This was the question the Labour Appeal Court had to consider in RFS Administrators v Samons and others.  The core of the dispute involved additional remuneration paid to the employees by the companies to which they had been seconded, being two retirement funds administered by RFS Administrators (“the Funds”).

RFS Administrators claimed payment from the employees of bonuses paid to employees by the Funds to whom they had been seconded by RFS Administrators.  The court held the bonuses did not have to be repaid by the employees as the bonuses were not considered secret profits and RFS Administrators failed to prove that they had suffered any damages as a result of a breach of contract by the employees.

The employees had been seconded as the Principal Officer of the Funds and to support to the Principal Officer.  Their normal remuneration was paid by RFS Administrators and the Funds were charged for these amounts by RFS Administrators.

During 2015/2016, the funds resolved to pay the employees bonuses. The money for the bonuses was paid by the Funds into RFS Administrators’ bank account for them to pay the bonuses to the employees, which was done.

RFS Administrators subsequently sued the employees for payment of the bonuses paid to them on the basis that they were not entitled to receive them.

In defence of the claim, the employees contended that they were not employees of RFS Administrators but rather employees of the Funds.

The Labour Appeal Court swiftly dismissed this argument finding based on the evidence that the employees’ claims of being employees of the Funds rather than of RFS Administrators were opportunistic.

However, the finding that they were employees did not mean that the claim should succeed.  The Court explained that RFS Administrators still had to prove, on a balance of probabilities, that the payments either constituted contractual damages or secret profits to be disgorged to it.

RFS’s claim for disgorgement of profits

In order to succeed with its claim for disgorgement of profits, RFS Administrators was required to establish that there was a fiduciary relationship between it and the employees; that in breach of that obligation the employees placed themselves in a position where their duties and personal interests were in conflict; and that the profits were made in secret and as a consequence of untoward conduct by the employees.

Restating the law, the Court confirmed that an employee when rendering their services, must always act in the best interests of their employer and is not entitled to use their employment relationship with the employer, without the employer’s permission, to make a profit or earn a commission for their own account.

The Court confirmed the principle set out by the Supreme Court of Appeal in Phillips v Fieldstone Africa (Pty) Ltd that the rule is a strict one which allows little room for exceptions and “the defences open to a fiduciary who breaches his trust are very limited: only the free consent of the principal after full disclosure will suffice”.

The Court then found that although the employees were still employed by RFS Administrators when they received the payments meant that they owed RFS Administrators a fiduciary duty, the facts established that those payments were not made in secret.  Rather, the evidence showed that the additional payments were made with RFS Administrators’ full knowledge and acquiescence.  There was no element of secrecy or untoward conduct on the part of the employees in the way the additional payments were made.  Consequently, RFS Administrators’ claim for disgorgement of profits could not succeed.

The claim for contractual damages

Regarding the claim for contractual damages, RFS Administrators failed to establish which terms of their contracts had allegedly been breached by the employees. They were unable to provide any factual basis for the assertion that the contract of employment prevented the employees from receiving the payments and failed to establish any causal connection between the alleged breach of the contracts and the damages it allegedly suffered as a consequence.  The monies were paid to the employees directly from funds paid into RFS Administrators’ bank account by the respective Funds and were earmarked for payment to the employees.  The money was specifically transferred to enable RFS Administrators to pay the employees in accordance with the resolution adopted by the Funds.  RFS Administrators’ claim for contractual damages also failed.

The learning from this case for employers sending employees on extended secondments – if they wish to ensure that the employees are not entitled to additional remuneration they should expressly prohibit the earning of additional remuneration in the employment contract.

Written by Ludwig Frahm-Arp, Partner and Kedibone Seroka – Associate at Fasken