A recent decision by New York’s highest court highlights the value to employers of initially setting forth the terms of employment in a written offer letter. In Ryan v. Kellogg Partners Institutional Services, the New York Court of Appeals upheld an award of $380,000 for an unpaid wage claim and attorneys’ fees, principally because the jury believed the plaintiff’s testimony that he was promised a $175,000 bonus by the defendant’s managing partner, and notwithstanding the managing partner’s testimony that he made no such promise.
Neither the employer’s employment-at-will policy and disclaimers, nor the Statute of Frauds provided a defense to the claim, but a properly drafted employment offer letter, which was missing here, would have made all the difference in the result.
The plaintiff testified that he was recruited to work for the defendant, which at the time was a fledgling securities brokerage firm. He testified that he sought an annual salary of $350,000 to change jobs, and, to meet his demand, the managing partner offered him compensation consisting of a salary of $175,000 and a guaranteed bonus of $175,000 payable within the first year of his employment. After accepting the position, but before starting, plaintiff completed an employment application with an employment-at-will acknowledgment. He also signed off on the employer’s handbook that confirmed his “at will” status, and specifically provided that:
[no] representative of the company . . . has the authority to enter into any agreement for employment for any specified period of time or to make any agreement contrary to [the employee’s at-will status]. [N]othing contained in the handbook may be construed as creating a promise of future benefits or a binding contract with [the employer] for benefits or any other purpose.
The new business started slowly and, according to the plaintiff, within the first year, the managing partner asked him to postpone the bonus for a year. Plaintiff claimed to reluctantly agree. There was, apparently, no documentation of this discussion or agreement. The plaintiff also testified that he discussed the bonus “many times” with the managing partner who, according to the plaintiff, “put him off.” Ultimately, plaintiff was offered a $20,000 bonus, which he refused to accept, and subsequently was terminated.
At trial, the managing partner contradicted the plaintiff’s testimony in “every conceivable way” on the topic of bonuses. He told the jury that the subject of a $175,000 bonus was never discussed before or after plaintiff was hired, and that bonuses were entirely discretionary.
The jury credited the plaintiff’s testimony and awarded the $175,000 bonus. The court found the failure to pay the bonus to be a violation of the wage payment provisions of the New York Labor Law and awarded attorneys’ fees of $205,000.
The Court of Appeals affirmed in all respects. In particular, the Court reasoned that the employment-at-will policy and acknowledgments did not provide a defense to this claim because, while the employment-at-will policy established that the plaintiff was not guaranteed employment for any period of time, and that his employment, compensation, and benefits were subject to termination, that policy did not establish that bonuses were discretionary, or that the plaintiff was not entitled to payment of compensation that he claimed was promised at the outset of his employment. According to the Court, the at-will disclaimers did not preclude an employee from recovering remuneration earned before his employment ended. It was for the jury to decide what agreement the parties had reached on the plaintiff’s bonus compensation.
The Statute of Frauds (New York General Obligations Law §§ 5-701 et seq.), which limits the enforceability of oral contracts by requiring a writing in certain enumerated circumstances, was not a defense here because there was adequate consideration for the alleged promise, and the bonus was scheduled to be paid within one year.
The Court of Appeals also approved the award of attorneys’ fees to the plaintiff on the theory that the failure to pay the bonus constituted a failure to pay wages under New York Labor Law. The Court noted that, subsequent to trial, the relevant Labor Law provision, Section 198(1-a), had been amended to increase the potential recovery to include liquidated damages of 100% of the wages found due (i.e., double damages plus attorneys’ fees).
The facts in Ryan v. Kellogg Partners illustrate the significant risk that employers take in not confirming the terms of employment through a written offer letter. Such an offer letter can incorporate at-will employment principles before the employee accepts a position. In addition, important terms of employment, including salary, benefits, bonus and incentive opportunities, can be clearly identified and not left to the vagaries of jury deliberations. The warning of Ryan v. Kellogg Partners is that substantial jury verdicts can rest on the testimony of a former employee. Employers who heed that warning will have thorough employment documentation -- beginning with a well-crafted offer of employment.
Last week, the Second Circuit Court of Appeals affirmed a Southern District of New York decision denying IBM Corporation's application for a preliminary injunction to enforce a broad non-competition agreement and to prevent a former high-level executive from working for Hewlett-Packard. The case illustrates the high standard under New York law to obtain preliminary injunctions to enforce non-competition agreements.
The case involved Giovanni Visentin, who worked for IBM in numerous roles during his 26 years of employment. His most recent position was General Manager of IBM's Integrated Technology Services ("ITS") business. In that position, he was responsible for the development and sale of ITS products and services throughout North America. In January of 2011, Mr. Visentin submitted his resignation from IBM to accept a position with Hewlett-Packard in the position of Senior Vice President, General Manager, Americas for Hewlett-Packard Enterprise Services.
Mr. Visentin had signed a non-competition agreement during his employment with IBM, which, on its face, seemed to preclude Mr. Visentin from working in his new position at Hewlett-Packard. The non-competition agreement provided that Mr. Visentin would not, during his employment and for a period of 12 months following the termination of his employment, become employed by any competitor of IBM in any geographic area in the world for which Mr. Visentin had job responsibilities during his last 12 months of employment with IBM. Clearly, Hewlett-Packard is one of IBM's principal competitors. However, the Southern District of New York held that the non-competition agreement was overly broad and refused to grant the preliminary injunction requested by IBM.
The Court reiterated the standard under New York law that "properly scoped non-competition agreements are enforceable to protect an employer's legitimate interests so long as they pose no undue hardship on the employee and do not militate against public policy." The Court also recognized that the protection of confidential information and trade secrets are legitimate interests of an employer in enforcing a non-competition agreement. The Court found, however, that the evidence did not support IBM's contention that any of its confidential information or trade secrets would be in jeopardy as a result of Mr. Visentin's employment with Hewlett-Packard.
The evidence indicated that Hewlett-Packard took steps to fence Mr. Visentin off from his former IBM clients and to avoid any overlap in responsibilities between his position with IBM and his new position with Hewlett-Packard. The new position was structured so that it was different from his IBM position in terms of subject area, geographic scope, and level of responsibility. For example, Hewlett-Packard narrowed Mr. Visentin's responsibilities during his first 12 months of employment (i.e., the length of the non-competition agreement) to include primarily segments of Hewlett-Packard's business for which he did not have responsibility during his employment at IBM. In the few segments for which Mr. Visentin did have responsibility during his employment at IBM, Hewlett-Packard made sure that Mr. Visentin worked only with existing Hewlett-Packard clients. In the geographic regions where Mr. Visentin had no responsibility during the last year of his employment with IBM, Mr. Visentin was responsible for Hewlett-Packard's full range of products and services for all existing and potential clients.
Based on all of these factors, the Court concluded that IBM had not satisfied its burden of demonstrating that any of its confidential information or trade secrets would be disclosed or relied upon by Mr. Visentin as a result of his new position at Hewlett-Packard, and refused to grant the application for a preliminary injunction.
For an employer seeking to hire a new employee who may have signed a non-competition agreement with a former employer, this case can serve as a blueprint of the steps that the employer can take to minimize the risk that the non-competition agreement will be enforced.
Over the past couple of decades, there has been much debate over whether arbitration agreements can be used to prevent employees from asserting discrimination and other employment-related claims in court. Lost in this debate, however, is a simpler and perhaps more reliable means of managing an employer’s risk: a jury waiver. A jury waiver is nothing more than a contractual provision in which an employee waives his or her right to a trial by jury in a legal proceeding brought against his or her employer. Such a provision is most commonly found in an employment agreement that is entered into when an employee is hired, but the agreement can be entered into at other times, such as when the employee obtains a raise or promotion.
Many employers assume that a jury waiver cannot be enforceable. We are, after all, trained from an early age to believe that we have a constitutional right to a trial by jury. In large part, that belief is accurate. The right to a jury trial is embodied in both the United States and New York Constitutions. And yet, the case law is generally clear that a jury waiver, if properly written and entered into, can have the effect of surrendering an employee’s right to a jury trial.
The more pressing question, then, is not whether a jury waiver is valid, but whether employers should take advantage of this opportunity. Similarly, is a jury waiver preferable to arbitration? Both jury waivers and arbitration agreements help avoid the danger and unpredictability of a jury trial, but there are some distinct advantages to jury waivers. Maybe the most obvious advantage is that, by keeping the process in the judicial system, a jury waiver allows the employer to exercise all of its formal, procedural rights, including the right to conduct discovery; the right to file a motion asking for the dismissal of the case; and the right to pursue a meaningful appeal. Anyone who has been through litigation knows that these tools can be powerful weapons for a defendant.
Detractors of jury waivers may respond by arguing that arbitration is cheaper and less time-consuming. In many instances, they are correct. However, most lawyers would agree that arbitration has become more protracted and expensive in recent years. Although it may still be a cheaper alternative to judicial litigation, that advantage is not as clear-cut as it was in the past. This is in no small part due to the fact that arbitration agreements are often challenged in court. In fact, the litigation over the enforceability of an arbitration agreement can be so costly and time-consuming that it often defeats the purpose of arbitration altogether.
Regardless, those employers who are considering the use of jury waivers must be aware of the best manner in which to frame such a waiver in order to enhance its chances of being held enforceable. The courts have made it clear that a jury waiver must be “knowing and voluntary” in order to be enforceable. As such, a waiver is more likely to withstand challenge if it contains specific references to the statutes for which a jury demand is being waived (e.g., Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act, etc.). On the other hand, if the waiver is buried in a lengthy, complex contract or is being forced upon an unsophisticated employee who is unlikely to appreciate the waiver’s implications, a court will be less inclined to find that the waiver is truly “knowing and voluntary.” An employer should therefore ensure that the agreement is carefully drafted to make clear the nature and scope of the jury waiver.
Ultimately, although often ignored as a possibility, jury waivers are a viable option for many employers. The state and federal courts have upheld their validity. Accordingly, despite all of the attention given to arbitration agreements, many employers would be well-advised to carefully consider the advantages of a jury waiver instead.
Often the simplest and most straightforward cases serve as helpful reminders of best practices. This is certainly true of a recent federal court decision applying New York contract law and the New York Labor Law (“NYLL”) to a claim for bonus compensation. In that case, including the right language in an offer letter made it easy for the court to dismiss the claims.
There are a number of best practices applicable to offer letters. At a minimum, of course, the offer letter should include an employment at-will statement, unless the employment is not intended to be at-will. But simply including that statement does not mean the offer letter cannot be contractual in nature for purposes unrelated to the right to discharge. Representations made in the offer letter can be enforceable, particularly representations about bonus compensation. If the offer letter refers to potential bonus compensation, it should also incorporate by reference the terms of the bonus plan, and explicitly describe any eligibility requirements, including, if applicable, the requirement of active employment on the payout date. Most important, if the bonus plan is a discretionary plan – meaning that whether there will be a payout and how much the payout will be is entirely discretionary with the employer -- that fact should be stated. Language like that can provide a complete defense to a claim by a discharged employee that he was entitled to bonus compensation as unpaid wages under the NYLL. Bonus compensation can be “wages” under the NYLL, but only if it has already been “earned” at the time of termination. It is not “earned,” if, at the time of discharge, the payment is conditioned on some future event or left to the discretion of the employer.
On the less intuitive side, consider including what lawyers refer to as a “merger clause.” A merger clause states that the offer letter supersedes prior discussions and agreements, if any, between the parties. When such a clause is included in an offer letter, it can be used to defeat a breach of contract claim based on an alleged oral promise of something different than what was stated in the offer letter.
Some employers do not like to complicate an offer letter or make it too lengthy. In many cases that is not necessary, but in others inserting some complication in the letter is just prudent risk management, which can pay significant future dividends.
