When an employer finds out that its employee has been unfaithful and/or breached his/her contractual or fiduciary duties owed to the company, a common knee jerk reaction is to immediately terminate the employment of the employee and (1) refuse to pay any outstanding salary of the employee on the basis that the employee’s breaches of duty would preclude a claim for salary, or (2) pay only as at the point in time of termination.

While instinctive and probably gratifying for the employer, a refusal to pay salary that is due to the employee is incorrect in law. In the recent case of Schonk Atonius Martinus Mattheus and another v Enholco Pte Ltd and another appeal [2015] SGCA 65 (“Mattheus”), the Court of Appeal delivered a very instructive judgement clarifying the law on such situations.

The Court also set out its approach in calculating the quantum of loss where an employee intentionally and wrongfully diverts the business meant for the company.

Employers are not entitled to withhold payment of salary

In the case of Mattheus, the employer argued that it should not have to pay Mr. Mattheus his salary because it was clear that Mr. Mattheus had betrayed the trust of the employer and breached his fiduciary duties. This was not in dispute as the Court noted that there were “serious and deliberate breaches of duties, including a duty of loyalty, on the part of Mr. Mattheus…”

However, the Court made clear that Mr. Mattheus should still receive his salary because “it does not appear to be the case that Mr. Mattheus did  nothing during at least a part  of this period of his employment.” The Court held that where “the employee has breached his duty then recourse is available either by permitting damages to be claimed or exceptionally, where the facts warrant this, by establishing that there was a total failure of consideration”.

It follows from the latter that unless in circumstances where it is proved (and the burden falls on the employer) that there has been a total failure of consideration on the part of the employee, an employer’s attempt to “claw-back” salaries paid is unlikely to succeed. The Court referred to Bank of Ireland v Jaffery and another [2012] EWHC 1377 (Ch) where it was held that “it would be unfair…even taking into account the nature of Mr Jaffery’s breaches, to require him to pay his salary and bonuses, or indeed any part of them. The breaches must…be looked at in the context of his employment as a whole…it would be both disproportionate and inequitable …to require Mr  Jaffery to repay some 5  years of salaries and bonuses in addition to disgorging his profits or paying equitable compensation.”

This does not mean that an errant employee gets away scot-free. The Court has clarified the general principle that an employer may claim damages for any breach of duty by its employee but such a breach will not by itself disentitle the employee to his or her salary. In fact, the employer may “make a deduction from the salary in respect of such loss as it proves it has suffered by reason of the employee’s breach.”

Finally, the Court suggested that if an employer wanted to retain such a right to withhold salaries, then such a right must be set out in the employment contract itself.

Loss of future profits arising from diversion of business

Mr. Mattheus argued that his employer should not be entitled to any damages for the clients that left because they were “only willing to contract with (him) and not with the employer” and his employer had failed to prove that “they would have retained those contracts after the termination of his employment.

The Court of Appeal dismissed this line of argument, otherwise, “it would reward the defaulting employee since the consequences of his breach would be assessed on the footing that the breach would take place in any event and this plainly cannot be correct.”

What this means is that errant employees who divert business or solicit their employer’s customers cannot hide behind the testimony of customers who nonetheless prefer to contract only with the errant employee and not with the employer. As the Court noted, had “Mr. Mattheus not breached his duties, he would have remained within (the company’s) employ and the (customer) contracts would have remained with the (employer).”

In the case of Mattheus, even though the employer failed to prove the quantum of damages it sought, the Court considered the available evidence and came up with a figure nonetheless because it held that “a dishonest fiduciary should not be entitled to rely on technical evidential difficulties to completely evade liability for a loss he has undoubtedly caused.”

In calculating the future loss of the employer in respect of the client accounts diverted, the Court held that it was reasonable to award damages for the loss of profits calculated over a period of one year as such a period reflects the minimum period for which it may reasonably be expected the business would have continued.

Concluding Words

The Court of Appeal’s judgement in the case of Mattheus is good news for employers who have to deal with errant employees who not only breach their duties but who, like in Mr. Mattheus’ case, “had gone to extraordinary lengths to destroy evidence” thereby creating evidential difficulties for the employers. The Court has assured employers that it will not let evidential  difficulties stand in the way of awarding damages against such dishonest employees; nor will it entertain arguments that the employer should not receive damages because the clients would only deal with that particular employee. It is clear that the clients belong to the company. At the same time, employers cannot take the position that the errant employee is not entitled to salary because the correct remedy for the employer is to (1) set off any losses caused by the employee against the salary owed and (2) to seek damages against the employee.

The termination of an employee’s employment, especially when it involves allegations of breach of contractual and fiduciary duties, is usually factually and legally complex and needs to be managed carefully.