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New York companies that require employees to sign noncompete agreements sometimes make deferred compensation conditional on whether the ex-employee actually complies with that noncompete pact.

That’s fine, according to state law. But the deal can collapse, as a new case shows, if you make the employee’s job so intolerable that it forces the person to quit (i.e., “constructively discharge” the employee).

When employees suffer a constructive discharge, they can still collect deferred compensation even if they violate the noncompete and go right to work for a direct competitor.

Recent case: Schroder Capital paid Paul Morris an annual salary plus a year-end bonus, which was deferred compensation vested after three years.

Morris signed a noncompete, agreeing to forfeit the bonus if he quit and went to work for the competition. When Schroder cut the amount of investment capital Morris was responsible for from $7.5 billion to $1.5 billon, he quit and started a hedge fund. Schroder refused to pay the deferred bonuses, so Morris sued.

The court had to decide which test to use to define a constructive discharge. It chose the constructive-discharge rule used by federal courts in discrimination cases. That test requires the employer to create an environment so intolerable that the employee would have no choice but to quit.

Now, a lower court will decide if a change in portfolio responsibility meets that high standard. If it does, Morris receives the bonus. If not, he forfeits it because he breached the noncompete provision of his employment contract. (Morris v. Schroder Capital Management, No. 137, Court of Appeals of New York, 2006)

Tip: This case makes it harder for New York employees to breach noncompete agreements and still collect deferred compensation. If you use noncompetes, now’s a good time to have a qualified attorney review them to ensure you take full advantage of the rule.  

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