In a recent decision that should assist companies seeking to bind former employees to noncompete agreements, the New York Court of Appeals has adopted the federal “constructive discharge” test as the appropriate legal standard for determining whether or not an employee voluntarily left his or her employment. Morris v. Schroder Capital Management, Int’l, 7 N.Y.3d 616, 859 N.E.2d 503, 825 N.Y.S.2d 697 (N.Y. 2006).
The plaintiff, Morris, sued his former employer, Schroder, in federal district court, alleging breach of contract for failing to pay him deferred compensation benefi ts. The district court dismissed the action, fi nding that Morris had forfeited the benefi ts by violating a covenant not to compete. The court held that the covenant was valid pursuant to New York’s “employee choice” doctrine, which permits denial of deferred compensation under such covenants to employees who voluntarily leave a company’s employment. On appeal, the Second Circuit Court of Appeals certifi ed to New York State’s highest court the question whether the federal “constructive discharge” test—where an employer deliberately makes an employee’s working conditions so intolerable that the employee is forced to resign—is the appropriate legal standard to apply in determining whether Morris had voluntarily left his employment. Morris contended that the appropriate standard is whether the employer had failed or refused to keep him at the same high-level job with the salary, responsibilities and career potential he had previously enjoyed.
The court concluded that the “constructive discharge” test was the appropriate standard. In order to receive deferred compensation that otherwise would be forfeited because of a breach of a noncompete agreement, an employee must show that the employer “intentionally” made the employee’s work environment so intolerable that it compelled him or her to leave. This decision benefi ts New York employers by clarifying the law and adopting the more employerfriendly standard. However, it is still advisable to be mindful of potential complications in enforcing noncompete agreements, no matter how clearly they appear to be worded, and to consult an attorney in connection with enforcement efforts.
If you have any questions about this case, noncompete agreements, or New York employment law in general, please contact Alan Koral (212-407-7750), Daniel Green (212-407-7735), or any other Vedder Price attorney with whom you have worked.