Exit, Choice and Employee Loyalty

Abstract

This essay argues that we should understand the employee duty of loyalty as a contractual duty, not a fiduciary duty that attaches by virtue of employee status. The chapter considers several risks associated with a contract paradigm but concludes that those risks are less acute than they might at first appear. It then examines several possible contractual conceptions of the duty of loyalty, including those in which its obligations are imputed by public policy or implied as elements of party agreement.

Understanding the duty of loyalty as an instance of the general duty to perform in good faith makes the best sense of a historically suspect obligation. This understanding not only redeems the duty of loyalty as a reasonable obligation of employees but also generates guidance on how it can be construed in the most normatively satisfactory way. In particular, understanding the duty of loyalty as an instance of the duty of good faith suggests that its scope should hinge on other terms of an employment contract such as the scope of employer discretion and the terms of employee exit.

Keywords: employee loyalty, duties of loyalty, fiduciary duty, duty to perform in good faith

JEL Classification: K12, L14, M5