In Morris v. Schroder Capital Management International (November 2006), the New York Court of Appeals recently issued a decision concerning the "employee choice doctrine." The employee choice doctrine applies when an employer conditions an employee's receipt of post-employment benefits on the employee's compliance with a restrictive covenant (such as where a stock option plan or deferred compensation plan provides for the forfeiture of benefits if the employee leaves to work for a competitor). According to this doctrine, if an employee is afforded the choice between receiving such benefits and refraining from competing against his former employer, or forfeiting such benefits and choosing to compete with his former employer, a court will uphold a restrictive covenant without considering whether the covenant is reasonable. In practice, if an employee leaves his employment voluntarily and competes with his former employer, a court will enforce the forfeiture of the post-employment benefits without regard to the reasonableness of the restrictive covenant. On the other hand, if an employee is terminated involuntarily and without cause and then competes with his former employer, a court will not apply the employee choice doctrine and will instead determine whether to uphold the employee's forfeiture of benefits based on whether the restrictive covenant was reasonable.
In 1997, Plaintiff Paul M. Morris commenced employment with Schroder Capital Management International ("Schroder"), an investment banking and asset management company and subsidiary of Schroders plc. As a senior vice president and head of domestic equities at Schroder, Morris was paid an annual salary plus a year-end bonus. Part of the year-end bonus was considered a "deferred compensation award" that would not vest until three years after the date of issue. The plans that governed the deferred compensation that Morris was awarded for the years 1997, 1998 and 1999 (and that would vest respectively in 2001, 2002 and 2003) each contained a forfeiture provision that provided that all deferred compensation would be forfeited if Morris resigned before the end of the three-year vesting period and became employed by a company that competed with Schroder. Morris resigned in 2000 and started a hedge fund prior to receiving any deferred compensation payments. Schroder informed Morris that because he was engaging in a business that was competing with Schroder, Morris had forfeited his deferred compensation benefits.
Subsequently, Morris commenced an action in the United States District Court for the Southern District of New York against Schroder, alleging breach of contract for failure to pay him deferred compensation benefits. Morris argued that he was entitled to the deferred compensation benefits because he did not leave his job voluntarily — that because Schroder significantly decreased his job responsibilities (in particular, the company reduced the amount of assets over which Morris had control from approximately $7.5 billion to $1.5 billion), Morris had a "dead-end job" and he was forced to resign. Schroder filed a motion to dismiss the action on the pleadings for failure to state a claim, alleging, in part, that Morris's claims were barred by the employee choice doctrine.
The District Court granted Schroder's motion to dismiss, holding that Morris voluntarily left his job and that the non-competition provisions in the deferred compensation plans were therefore protected by the employee choice doctrine. In arriving at this conclusion, the District Court applied the constructive discharge test to determine whether Morris voluntarily left his job. In employment discrimination cases where employees claim that they were "constructively discharged" as a result of an alleged hostile work environment, courts have held that an employee is "constructively discharged" from his job when an employer "rather than directly discharging an individual, intentionally creates an intolerable work atmosphere that forces an employee to quit involuntarily. Working conditions are intolerable if they are so difficult or unpleasant that a reasonable person in the employee's shoes would have felt compelled to resign." Whidbee v. Garzarelli Food Specialties, Inc., 223 F.3d 62 (2d Cir. 2000). In applying the constructive discharge standard to the employee choice doctrine in this case, the District Court held that at the time of Morris's resignation, his working conditions "were not so intolerable that a reasonable person would have been forced to leave the job."
Morris appealed this decision to the United States Second Circuit Court of Appeals. The Second Circuit then certified the following questions to the New York State Court of Appeals, which the New York State Court of Appeals accepted: "(1) Is the factual determination of involuntary termination (i.e., whether an employee quit or was fired) under the New York common law employee choice doctrine governed by the constructive discharge test from federal employment discrimination law?" and, "(2) If not, what test should courts apply?"
The New York State Court of Appeals agreed with the District Court's decision to apply the constructive discharge test, concluding that the constructive discharge test is "well-established" and "is appropriate in the context of the ‘employee choice doctrine'" when determining whether an employee left his employment voluntarily or involuntarily. Morris had argued that the correct standard to apply is whether an employer is willing to employ the employee in the same or a comparable job. In reaching its decision, the Court explained that the essence of the employee choice doctrine is that "an employee is given a choice [to] either preserv[e] his rights under an employment contract by not competing, or to los[e] them" by competing. The Court further stated that if an employer "intentionally makes the employee's work environment so intolerable" that the employee is compelled to leave, the "choice" is "essentially taken away from the employee." In such situations, the Court explained that, "an employer should not be permitted to enforce an unreasonable noncompete clause and simultaneously deny the employee his benefit under the guise of the employee choice doctrine." The Court also made clear, however, that for the test to be satisfied, the workplace "atmosphere must be so intolerable as to compel a reasonable person to leave" and that the test would not be satisfied if an employee leaves his job merely because he is "simply dissatisfied with a change in his job assignments."