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Fighting Back: Counterclaiming against Employees
Practical Law Legal Update 3-605-7606 (Approx. 4 pages)
Fighting Back: Counterclaiming against Employees
by Practical Law Labor & Employment
| Law stated as of 24 Mar 2015 • USA (National/Federal) |
A Legal Update providing guidance for employers considering counterclaims against their current and former employees. This Update discusses counterclaims employers may assert, such as claims for breach of fiduciary duty or the duty of loyalty arising out of the employment relationship, and temporary or permanent injunctive relief for an employee's breach of obligations under a restrictive covenant, as well as the risk of a retaliatory conduct claim by the employee.
Employment disputes typically involve employees as plaintiffs asserting affirmative claims against their current and former employers as defendants. Employers may want to go on the offensive, either by bringing direct legal action or by filing a counterclaim in response to an employee's complaint. Employers must carefully weigh the benefits against the potential pitfalls before filing counterclaims against their employees.
Employers' potential counterclaims against their employees and former employees arise in many contexts. Most commonly, however, employers assert counterclaims under state law for:
- Repayment of money or other benefits given to the employee and rightfully due back to the employer, such as:
- overpaid compensation (see, for example, Parry v. New Dominion Constr. Inc., No. 14cv1115, (E.D. Pa. Feb. 10, 2015));
- recovery of a draw against commissions; or
- repayment of a loan or enforcement of a promissory note.
- Voiding or seeking specific performance of a contract, such as where the employer paid the employee severance or other benefits in exchange for a release of claims, and the employee has sued the employer or another released party in violation of the release terms (see Standard Document, Settlement and Release of Claims Agreement: Single Plaintiff Employment Dispute).
- Breach of fiduciary duty or the duty of loyalty arising out of the employment relationship, such as using the employer's equipment and resources to begin a competing business while still employed by the employer. However, a counterclaim for an employee's mere performance is generally not actionable.
- Temporary or permanent injunctive relief or damages for an employee's breach of obligations under a restrictive covenant, such as a:
- non-compete agreement (see Standard Document, Employee Non-compete Agreement);
- non-solicitation agreement;
- confidentiality agreement (see Standard Document, Employee Confidentiality and Proprietary Rights Agreement);
- non-disparagement clause; or
- garden leave provision.
- Misappropriation of trade secrets or other confidential, proprietary information, including when employees steal their employer's documents to support their claims against the employer (see, for example, Cafasso v. Gen. Dynamics C4 Sys., Inc., No. CV06-1381-PHX-NVW, (D. Ariz. Nov. 4, 2009)).
- Theft of other company property, goods or services.
- Defamation or slander, such as when an employee makes knowing false statements about the employer or its representatives (see, for example, Tucker v. Benjamin Moore & Co., No. L-4381-14 (N.J. Super. Ct. Essex Co. July 14, 2014)).
- Abuse of process and malicious prosecution (see, for example, Avigliano v. Sumitomo Shoji Am., Inc., 473 F. Supp. 506, 515-16 (S.D.N.Y. 1979), vacated and remanded on other grounds, 457 U.S. 176 (1982)).
A counterclaim's viability in a federal court lawsuit generally depends on:
- The substantive merits of the counterclaim.
- The court's jurisdiction over the counterclaim, which in turn depends on whether the counterclaim is a:
- compulsory counterclaim (FRCP 13(a)(1)); or
- permissive counterclaim (FRCP 13(b)).
Employers considering asserting counterclaims must be aware, however, that they risk claims of retaliatory conduct by the employee. Most federal statutes include protections for employees against retaliatory conduct by the employer where the employee has complained about a violation of the statute. Under certain circumstances, an employer's filing of a counterclaim may interfere with an employee's statutory protections and fall within the broad definitions of retaliation under these statutes.
Practical Law Labor & Employment has recently published Practice Note, Employment Litigation: Counterclaims against Employees, which explores the key issues employers should consider before asserting counterclaims against their current and former employees, including:
- Commonly asserted claims.
- Jurisdictional considerations.
- The potential benefits and drawbacks of asserting counterclaims, including the risk to employers that counterclaims may be construed as retaliatory conduct.