Public Officials And Employees Ethical Obligation To Avoid Even Indirect Financial Conflicts Of Interest

By: Morin I. Jacob
League of California Cities Human Resources Bulletin, December 01, 2011

Public employees and officials have ethical obligations that are unique to them and are part and parcel of their roles in the public sector.  For example, they are required to act in the best interests of the public at all times.  They are charged with the fiduciary duty to protect and manage public funds, and must at all times conduct themselves and their business dealings in accordance with ethical standards, regulatory requirements, and the public trust.  Violations of ethical obligations carry a multitude of consequences that vary depending on the type of offense.  Penalties can range from civil or criminal sanctions to permanent forfeiture of state public office.  In addition, when government employees fail to comply with ethical obligations they may also be subject to discipline, up to and including discharge.

Government Code section 1090 prohibits government employees and officials from being financially interested in a contract made in their official capacity.  The public official or employee must not be distracted by personal financial gain, or even by the possibility of personal financial interest.  The statute removes or limits any possibility that an official or employee will be influenced by any direct or indirect personal interest when making an official decision.

The term "financial interest" is not defined by statute.  However, through the courts, and opinions issued by the Attorney General, we generally understand the inquiry to be whether a public employee may realize any private gain which would cause his or her loyalties to be divided in serving his or her employer.  For purposes of Section 1090, if a contract would benefit an employee or official's source of income, it benefits the employee official and a violation occurs.

The financial interest can be direct or indirect.  For example, an official or employee has a "financial interest" in the community property earnings of his or her spouse.  This is true even if the couple has an agreement to treat their earnings as separate property (i.e., a "prenuptial agreement").  Just recently, for example, the Attorney General issued an opinion addressing whether the financial interests of one spouse would be attributable to the other spouse under Section 1090 if the couple had a prenuptial agreement specifying that each spouse has no present or future financial interest in the income or assets of the other.  The Attorney General opined that the financial interests of the spouse would still be attributable to the public official.  The Attorney General opined that a person's interest in a spouse's employment and income is a per se financial interest within the meaning of Section 1090.  Although the scope of prenuptial agreements has expanded over time, the law still imposes an affirmative obligation on each spouse to support the other during marriage.  So, for example, a city council member cannot enter into a contract that would financially benefit his/her spouse because that financial interest will be indirectly attributed to the council member.  And, having a prenuptial agreement in place will not extinguish the financial conflict interest that exists.

The consequences of a Section 1090 conflict are harsh.  A public employee or official cannot avoid a conflict merely by abstaining from the decision-making process.  Moreover, a single public official's interest in a contract prevents the entire legislative body from entering into the contract.  Finally, a contract that violates Section 1090 is absolutely void.  Since a void contract from a legal standpoint does not exist, it means the contract is not enforceable. 

If a court finds a contract void because of a Section 1090 violation, it can impose various remedies including the requirement that the party with the illegal interest forfeit and repay monies obtained through the contract.  Disgorgement of profits is particularly likely, since public officials and other fiduciaries cannot profit by a breach of their duty.  Further, a public official who violates the statute, even in reliance on legal advice, may still face both civil and criminal liability.  Anyone who willfully violates Section 1090 may not only be punished by a fine or by imprisonment, but may also be forever disqualified from holding any public office in California.

Morin I. Jacob (mjacob@lcwlegal.com) is an Of Counsel with Liebert Cassidy Whitmore's San Francisco office, a California labor and employment law firm representing public agency management.  Morin has served as a member of the League of California Cities Employee Relations Committee.  She is also a contributor to the firm's California Public Agency Labor & Employment Blog.

Reproduced with permission from the League of California Cities, (December 2011).

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