confidential or proprietary research or products to another business;
- Soliciting other employees to follow them to a competing business; or
- Owning or working for a competing business without the employer’s approval.
Both federal and state courts assessing fiduciary duty claims in Colorado tend to uphold employer claims when employees compete against their employers in these ways. Practically, the more an employee’s self-dealing or competition with the employer may or has financially harmed the employer the more likely the employer is to pursue a claim against the employee in court.
Although employers can pursue breaches of fiduciary duty claims in Colorado, an employer may decide that a lawsuit after the breach occurs is not a great remedy. After all, if an employee sends trade secrets like client lists or marketing research to a competing business then it’s effectively impossible to get that information back. Filing a lawsuit may take years to resolve with no guarantee that a jury will be more sympathetic to an employer than employee. To help solve this problem many employers require employees with access to confidential information, client relationship, or high level decision-making to sign non-compete agreements.
Non-compete agreements, under employment law, are contracts between employer and employee that restrict the employee from competing against the employer by:
- Working for a competitor;
- Sharing confidential trade secrets with competitors;
- Self-dealing to the employer’s detriment; or
- Soliciting clients and employees to join a competing business.
A non-compete agreement in many ways converts fiduciary duties from common law to contract and gives employers contractual remedies against the employee. A non-compete agreement can go farther than an employee’s fiduciary duties by limiting the employee’s ability to quit working for the employer and immediately go to work for a competitor.
Colorado law and non-compete agreements
States differ in how broad they allow non-compete agreements to restrict an employee’s ability to earn a living beyond the employer. Employers have an incentive to use non-compete agreements aggressively to retain employees. Employers may seek broad non-compete agreements as a poison pill to make it difficult for employees to leave and find work elsewhere. That in turn can give the employer a tactical advantage in negotiating compensation to the employee’s detriment.
Colorado greatly limits the enforceability of non-compete agreements to prevent employer overreach. These limits are first statutory under Colorado Revised Statutes 8-2-113 which makes all covenants not to compete void unless they meet an exception involving:
- The sale of a business;
- Protection of a trade secret;
- Executive or managerial employees and their staff.
Colorado, unlike some other states, does not allow a non-compete agreement to bind professionals like physicians to an employer even if the physician has trade secrets or acts in a managerial capacity over a hospital or clinic.
If a covenant not to compete passes the statutory bar it may still fail in the courts. Colorado courts refuse to uphold non-compete agreements if they are not reasonable in duration and scope. A non-compete agreement is unreasonable if it exceeds the bounds necessary to protect the employer’s interests and does not impose a material hardship on the employee. Courts in Denver and other parts of Colorado routinely uphold covenants not to compete up to five years and 100 miles from the business. See Reed Mill & Lumber Co., Inc. v. Jensen, 165 P.3d 733 (Colo. App. 2006).
Do employers have a fiduciary duty to employees?
Generally employers do not have fiduciary duties to employees. Recall that the fiduciary relationship flows unilaterally from fiduciary to beneficiary. It is not a bilateral relationship; however, within a two-party relationship it is possible that the parties are separately fiduciaries in different roles to the other.
The most common way an employer acts as a fiduciary to employees is when it operates retirement benefits for the employee. Retirement plans, such as defined benefit pensions, 401k plans and 403b plans, require employers to hold assets in trust for employees. This requires that the employers act in the interests of employees and exercise care with the assets. The Employee Retirement Income Security Act of 1974 (ERISA) governs most private employee retirement plans and establishes statutory fiduciary duties that limit the employer’s ability to use the plan or plan assets to its own financial gain. ERISA’s thicket of statutory and regulatory duties tightly constrain employers and a breach of these duties can result in costly penalties to the employer.
Some lawyers and other legal experts argue that employers are or should be fiduciaries to employees for wages and other compensation earned but not paid. To date Colorado courts generally have not agreed although there are at least good arguments why employers should have fiduciary duties when they deduct from wages for benefits, child support payments and other legal purposes. In many of these cases Colorado provides statutory remedies when employers unlawfully deduct from wages, do not make timely payment of wages, or otherwise fail to pay wages within the confines of the Colorado Revised Statutes.
When should you hire an employment lawyer in Colorado for a fiduciary duty issue?
Breach of fiduciary duty claims can carry substantial financial recovery for a prevailing employer therefore it is always a good idea to talk to an employment law attorney as soon as an issue arises. Ideally you should talk to an attorney before making any employment or business decision that your employer might perceive as self-dealing or competition. However, if the employer has already filed suit or threatened to file suit then you need to talk to an attorney immediately.
If you believe your employer self-dealt or otherwise abused assets in a retirement plan then you should find an employment law attorney to talk to about potential claims against your employer. Under ERISA and other laws governing employee benefits, an employee or retiree must often follow a specific process before filing suit and must file specific claims in a lawsuit to recover from the employer. ERISA claims are extremely complex claims and employers often hire employment lawyers from big law firms that specialize in ERISA to represent them.