SHIRLEY S. ABRAHAMSON, J.
The question on appeal is whether an employer can recover from an employee, in addition to damages for misappropriation, all compensation paid to the employee during that period of employment in which the employee misappropriated funds belonging to the employer. The trial court awarded the employer $45,252.34, which was the entire salary and bonuses paid to the employee during the period in question. We reverse the judgment and remand the case.
I.
The employer, the plaintiff, initiated the suit against the employee, the defendant, filing a complaint stating three causes of action. The first and third causes of action
were dismissed pursuant to a stipulation that provided that the employee pay the employer $50,000 and that the second cause of action continue as a separate cause of action unaffected by the stipulation.
This second cause of action of the complaint alleged that the employee breached his contract of employment by misappropriating funds belonging to the employer and that the employer elected to rescind the contract of
employment effective as of the time the first misappropriation occurred. The remedy sought was restitution of all compensation paid to the employee during the period the employee was misappropriating funds.
The parties submitted this second cause of action to the trial court upon a stipulation of facts. The stipulation states: The Hartford Elevator, Inc. (employer-plaintiff) hired LaVern Lauer (employee-defendant) on or about March 1, 1971, to serve as manager of the mill owned by the employer. The duties of mill manager included keeping accurate records of receipts and disbursements, making out invoices, receiving monies, preparing receipts for deposit in the company’s bank account, and delivering checks to the corporate agent and cash receipts to the corporate president or secretary. The employee’s salary was $1,000 per month, and he was paid bonuses in 1972, 1973 and 1974 totaling $6,477.53. The employment arrangement was terminated on April 7, 1975, because the employee was suspected of misappropriating funds.
The stipulation allows the trial court to take judicial notice of the criminal proceedings for information as to the method used to misappropriate funds. It appears that during the months January 1972 to March 1975 (except for April 1973), the employee apparently issued to customers invoices that were not posted in the corporation’s books of account and he personally received cash for the amounts shown on the invoices and did not deliver the cash to the corporate officers. Duplicate copies of these invoices were obtained from various customers and are listed in an exhibit. These duplicate invoices totaled $35,533.10, but the trial court found that this amount was not necessarily the total amount misappropriated by the employee.
A criminal complaint was issued April 17, 1975, alleging a violation of sec. 943.20(1) (b) and (3) (c), Stats.,
during the years 1972 through 1975. The employee pleaded nolo contendere to the criminal charge, which plea was accepted. On April 5, 1976, the judgment of conviction was entered with the prison sentence stayed, and the employee was placed on probation, with the requirements that he make restitution in accordance with the stipulation in this civil action and that he pay a fine of $500.00 plus costs.
The trial court in the case at bar found that the employee had embezzled money from the employer from January 1972 through March 1975.
II.
The trial court in the instant case concluded that the contract of employment imposed a duty of loyalty on the employee with respect to the employer’s affairs and that the employee continuously and substantially breached his duty of loyalty by embezzling funds. The employee does not dispute these conclusions on appeal. The employee maintains that the trial court erred in concluding that the employer is entitled to recover from the employee all salary and bonuses paid to the employee after January 1, 1972, the first month during which the breach of duty was proven.
We initially observe that the original complaint demanded judgment in the amount of $110,000 actual damages and $200,000 punitive damages, in addition to the return of all compensation paid to the employee after the misappropriation began. The question of compensatory or punitive damages is not before this court. The parties and trial court viewed the compensatory and punitive damages demanded as satisfied upon payment of the $50,000 and dismissal of the first and third causes of action pursuant to the stipulation. The second cause of action was for restitution of compensation paid as shown by the final paragraph of the second cause of action:
“19. That the defendant LaVern A. Lauer, under his contract of employment with the plaintiff, received from the plaintiff compensation in the form of money paid for his services. For the full amount of such compensation paid to LaVern A. Lauer after the time that the first of said misappropriations occurred, the plaintiff has a cause of action for restitution.”
The only question before us on appeal is whether the trial court erred in concluding as a matter of law that an employee who breaches his duty of loyalty must re
turn to the employer compensation he received for services rendered during the period of the breach.
III.
The trial court rested its decision on language in three Wisconsin cases
that an agent who breaches the duty of loyalty or who wilfully breaches the contract of employment forfeits his compensation. Although there is such language in our opinions this court did not require the employee in any of these cases to forfeit or return any compensation received in excess of the amount misappropriated.
One of the cases upon which the trial court relied was
Arthur Koenig Co. v. Graham Glass Co.,
170 Wis. 472, 473-474, 175 N.W. 814 (1920). In this action by an agent against his principal to recover the reasonable value of the agent’s services, this court stated the applicable rule of law as follows:
“An agent who is guilty of fraud upon his principal or who betrays his trust by acting adversely to the interest of his principal, or is guilty of unfaithfulness, dishonesty, gross misconduct, gross mismanagement, gross unskillfulness, or who fails to follow his principal’s instructions, as a general rule forfeits his right to compensation.”
This court affirmed the judgment in favor of the agent, because it could “not say upon the record that the [agent] was guilty of such gross misconduct as to forfeit its right to the agreed commissions.”
The trial court further relied upon the following language from
Hinkley v. Sagemiller,
191 Wis. 512, 519, 210 N.W. 839 (1926):
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SHIRLEY S. ABRAHAMSON, J.
The question on appeal is whether an employer can recover from an employee, in addition to damages for misappropriation, all compensation paid to the employee during that period of employment in which the employee misappropriated funds belonging to the employer. The trial court awarded the employer $45,252.34, which was the entire salary and bonuses paid to the employee during the period in question. We reverse the judgment and remand the case.
I.
The employer, the plaintiff, initiated the suit against the employee, the defendant, filing a complaint stating three causes of action. The first and third causes of action
were dismissed pursuant to a stipulation that provided that the employee pay the employer $50,000 and that the second cause of action continue as a separate cause of action unaffected by the stipulation.
This second cause of action of the complaint alleged that the employee breached his contract of employment by misappropriating funds belonging to the employer and that the employer elected to rescind the contract of
employment effective as of the time the first misappropriation occurred. The remedy sought was restitution of all compensation paid to the employee during the period the employee was misappropriating funds.
The parties submitted this second cause of action to the trial court upon a stipulation of facts. The stipulation states: The Hartford Elevator, Inc. (employer-plaintiff) hired LaVern Lauer (employee-defendant) on or about March 1, 1971, to serve as manager of the mill owned by the employer. The duties of mill manager included keeping accurate records of receipts and disbursements, making out invoices, receiving monies, preparing receipts for deposit in the company’s bank account, and delivering checks to the corporate agent and cash receipts to the corporate president or secretary. The employee’s salary was $1,000 per month, and he was paid bonuses in 1972, 1973 and 1974 totaling $6,477.53. The employment arrangement was terminated on April 7, 1975, because the employee was suspected of misappropriating funds.
The stipulation allows the trial court to take judicial notice of the criminal proceedings for information as to the method used to misappropriate funds. It appears that during the months January 1972 to March 1975 (except for April 1973), the employee apparently issued to customers invoices that were not posted in the corporation’s books of account and he personally received cash for the amounts shown on the invoices and did not deliver the cash to the corporate officers. Duplicate copies of these invoices were obtained from various customers and are listed in an exhibit. These duplicate invoices totaled $35,533.10, but the trial court found that this amount was not necessarily the total amount misappropriated by the employee.
A criminal complaint was issued April 17, 1975, alleging a violation of sec. 943.20(1) (b) and (3) (c), Stats.,
during the years 1972 through 1975. The employee pleaded nolo contendere to the criminal charge, which plea was accepted. On April 5, 1976, the judgment of conviction was entered with the prison sentence stayed, and the employee was placed on probation, with the requirements that he make restitution in accordance with the stipulation in this civil action and that he pay a fine of $500.00 plus costs.
The trial court in the case at bar found that the employee had embezzled money from the employer from January 1972 through March 1975.
II.
The trial court in the instant case concluded that the contract of employment imposed a duty of loyalty on the employee with respect to the employer’s affairs and that the employee continuously and substantially breached his duty of loyalty by embezzling funds. The employee does not dispute these conclusions on appeal. The employee maintains that the trial court erred in concluding that the employer is entitled to recover from the employee all salary and bonuses paid to the employee after January 1, 1972, the first month during which the breach of duty was proven.
We initially observe that the original complaint demanded judgment in the amount of $110,000 actual damages and $200,000 punitive damages, in addition to the return of all compensation paid to the employee after the misappropriation began. The question of compensatory or punitive damages is not before this court. The parties and trial court viewed the compensatory and punitive damages demanded as satisfied upon payment of the $50,000 and dismissal of the first and third causes of action pursuant to the stipulation. The second cause of action was for restitution of compensation paid as shown by the final paragraph of the second cause of action:
“19. That the defendant LaVern A. Lauer, under his contract of employment with the plaintiff, received from the plaintiff compensation in the form of money paid for his services. For the full amount of such compensation paid to LaVern A. Lauer after the time that the first of said misappropriations occurred, the plaintiff has a cause of action for restitution.”
The only question before us on appeal is whether the trial court erred in concluding as a matter of law that an employee who breaches his duty of loyalty must re
turn to the employer compensation he received for services rendered during the period of the breach.
III.
The trial court rested its decision on language in three Wisconsin cases
that an agent who breaches the duty of loyalty or who wilfully breaches the contract of employment forfeits his compensation. Although there is such language in our opinions this court did not require the employee in any of these cases to forfeit or return any compensation received in excess of the amount misappropriated.
One of the cases upon which the trial court relied was
Arthur Koenig Co. v. Graham Glass Co.,
170 Wis. 472, 473-474, 175 N.W. 814 (1920). In this action by an agent against his principal to recover the reasonable value of the agent’s services, this court stated the applicable rule of law as follows:
“An agent who is guilty of fraud upon his principal or who betrays his trust by acting adversely to the interest of his principal, or is guilty of unfaithfulness, dishonesty, gross misconduct, gross mismanagement, gross unskillfulness, or who fails to follow his principal’s instructions, as a general rule forfeits his right to compensation.”
This court affirmed the judgment in favor of the agent, because it could “not say upon the record that the [agent] was guilty of such gross misconduct as to forfeit its right to the agreed commissions.”
The trial court further relied upon the following language from
Hinkley v. Sagemiller,
191 Wis. 512, 519, 210 N.W. 839 (1926):
“It is one of the fundamental principles of agency that an agent guilty of misconduct and fraud in relation to the transaction of his principal’s business is not entitled to compensation for his services.”
In
Hinkley,
a suit was brought to remove the general manager of the company from office and to recover misappropriated company funds. The general manager claimed that he was owed compensation for personal services. The trial court concluded that the salary agreed upon and due the general manager for the months during which he was employed and not under suspension was $560.00; that the misappropriation amounted to $760.44; and that the company could have judgment against the general manager in the amount of $200.44.
Although this court reversed the judgment in
Hinkley
on grounds not material here, the opinion allowed the general manager compensation for the period he worked even though he had misappropriated funds. The language quoted by the trial court in the case at bar comes from that part of the opinion holding that the general manager was not entitled to compensation for services during the period of his suspension.
The third case upon which the trial court based its decision is
Blum v. Palace Garage Co.,
214 Wis. 319, 323, 252 N.W. 177 (1934), in which this court stated:
“. . . The law respecting’ the right of an agent or servant to compensation where the agent or servant has been guilty of disloyalty ... is stated in 2 Restatement of the Law of Agency, p. 1102, sec. 469, as follows:
“ ‘An agent is entitled to no compensation for conduct which is disobedient or is a breach of his duty of loyalty; such conduct, if constituting- a wilful and deliberate breach of his contract of service, disentitles him to compensation for even properly performed services for which no compensation is apportioned.’ ”
However, this general rule was not applied in
Blum
to require the agent to reimburse the principal for wages paid.
In the
Blum
case, the plaintiff Peter Blum was an employee of Palace Garage Company. In 1927 he had converted funds to his own use, concealed his wrongful acts and destroyed records. He had received a weekly salary during his employment, and he sued for payment of one-third of the annual corporate profits which he claimed he had been promised.
The referee concluded that Blum had forfeited his right to a share of the profits for the year 1927 because he had not met a condition of the agreement for payment of the net profits, namely “that he would diligently and faithfully work for the best interest of the [company] in the management of the business.” The employee did not appeal from this part of the referee’s decision, and this court did not address the employee’s right to a part of the net profits for 1927, the year in which the employee embezzled funds. The company appealed the referee’s decision that the employee was entitled to his share of the profits, if any, earned before 1927 and also appealed the referee’s calculation of profits.
This court held that Blum could recover his share of profits for the years prior to 1927, but that no profits of the type the parties had agreed to share had existed prior to 1927.
This court granted the company’s counterclaim against Blum in the amount of $1,033.20. It appears from the briefs in the
Blum
case that the referee had calculated the amount of $1,033.20 as follows: $903.51 (the amount embezzled) ; $100.09 (the amount owed on a book ac
count); $30 (rent), for a total of $1,033.60. (The difference of 40 cents is not explained.) Blum was required to repay the amounts embezzled and forfeited his share of profits, but he was not required to reimburse the corporation for the weekly salary he received.
There is no question that the employee in the case at-bar, a general manager, owed a fiduciary duty to the employer, breached that duty and is liable for the breach.
General Automotive Mfg. Co. v. Singer,
19 Wis.2d 528, 533, 120 N.W.2d 659 (1963); Restatement of Agency (Second) secs. 387-398 (1957). The issue in this case is whether the employee must, in addition to returning the misappropriated funds, forfeit all right to the compensation he received while he was misappropriating funds. This is a troublesome question.
The general rule appears to be that an agent who is dishonest in the performance of his duties forfeits the right to compensation.
This rule is derived from the broader principle of contract law that a party who vio
lates an agreement should not he permitted to recover under the contract. However, these rules are not rigid, inflexible or without exceptions. Calamari,
Contracts,
sec. 11-26 (1970); Williston,
Contracts,
secs. 1017B, 1477 (Jaeger 3d ed. 1970).
Sec. 456 of the Restatement (Second) of Agency (1957) sets forth the liability of the employer to the defaulting employee for compensation
as follows:
“Sec. 456. Revocation for Breach of Contract or Renunciation in; Breach of Contract
“If a principal properly discharges an agent for breach of contract, or the agent wrongfully renounces the employment, the principal is subject to liability to pay to the agent, with a deduction for the loss caused the principal by the breach of contract:
“(a) the agreed compensation for services properly rendered for which the compensation is apportioned in
the contract, whether or not the agent’s breach is wilful and deliberate; and
“(b) the value, not exceeding the agreed ratable compensation, of services properly rendered for which the compensation is not apportioned if, but only if, the agent’s breach is not wilful and deliberate.”
The Comments to this section of the Restatement explain apportioned and unapportioned services as follows:
“b. Apportioned, services.
If an agent is paid a salary apportioned to periods of time, or compensation apportioned to the completion of specified items of work, he is entitled to receive the stipulated compensation for periods or items properly completed before his renunciation or discharge. This is true even if, because of unfaithfulness or insubordination, the agent forfeits his compensation for subsequent periods or items.
“c. Unapportioned services.
If the agent has rendered services, compensation for which is not apportioned in the contract of service, and his renunciation or other breach of contract is not wilful, he is entitled to an amount equal to the fair value of his services, not exceeding the agreed compensation, minus any damage caused to the principal by his breach of contract. A breach of contract is wilful and deliberate, as those words are herein used, only when the agent, in complete disregard of his contractual obligations, fails to perform or misperforms the promised services and has no substantial moral excuse for so doing, or is guilty of disloyal or grossly insubordinate conduct.”
If the agent sues the principal for compensation, sec. 469 of the Restatement (Second) of Agency (1957) provides that the employer may defend the suit by proving disloyalty and insubordination:
“Sec. 469. Disloyalty or Insubordination as Defense
“An 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 wilful 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.”
Comment
e
to sec. 469 states that if the principal in ignorance of the agent’s faulty conduct pays the agent, the principal can maintain an action to recover the amount.
In addition, because agents and trustees are classed together for many purposes as fiduciaries, it is instructive to look at the Restatement (Second) of Trusts (1957) which speaks to the effect of a breach of trust on the trustee’s compensation.
Sec. 243 provides:
“If the trustee commits a breach of trust, the court may in its discretion deny him all compensation or allow him a reduced compensation or allow him full compensation.”
The Comment to this section explains that the trustee is liable for any loss occasioned by his breach and that the reduction or denial of compensation is not in the nature of an additional penalty for the breach but is based on the fact that the trustee has not rendered or has not properly rendered the services for which compensation is given. Comments
c
and
d
discuss the discretion of the court in determining compensation and describe the factors the court should consider in reducing or denying the trustee compensation.
“c. The discretion of the court.
It is within the discretion of the court whether the trustee who has committed a breach of trust shall receive full compensation or whether his compensation shall be reduced or denied. In the exercise of the court’s discretion the following factors are considered: (1) whether the trustee acted in good faith or not; (2) whether the breach of trust was intentional or negligent or without fault; (3) whether the breach of trust related to the management of the
whole trust or related only to a part of the trust property; (4) whether or not the breach of trust occasioned any loss and whether if there has been a loss it has been made good by the trustee; (5) whether the trustee’s services were of value to the trust.
“d. Denial of compensation.
If the trustee repudiates the trust or misappropriates the trust property or if he intentionally or negligently mismanages the whole trust, he will ordinarily be allowed no compensation.”
It is clear that the agent is liable for damages in the event of a breach of duty and that any losses he caused may be offset against any claim he may have for compensation. However we do not adopt the rigid, mechanical rule urged by the employer that compensation is automatically denied to the agent during the period in which he has committed a wilfull and significant breach of duty of loyalty.
The employer relies on
Vendo Co. v. Stover,
58 Ill.2d 289, 321 N.E.2d 1, 10 (1974), in which the Illinois Supreme Court did not limit an employer to recovery of profits and required an employee to forfeit compensation, explaining.
“. . . The limitation on a plaintiff’s recovery proposed by defendants [namely limiting plaintiff’s recovery to profits] would mean that a fiduciary could violate his duty without incurring any risk. For if his misconduct were discovered the most that he could lose would be the profit gained from his illegal venture; the law would have operated only to restore him to the same position he would have been in had he faithfully performed his duties.”
See also Grace v. E. J. Kozin Co.,
538 F.2d 170, 175 (7th Cir. 1976), in which the court concludéd that in the event an employee breaches his duty of loyalty, compensation should be forfeited as a deterrent to wrongful conduct. We do not adopt the rationale of these cases.
We conclude that whether the agent should be denied all or any part of his compensation during the period in which he breached his duty of loyalty depends on consideration and evaluation of all the circumstances, including the nature of the employee’s services and breach of duty; the detriment to the employee if he is deprived of compensation; loss, expenses and inconvenience caused to the employer by the employee’s breach; and the value to the employer of the services properly rendered by the employee.
Cf. Town Plan & Eng. Assoc. Inc. v. Amesbury Spec. Co. Inc.,
369 Mass. 737, 342 N.E.2d 706, 711 (1971).
Because the trial court in the case at bar incorrectly concluded that it had no alternative but to deny the employee the entire compensation for the entire period during which he misappropriated funds, we reverse the judgment and remand the matter to the trial court to determine whether the employee should be denied all or
any part of his compensation upon consideration and evaluation of all the circumstances of the case at bar. Upon review of the stipulation the trial court may conclude that there is an inadequate record upon which to base a decision, and the trial court may ask for the taking of testimony or for an additional stipulation.
By the Court.
— Judgment reversed and cause remanded for proceedings not inconsistent with this opinion.
The following memorandum was filed April 15, 1980.
PER CURIAM
(on motion for reconsideration).
In our original opinion it is stated:
“We conclude that whether the agent should be denied all or any part of his compensation during the period in which he breached his duty of loyalty depends on consideration and evaluation of all the circumstances, including the nature of the employee’s services and breach of duty; the detriment to the employee if he is deprived of compensation; loss, expenses and inconvenience caused to the employer by the employee’s breach; and the value to the employer of the services properly rendered by the employee.
Cf. Town Plan & Eng. Assoc. Inc. v. Amesbury Spec. Co. Inc.,
369 Mass. 737, 342 N.E.2d 706, 711 (1971).”
This language is withdrawn and in its place the following is substituted:
We conclude that whether the agent should be denied all or any part of his compensation during the period in which he breached his duty of loyalty depends on consideration and evaluation of the relevant circumstances with a view to avoiding unjust enrichment of or unjust deprivation to either the employer or employee. The circumstances to be considered include, but are not limited to, the nature and extent of the employee’s services and breach of duty; the loss, expenses and inconvenience caused to the employer by the employee’s breach; and the value to the employer of the services properly rendered by the employee.10
Cf. Town Plan & Eng. Assoc. Inc. v. Amesbury Spec. Co. Inc.,
369 Mass.
737, 342 N.E.2d 706, 711 (1971). A consideration of these and other relevant factors, we believe, is consistent with established principles of equity and justice.
The burden- of proof to establish a right of the employer to recover compensation paid to the employee as a result of the employee’s breach of duty owed to the employer is upon the employer. The burden to go forward with evidence to establish mitigating circumstances which would limit the employer’s recovery is upon the employee.
Motion for reconsideration denied.