You have been terminated! – involuntarily and without cause. A former employee often is presented with a severance agreement in exchange for securing certain post-employment benefits. It is important to consider how a severance agreement may affect the rights and benefits of a former employee, many of which may already be contracted to during the course of the employee’s employment. For example, a non-competition agreement may have been previously executed or the former employee may be a participant in an incentive compensation plan containing a forfeiture-for-competition clause. Often, these operative documents are drafted at different times and by different attorneys who may not be aware of the existence of such prior agreements. A hodge-podge of written agreements may result in ambiguities and be open to multiple interpretations – negating the very purpose for which these documents were originally created. The intent of these documents and the very purpose for their creation is to set forth a roadmap in the event of a dispute. If such documents do not achieve their intended purpose, responsibility for ambiguities, and language that may be susceptible to more than one interpretation, lies with the drafter. [1] Thus, in reviewing a severance agreement, a former employee should ascertain whether he/she is signing away any right to an already vested benefit. Careful consideration and negotiation with one’s former employer may be appropriate and necessary.

In the case of a person who has already been terminated, involuntarily, without notice and without cause - there may still be a way to recover benefits that have been potentially “forfeited.” In New York, courts disfavor non-competition agreements involving employees on public policy grounds. “Our economy is premised on the competition engendered by the uninhibited flow of services, talent and ideas. Therefore, no restriction should fetter an employee's right to apply to his own best advantage the skills and knowledge acquired by the overall experience of his previous employment. This includes those techniques which are but ‘skillful variations of general processes known to the particular trade.’”[2]

It is important to note that under the employee-choice doctrine, a restrictive covenant will generally be enforced without regard to its reasonableness if the employee has been afforded the choice between not competing (and thereby preserving his benefits) or competing (and thereby risking forfeiture).[3] This is the underlying premise of forfeiture-for-competition clauses found in incentive compensation plans and applies to an employee terminating his/her employment relationship, voluntarily. If it is the employer who has terminated the employment relationship, involuntarily and without cause, then New York Courts will examine the reasonableness of the restrictions of the forfeiture-for-competition clause.

Under a reasonableness analysis, a court must first determine whether the employer has a legitimate interest to protect, and whether this interest will protect the employer from economic injury caused by “unfair or illegal” conduct by the former employee.[4] Thus, the agreements may be enforced “to the extent necessary (1) to prevent an employee's solicitation or disclosure of trade secrets, (2) to prevent an employee's release of confidential information, or (3) in those cases where the employee's services to the employer are deemed special or unique.”[5] Courts will then balance the employer’s interests against the extent to which the non-competition agreement is unreasonable in “time, space or scope.”[6] In other words, “such [restrictive] covenants will be enforced only [to the extent it is] reasonably limited [in time and geographic scope], and then only to the extent necessary to protect” the employer's legitimate interests.[7]

It is important to remember that, in all likelihood, a former employer is not interested in continuing to distribute payments to a former employee after his/her employment has been terminated. When negotiating a severance agreement, it is important to ascertain the effect of the operative clauses on the rights to benefits previously contracted to and with a now former employer. Taking the appropriate course of action to assure receipt of all benefits due, will avoid unnecessary concern and, hopefully eliminate the possibility of a long and protracted legal dispute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. 

[1] Leninger v. Gibbs & Hill, Inc., 730 F.2d 903, 905 (2d Cir. 1984) (To the extent that the contract is ambiguous . . . the court must apply "the well-established rule that contractual ambiguities should be construed most strongly against the drafter.")

[2] Reed, Roberts Associates, Inc. v. Strauman, 40 N.Y.2d 303, 307 (1976)

[3] Lucente v. Int’l Bus. Mach. Corp.. 262 F.Supp.2d 109, 113 (S.D.N.Y. 2003)

[4] Id. (citing American Broadcasting Companies, Inc. v. Wolf, 52 N.Y.2d 394, 404 (1981))

[5] Id. (citing Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 70 (2d Cir.1999))

[6] Id. (citing American Broadcasting Companies, Inc. v. Wolf, 52 N.Y.2d 394, 403-4 (1981))

[7] Id. (citing Columbia Ribbon & Carbon Mfg. Co. v. A-1-A Corp., 42 N.Y.2d 496, 499 (1977))