The Employee Choice Doctrine in New York: Can You Forfeit Deferred Compensation or Unvested Equity for Joining a Competitor?
You run a portfolio team at an asset manager on Park Avenue, and a rival across town has offered you a bigger seat. The catch is roughly $3 million in deferred compensation and restricted stock you haven't vested yet, plus a plan document saying it all disappears if you “engage in competition.” Down the hall, your general counsel is reading the same document and wondering whether it will hold up. In New York, the answer turns on the employee choice doctrine, and on details that executives and employers both routinely get wrong.
Key takeaways
If you resign voluntarily and compete, New York usually enforces forfeiture of unvested deferred pay without asking whether the restriction is reasonable.
If an employer fires you without cause, forfeiting your earned benefits because you compete generally won't hold up.
A cut in title or responsibilities rarely counts as being forced out, because the constructive discharge test is strict.
Clauses requiring you to repay money can get tougher scrutiny than clauses making payment conditional on not competing.
Where the case is heard matters, because New York's appellate departments disagree on how far the without-cause rule reaches.
Why is it a mistake to treat a forfeiture-for-competition clause like an ordinary non-compete?
Because New York courts enforce a forfeiture-for-competition clause against an employee who quits voluntarily without asking whether the restriction is reasonable, which is a far easier test for the employer than the one applied to a non-compete. That's the employee choice doctrine in a sentence.
A traditional non-compete flatly bars you from working for a rival, and New York courts are skeptical of those. Under the reasonableness test the Court of Appeals set out in the BDO Seidman case, a restrictive covenant is enforced only to the extent it's no greater than needed to protect the employer's legitimate interest, doesn't impose undue hardship on the employee, and doesn't harm the public. Plenty of non-competes fail that test in whole or in part.
A forfeiture clause works differently. It doesn't stop you from competing. It says that if you compete, you give up a benefit, typically unvested deferred compensation, a retention award, or post-employment payments. In Morris v. Schroder Capital Management International, 7 N.Y.3d 616 (N.Y. 2006), the Court of Appeals reaffirmed that when post-employment benefits are conditioned on not competing, the forfeiture is enforceable without any reasonableness review if the employee left voluntarily. The Court explained that under the doctrine, “an employee is given a choice in either preserving his rights under an employment contract by not competing or losing them by engaging in competition.”
For executives, the arguments you've heard about non-competes being hard to enforce may not help you at all. Walk across Sixth Avenue to a competitor after resigning, and you may simply lose the money. Have the plan documents reviewed before you sign an offer letter, because the forfeiture language often sits in a separate award agreement rather than your employment contract.
For employers, the flip side matters just as much. Because a forfeiture clause doesn't bar competition, it won't get you a court order stopping a departing executive from soliciting clients or using your data. For that you need a properly drafted restrictive covenant and, usually, an injunction. Under CPLR § 6301, a court may grant a preliminary injunction where the defendant is doing or threatening an act that violates your rights and tends to render the judgment ineffectual, and a temporary restraining order where immediate and irreparable injury will result before a hearing can be held. We walk through that process in our guide on preliminary injunctions and TROs in New York, and the related remedies in our post on trade secret misappropriation by a former employee.
Why doesn't a demotion or shrinking role let you quit and keep your deferred compensation?
Because New York judges whether a resignation was involuntary under the strict constructive discharge test, and a reduced role, even a dramatic one, usually doesn't meet it. Executives often assume that if the firm sidelined them, they were pushed out and the forfeiture shouldn't apply. Courts don't see it that way.
Morris shows how high the bar is. The executive had seen the assets under his management cut from $7.5 billion to $1.5 billion before he left and joined a competitor. The Court of Appeals held that “the well-established constructive discharge test is appropriate in the context of the ‘employee choice’ doctrine,” and the employer prevailed. That test generally asks whether the employer deliberately made working conditions so intolerable that a reasonable person would feel compelled to resign. Losing prestige, responsibility, or a book of business usually isn't enough by itself.
If your role is being cut back, don't resign in frustration and assume you'll sort out the money later. Document what's happening. Ask directly whether the firm is terminating you, because a termination without cause changes the analysis. And try to negotiate a separation agreement addressing your unvested awards before you give notice; once you've resigned and started at a rival, most of your leverage is gone.
If you end up disputing a forfeiture, watch the clock. An action on a contractual obligation generally must be brought within six years under CPLR § 213(2), but when that period starts depends on when each payment was due. Check the plan documents for other deadlines as well. Many executive deferred compensation plans are governed by the federal ERISA statute. Federal law may then control the dispute instead of the New York rules discussed here, and you may have to go through the plan's internal claims process before suing, often on much shorter timelines. Some award agreements also set their own shortened limitations period or require arbitration.
Why can you lose stock options for joining a competitor even when the grant has no forfeiture clause?
Because a New York court may treat the equity as given in exchange for your promise not to compete, and if you break that promise, the employer can seek to unwind the grant. Executives tend to scan option agreements for the word “forfeit.” Its absence isn't the safe harbor many assume.
In Lenel Systems International, Inc. v. Smith, 106 A.D.3d 1536 (4th Dep't 2013), stock options had been granted in exchange for a non-compete. The employee resigned voluntarily, joined a competitor, and, when the company sued to rescind the options, argued the restriction was unreasonable. The Fourth Department applied the employee choice doctrine and rejected that defense. It held that “the absence of an explicit forfeiture-for-competition clause in the Option Agreements does not prevent plaintiff from seeking rescission of the stock options under the circumstances of this case,” because his promise not to compete “was the sole consideration for the Option Agreements.” His summary judgment motion was denied, and the rescission claim went forward on whether he breached and whether the breach was material.
If you hold equity at a New York company, whether a Hudson Yards fintech or a Hauppauge manufacturer, read the grant alongside every restrictive covenant you've signed. If the paperwork ties the equity to a promise not to compete, assume a court may connect them. For employers, Lenel is helpful but no substitute for clear drafting. Relying on a court to infer the link invites exactly the litigation that company had to fight.
Why does firing an employee without cause undercut your forfeiture clause?
Because New York's highest court has held that when you terminate an employee without cause and then forfeit his earned benefits because he competes, the forfeiture is unreasonable as a matter of law. The doctrine depends on the employee making a choice. If you made it for him by firing him, the doctrine falls away.
That rule comes from Post v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 48 N.Y.2d 84 (N.Y. 1979). Employees went to work for a competitor, and the firm forfeited their pension benefits. The Court of Appeals held that where the discharge was involuntary and without cause, “such a forfeiture is unreasonable as a matter of law and cannot stand.” It reversed summary judgment for the employer and left the question of whether the terminations were voluntary for trial.
Downstate courts have applied Post beyond pensions. In Scott v. Beth Israel Medical Center, Inc., 41 A.D.3d 222 (1st Dep't 2007), a terminated executive sued for severance and contract damages alleged at more than $29 million. The trial court ruled he forfeited severance by opening his own medical practice, treating it as irrelevant whether he was fired with or without cause. The First Department reversed and reinstated the complaint. In Grassi & Co. v. Janover Rubinroit, LLC, 82 A.D.3d 700 (2d Dep't 2011), the Second Department refused to enforce a restrictive covenant and client-reimbursement clauses against an employee the firm had terminated without cause, because the “mutuality of obligation” on which the covenant depended had ceased to exist.
Employers shouldn't assume they can fire someone, call it a restructuring, and keep the forfeiture. Scott shows that if you claim the firing was for cause, that dispute must be resolved before the forfeiture is enforced, which can mean depositions and a trial about your own reasons for the termination. Define “cause” carefully and make sure your file supports it. Post also expressly left open whether a clause unmistakably covering without-cause discharges would change the result, so a plan that's silent on the point gives up an argument you might otherwise have.
Why does drafting a clawback instead of a vesting condition invite the reasonableness test?
Because some New York courts treat a clause that makes a departing employee pay money back differently from one that simply conditions whether a benefit is paid, and the repayment version can be judged under the full reasonableness standard. The structure you pick can decide which test applies.
In Davis v. Marshall & Sterling, Inc., 217 A.D.3d 1073 (3d Dep't 2023), employment agreements required departing employees to share commissions with their former employer. The employees argued they'd been terminated without cause. The Third Department wrote that “Post involved the forfeiture of pension plan benefits and we find that its holding is limited thereto,” tested the payback clause under the BDO Seidman standard regardless of how the employees left, and upheld summary judgment on liability for the employer. The without-cause argument failed, but the clause also had to survive reasonableness review instead of getting the employee choice doctrine's lighter treatment.
Davis expressly acknowledges that the First and Second Departments read Post more broadly, and Grassi refused to enforce reimbursement clauses against a without-cause terminee. So the same clause, on the same facts, may fare differently in a Manhattan or Mineola courtroom than in Albany. A forum-selection clause naming New York County, where appeals go to the First Department, is a substantive choice, not boilerplate.
There's no one-size-fits-all contract clause. Attorney's-fee provisions, forum-selection clauses, and arbitration clauses each help in some deals and hurt in others, so they should be chosen for the deal in front of you. An arbitration clause in an executive plan may keep a departure dispute out of public filings, but arbitration awards get very limited court review. Our guide to selecting an arbitrator in AAA commercial disputes covers that tradeoff.
Choice of law needs the same care. General Obligations Law § 5-1401 lets parties to a transaction of at least $250,000 choose New York law even without a reasonable relation to the state, but the statute says it doesn't apply to contracts for labor or personal services. An employer with executives in Connecticut or New Jersey can't lean on that statute to make New York law stick.
Disputes over contracts drafted with AI tools are also becoming more common. AI can produce a polished generic contract, but if you don't know what you need it to say, it may leave out the terms that protect you, and that gap has become a real source of litigation. A generic equity plan won't know whether you want a vesting condition or a clawback. Before finalizing any plan, confirm it does the following:
States whether the award is conditioned on non-competition or requires repayment, chosen deliberately.
Addresses resignations, for-cause terminations, and without-cause terminations separately and expressly.
Defines “cause” and “competition” with specifics rather than general language.
Lines up with the award agreements and restrictive covenants so the documents don't contradict each other.
Frequently Asked Questions
Does the employee choice doctrine apply if I was laid off?
Generally not. Under Post, forfeiting earned benefits because an employee fired without cause later competes is unreasonable as a matter of law, and downstate courts have extended that reasoning to severance and reimbursement clauses. The Third Department limits Post to pension benefits, and employers often dispute whether a termination was truly without cause.
Is deferred compensation considered “wages” under the New York Labor Law?
Sometimes. Labor Law § 190(1) defines wages as earnings for labor or services rendered, and § 193 bars deductions from wages except as the statute allows. Courts have generally treated discretionary bonuses and pay tied to firm performance as outside that definition, but if a prevailing employee's claim qualifies as a wage claim, § 198 requires attorney's fees and, absent the employer's good faith, liquidated damages equal to 100% of wages due.
Can my employer get an injunction to stop me from joining a competitor based only on a forfeiture clause?
Usually not. A forfeiture clause gives the employer a right to withhold the benefit, not to stop you from working. Stopping competition generally requires a separate restrictive covenant that survives the reasonableness test, plus a showing under CPLR § 6301.
How long do I have to sue over forfeited deferred compensation?
Breach of contract claims generally carry a six-year limitations period under CPLR § 213(2), and when the period begins depends on when each payment was due under the plan. But if your plan is governed by the federal ERISA statute, or your award agreement sets a shorter deadline or requires arbitration, different and often shorter timelines may apply. Have the documents reviewed promptly.
Under the employee choice doctrine, a voluntary departure to a competitor can cost you unvested pay without any reasonableness review, while a without-cause firing usually defeats the forfeiture. For employers, the drafting choice between a vesting condition and a clawback, and the venue where a dispute lands, can decide which rules apply. To see how these fights fit into business litigation more broadly, read our overview of common commercial litigation cases in New York.
If you or your business is facing a dispute over forfeited deferred compensation, unvested equity, or a forfeiture-for-competition clause, Reza Yassi at Yassi Law PC is ready to help. Call us today at 646-992-2138 for a consultation.
Written by Reza Yassi | LinkedIn
Prior results do not guarantee a similar outcome.
This article is for informational purposes only and does not constitute legal advice. Although I am an attorney, I am not your attorney, and reading this article does not create an attorney-client relationship. Laws vary by jurisdiction and may have changed since the publication of this article. For advice specific to your situation, consult a qualified attorney.
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