A remedy of disgorgement: Secondment and the non-disclosure of secret profits
A remedy of disgorgement: Secondment and the non-disclosure of secret profits
The Labour Court in the case of RFS Administrators (PTY) LTD v Samons and Others (JS 641/17)  ZALCJHB 110 (30 August 2022) dealt with the elements that a party must prove when seeking a remedy of disgorgement in terms of the Basic Conditions of Employment Act 75 of 1997 (BCEA) arising from a breach of an oral contract of employment.
At a glance
- To claim a remedy of disgorgement for a breach of an oral employment contract, the party must prove that profit was made in secret, other contractual remedies are inadequate, and there is a causal link between the breach and the profit.
- In the case of RFS Administrators (PTY) LTD v Samons and Others, the Labour Court found that there was no employment relationship at the time the bonuses were issued, therefore no breach of contract occurred.
- Disgorgement is not an alternative remedy for breach of contract, and the primary remedies are specific performance or contractual damages. The employer must prove a connection between the alleged breach and the remedy of disgorgement.
A party seeking to claim a remedy of disgorgement must prove all the elements applicable to the remedy. If the remedy arises from a breach of a contract, the party claiming the remedy must also prove that profit was made in secret, other contractual remedies are inadequate, and there is a causal link between the alleged breach and profit made.
In this case, the Labour Court found that there was no employment relationship at the time the bonuses were issued. Therefore, there was no breach of contract.
A summary of the facts is set out below.
RFS Administrators (the applicant) employed the respondents by way of oral agreement. The respondents were subsequently ‘seconded’ to the National Pension Fund For Municipal Workers and the National Fund For Municipal Workers (the Funds) in order to perform some functions.
The Funds took resolutions to pay the respondents bonuses, as a result of their exceptional performance, while under ‘secondment’. In response to the payment of the bonuses, the applicant sought the remedy of disgorgement, claiming that the receipt of bonuses was a breach of the respondents’ contracts of employment.
In supporting its claim, the applicant presented evidence that the amounts received by the respondents were received secretly and without the consent of the applicant.
In dealing with the period in which the bonuses were paid, the applicant contended that the respondents’ employment relationship was still in place when the bonuses were paid. The respondents, on the other hand, argued that the employment relationship had come to an end prior to the payment of the bonuses.
Questions before the Labour Court
The Labour Court had to deal with the following aspects:
- When does an oral employment contract cease and / or come into being?
- When does an employee owe an employer fiduciary duties?
- The requirements for disgorgement.
In response to these legal questions, the Labour Court made a distinction between a bonus and profit. It stated that a bonus is a form of remuneration that is added to a person’s wages for good performance. Remuneration as defined, may be any payment in money or in kind or both. On the other hand, a profit is a financial gain, considering the difference between the amount earned and the amount spent.
Although it is trite that an employer and employee relationship may exist without an employment agreement, when seeking a remedy of disgorgement, an employment agreement must be proven. A party that alleges that there is an oral contract, bears the onus to prove the existence of the oral contract and its terms. On establishing the existence of the oral contracts, the Labour Court found that in light of the fact that the applicant was alleging that an oral agreement was concluded with the respondents, which the latter subsequently breached, the applicant bore the onus to prove the existence of the oral contract and its terms.
The Labour Court held that the employer and employee relationship ended when the respondents worked for the Funds and were remunerated or entitled to be remunerated by the Funds. The fact that administratively, the applicant managed the finances, and the human resources requirements of the principal officer’s office did not suggest that the employment relationship had continued.
As to the question of whether there was a fiduciary relationship that arose as a result of the secondment agreement, the Labour Court stated that for fiduciary duties to arise, there must, within the particular relationship concerned, be specific contractual obligations, which the employee has undertaken and have placed them in a situation where equity imposes these rigorous duties in addition to the contractual obligations.
In conclusion, and based on the evidence presented, the Labour Court found that the applicant had failed to discharge the onus to prove the existence of an employment contract at the relevant time. Thus, there was no obligation on the respondents to not accept the bonus payments from their employers, being the Funds.
The Labour Court further considered whether there had been a breach of the employment contract. The court held that a breach happens when the agreed terms are not complied with, but in instances where the obligations no longer existed, there could be no breach of the contract.
Regarding the relief sought, the Labour Court emphasised that disgorgement is not an alternative remedy for breach of contract and that the primary remedy for breach of contract, is an order for specific performance. The alternative claim being a claim for contractual damages. Disgorgement becomes a remedy sui generis. It does not arise out of choice to obviate matters of proof.
The third requirement when a claim of disgorgement is made, is that an employer who alleges extra income must prove a connection between the alleged breach and the remedy of disgorgement. In this instance the applicant failed to suggest any methodology that the Labour Court may employ to connect the alleged gain and the alleged breach. For all the above reasons, the claim for the disgorgement relief and the claim for damages were bound to fail.
In awarding costs, the Labour Court held that since the dispute involved or concerned an employment contract, the Labour Court has concurrent jurisdiction with the civil courts. As such, the ordinary rules in relation to costs would apply and the applicant’s claim was therefore dismissed with costs.
The key takeaway is that when an employer is seeking a remedy of disgorgement, an employer must ensure that they have all the requirements in order to be successful for this remedy.
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