Leaving a job with unpaid commission, bonus or equity in New York

Start by sorting what you are owed

Commissions

A commission is earned when your agreement says it is. If the agreement is silent, past practice decides, and failing that, the commission is earned when you produce a buyer ready, willing and able to buy. Once earned, it is a wage. New York’s “long standing policy against the forfeiture of earned wages . . . applies to earned, uncollected commissions as well” (Weiner). In Weiner the Appellate Division reversed a directed verdict for the employee and sent the case back for trial. Whether his deferred incentive pay was a discretionary bonus or earned wages was a question for the jury. If it was earned wages, it said, he “could not contract to forfeit them.”

A commission that comes due after your last day is not lost just because you are gone. A firing aimed at cutting off commissions about to vest is its own claim. In Wakefield the Second Circuit reversed a jury award and ordered a new trial because of errors in the jury instructions. On retrial the salesman could recover by proving that the employer’s “desire to avoid paying him commissions that were virtually certain to become vested was a substantial motivating factor” in firing him. The full rules, including chargebacks and reassigned accounts, are in the guide: when a commission is earned and what happens when you are fired or quit.

Bonuses: wage or discretion?

The Labor Law protects “wages,” meaning earnings “for labor or services rendered.” Two Court of Appeals decisions mark the line.

• Not a wage: Truelove. A bonus pool existed only if the firm hit a revenue target, the CEO divided it in his sole discretion, and each quarterly installment required continued employment. That was a share in “the success of the employer’s entrepreneurship,” not a wage. Because the plan conditioned each installment on continued employment, the employee who resigned after the first one was not owed the rest. The Court affirmed summary judgment for the employer.
• A wage: Ryan. A broker left a well-paying job, and the jury believed his account that he was orally promised a $175,000 salary and a guaranteed, non-discretionary $175,000 bonus. The bonus was “expressly link[ed]” to his own work, and it “had been earned and was vested before he left.” At-will acknowledgments in his application and handbook did not defeat the claim: he was not claiming a right to keep his job, only pay for work already done, and the handbook did not mention bonuses. The Court affirmed a judgment for him that included attorney’s fees under the Labor Law.

Where the written plan does give management discretion over the amount, courts enforce it. In Namad, an employment contract said bonuses “shall be at the discretion of the management.” The employee argued that a sentence promising awards “consistent with the customary policy of the company” meant he should get about his old salary, but the Court of Appeals affirmed summary judgment against him. In Hunter, the Appellate Division affirmed dismissal of claims for unpaid bonuses that the contracts and handbook made “solely and completely a matter of defendant’s discretion.” Those bonuses were not wages, whatever the employees called them. For the limits on discretion, and for the 2021 amendment that settles that withholding a wage outright violates the law, see what “sole discretion” means and when an unpaid bonus is a wage claim.

What to read in your own documents: whether the bonus is a stated amount or formula, or is “at the discretion” of someone; whether it depends on your own production or on the firm’s results; and whether payment requires that you still be employed on the payment date. A promise made to recruit you, as in Ryan, is worth writing down now, with the date and who made it.

Deferred compensation and forfeiture for competing

Many senior employees are paid partly in awards that vest later and are forfeited if you leave to compete. New York calls this the “employee choice” doctrine: you can keep the award by not competing, or compete and give it up. The answer turns on how you left.

• If you quit voluntarily, the forfeiture is enforceable “without regard to reasonableness” (Morris). In Morris, a senior investment executive resigned to start a hedge fund and lost three years of deferred awards. He argued his job had been gutted. The Court of Appeals, answering a question certified by the Second Circuit, held that whether a resignation was involuntary is judged by the federal constructive discharge test. That test asks whether the employer deliberately made conditions so intolerable that a reasonable person would have felt compelled to resign. Being unhappy with a change in your assignments is not enough.
• If you were fired without cause, the employer cannot simply invoke the clause. In Post, two account executives lost their Merrill Lynch pensions for joining a competitor after, they said, being discharged without cause. The Court of Appeals held such a forfeiture “unreasonable as a matter of law.” It reversed summary judgment for the employer and reinstated the complaint, leaving for trial whether the departures were voluntary. Firing without cause “destroys the mutuality of obligation on which the covenant rests.” Post involved pension benefits and a clause that did not mention discharge; the Court left open how it would treat a plan written expressly to reach employees fired without cause. Morris later described the rule more generally: when the termination is involuntary and without cause, a court must decide whether the forfeiture is reasonable.

So before you resign, find out whether the awards you are walking away from carry a forfeiture-for-competition clause, and whether the way you leave turns a contestable forfeiture into one that is enforced as written.

Equity: the plan and the dates control

Equity tied to your employment is usually judged by the written plan or shareholder agreement, read as a contract. Under Truelove’s reasoning, pay that depends on the company’s success rather than your own work is generally not a wage. The leading New York case shows how strictly the dates are enforced. In Gallagher, an executive’s stock had to be sold back at book value if his employment ended before January 31, 1985, and at a formula keyed to earnings after that. He was fired on January 10. He said the firing was timed to buy his shares cheaply; by his account, as the dissent recounted it, that was about $89,000 instead of about $3,000,000. The Court of Appeals affirmed the dismissal of his claims for the higher price: he “got what he bargained for,” because the agreement he had negotiated with his lawyer allowed it and he was an at-will employee.

The lesson is practical. Read the vesting, repurchase and termination definitions in your equity documents before your last day is set. Whether you are terminated “without cause,” resign for “good reason,” or leave a few weeks after a vesting date can change the number more than anything else in the negotiation.

Before you sign a severance agreement

• Do not let earned pay become the price of the release. If you are 40 or older, a release of your federal age claim is valid only if you receive something beyond what you were already entitled to (29 U.S.C. § 626(f)(1)(D)). Commissions and bonuses you already earned do not count. See the over-40 rules.
• Know what you are giving up. A general release usually reaches unpaid commission and bonus claims, so value them before you sign. See what a release covers.
• Treat vesting and timing as negotiable. Accelerated vesting, the separation date, a pro-rated bonus and how the departure is characterized can be worth as much as the cash. See what is negotiable.
• Deductions and clawbacks. Labor Law § 193 limits what an employer may deduct from wages or require you to repay. See chargebacks and clawbacks.

What to gather

• Every version of your offer letter, commission plan, bonus plan and employment agreement, with the dates you received them.
• Equity award agreements, the plan document, any shareholder or repurchase agreement, and your vesting schedule.
• Commission statements, bonus letters, and pay stubs for the last two years.
• Emails or notes of any promise about pay, especially one made to recruit you.
• Any non-compete, non-solicit or forfeiture clause, and the definitions of “cause” and “good reason.”
• The date you were told you were leaving, and what was said about why.