Wages cannot be recouped for alleged concealed wrongdoing

Plaintiff employer cannot recoup compensation paid to defendant employee while he allegedly concealed job-related wrongdoing.

This letter opinion is issued to explain why it differs from an opposite conclusion another judge of this court reached in a related case.

Overview

Defendant Donald Bavely has demurred to several counts of an amended complaint, in which plaintiff Geneva Enterprises accuses Bavely of concealing wrongdoing while employed as the president of Rosenthal Automotive Group. Geneva’s complaint alleges that Bavely violated provisions of an employee handbook that he signed and wrongfully concealed the violations.

“The primary issue before the Court is whether an employer may claw back an employee’s salary, bonuses, and other forms of compensation paid prior to termination, but during a time when the employee’s concealed acts would have justified termination.

“The Court holds the employer may not claw back compensation on this basis unless: (1) the employment contract provided for this relief, or (2) the employer can point to specific wrongdoing that led to specific damages. In this latter instance the relief is the value of the actual damages on a transactional basis, not a general recoupment of the compensation paid.”

Bavely’s demurrer is sustained.

“Another judge of this Court, in a related case, reached an indistinguishable, opposite holding on a similar issue. Donna Bavely v. Geneva Enterprises, Inc., et. al., CL-2017-17979 (October 25, 2019 Order) (allowing Geneva to assert claims of fraud against a different employee and seek recovery of past compensation paid prior to learning of the employee’s misdeeds) (‘2019 Order’). Because these two holdings are irreconcilable, the Court issues this Opinion Letter to explain its reasons for its holding.”

Discussion

For the purposes of demurrer, the court assumes “as it must” that Geneva’s allegations are true. The court’s recitation of the allegations are not findings of fact.

“Geneva promotes a new cause of action that would be an employer’s fantasy: upon discovering an employee surreptitiously violated company policy, or any duty to the company, the employer is not limited to terminating the employment for cause. It is not limited to seeking damages directly tied to the employee’s wrongdoing. It may also recoup all the salary it paid that employee from the time of the violation.

“As Geneva asserts, this claw back can reach as far as a decade-old violation by Bavely. This novel cause of action has no direct support in Virginia law outside of this Court’s 2019 Order, which is a summary order that does not explain the Court’s reasons. As with most fantasies, however, this one is not real. …

“Contracts drive employment law in Virginia. … It is true that every contract of employment implies the employee will obey lawful and reasonable orders from an employer. … However, the usual remedy is recission of the contract – termination of the employment, not the recoupment of all compensation already paid. …

“Geneva does not argue a contractual right to forfeiture. Rather, it argues a general equitable right to recover employee compensation as damages for concealed employee wrongdoing. However, it fails to persuade the Court that Virginia law countenances a cause of action that permits wholesale forfeiture of wages already paid.

“To support its position, Geneva’s most persuasive authority is the Restatement for the principle that: ‘[a]n agent is entitled to no compensation for conduct which is disobedient or which is a breach of his duty of loyalty; if such conduct constitutes a willful and deliberate breach of his contract of service, he is not entitled to compensation even for properly performed services for which no compensation is apportioned.’ …

“However, Geneva reads this rule too literally. In the comments, the Restatement clarifies that a wrongdoing agent ‘is not entitled to compensation which otherwise would be due him because of the transaction.’ … (emphasis supplied). To claw back compensation already paid, a principal must tie specific payments to specific bad acts of the agent. It is not enough for the principal to cite the agent’s wrongdoing and reclaim all payments it paid the agent without a tie-in. ….

“Geneva makes a blanket assertion that all Bavely’s wrongdoings should result in the forfeiture of over a decade of his compensation. Neither Geneva’s employee manual nor any contract requires Bavely to forfeit compensation already paid to him as a remedy for his violations of company policy. So, Geneva cannot pursue this remedy on that basis.

“If Geneva seeks Bavely’s compensation forfeiture on a transactional basis, its Amended Complaint must tie specific bad acts with a specific loss to recover damages, transaction by transaction. To some extent, Geneva does this. It alleges Bavely used corporate resources for personal gain. … However, the remedy for this is specific restitution, not general forfeiture of all salary and other compensation Geneva paid Bavely.

“The Court sustains Bavely’s demurrer with leave to amend.”

Geneva Enterprises v. Bavely, Case No. CL-2018-18124, Feb. 17, 2021, Fairfax Cir. Ct. (Oblon). Timothy C. Bass, Nicholas D. San Filippo, Mihir Elchuri for the parties. VLW 021-8-027, 9 pp.