In its July 26, 1999, ruling in Futch v. McAllister Towing of Georgetown, Inc., the South Carolina Supreme Court held that an employer may withhold earned compensation from an employee fired for disloyalty to the employer. However, the ruling limits when an employer lawfully may withhold compensation and how much compensation it may retain.
In 1981, McAllister Towing began operating as the Port of Georgetown's only tugboat service. McAllister immediately hired Futch as a tugboat captain and its local manager. Futch had operated tugs in the area since the 1960s and was well known by the tugboat clientele. In early 1992, a McAllister representative approached Futch, now in his eighties, regarding his possible retirement. Futch said that he was not interested in retiring. In December 1992, McAllister gave Futch written notice that his job would terminateat the end of 1993. At about the same time, McAllister informed the Georgetown Port Authority that it might soon cease tugboat operations in the port altogether.
Knowing that his job was ending in 1993 and believing that McAllister might leave Georgetown, Futch began forming his own tugboat company. As early as February 1993, Futch began contacting McAllister's clients about the possibility of using his new tugboat company. By March, Futch had solicited commitments to use his new company from over 90 percent of McAllister's clients. Futch applied for a business loan in the spring of 1993, buying one tugboat and leasing another in April. He incorporated his new business in mid-1993, and filed annual registration papers with the State Port Authority in August. On August 2, 1993, a local shipping agency alerted McAllister to Futch's plans. McAllister fired Futch the next day and refused to pay him $4,200 in commissions he had earned in July and August 1993.
Futch sued McAllister under South Carolina's Payment of Wages Act. Although McAllister asserted Futch's disloyalty as a justification for withholding the unpaid commissions, McAllister did not dispute that Futch ably performed his duties for McAllister while he was developing his new company.
At trial, the jury found that Futch had not breached his duty of loyalty to McAllister and that Futch was entitled to all of his commissions. McAllister appealed, and the South Carolina Court of Appeals reversed the jury verdict, holding that Futch's conduct was disloyal as a matter of law. Because of his disloyalty, according to the Court of Appeals, Futch automatically forfeited all compensation owed to him at the time of his termination, regardless of when he committed the acts of disloyalty and the effects his disloyalty had on McAllister.
The South Carolina Supreme Court overturned that decision, holding that even if an employee is disloyal during some periods of employment, he may still recover compensation for services properly rendered during periods in which he is not disloyal, as long as his compensation is "apportioned." Apportioned compensation consists of payments allocated to certain periods of time or to the completion of specified items of work.
The Court concluded that Futch's only activity related to his new business during July and August 1993 (the months for which McAllister withheld payment) was his filing of an annual registration form with the State Port Authority. The Court considered this mere preparation and submission of forms permissible pretermination activity, not an act of disloyalty like Futch's actual solicitation of customers in February and March 1993. Thus, McAllister was not entitled to withhold Futch's wages payable for July and August 1993.
In reaching this conclusion, the Court cautioned that sometimes apportionment may not be proper, and an employee who engages in "unusually egregious or reprehensible conduct" may forfeit all unpaid compensation. Generally, this would be limited to situations in which the disloyal acts "permeate and corrupt" the employee's relationship with the employer. The Court found no evidence that Futch's solicitation of customers in February and March was "egregious or reprehensible," as opposed to merely disloyal.
The Futch decision is significant because it establishes an employer's right under South Carolina's Payment of Wages Act to withhold at least some compensation payable to a disloyal employee, and because it recognizes that employers may sue to recover compensation already paid during periods of disloyalty discovered after-the-fact. Nevertheless, the Supreme Court's balancing approach makes the applicability of the defense (or claim for wages already paid) dependent on the facts ofeach specific situation involving employee competition or disloyalty.