Recovering Unpaid Executive Compensation

Senior compensation is paid in layers, and the layers behind the paycheck are the ones companies withhold. An executive who leaves, or is pushed out, frequently finds that the bonus for a completed year is suddenly discretionary, the deferred compensation account is subject to a condition nobody mentioned, the carried interest was never documented, and the equity that vested last quarter is now said to be forfeited.

The Law Offices of Albert Goodwin recovers unpaid compensation for executives in New York City, and the analysis begins with a question that determines everything else: which body of law governs the particular item you are owed.

Is It Wages, or Is It a Contract Claim?

This distinction is worth a great deal of money, because compensation that qualifies as wages under the New York Labor Law carries remedies that an ordinary contract claim does not: liquidated damages, prejudgment interest, and, critically, mandatory attorney fees for a prevailing employee. A claim for $180,000 in unpaid compensation is a very different negotiation when the company also faces the executive's fees and an equal amount in liquidated damages.

Under Labor Law section 190, wages means earnings for labor or services rendered, including earnings based on a commission or other basis. New York's Court of Appeals has held that incentive compensation which depends on factors beyond the employee's own performance, such as the overall financial success of the employer, and which remains within the employer's discretion, is generally not wages. The same court has enforced a bonus as wages where it was guaranteed and the employee's entitlement did not depend on employer discretion.

The practical consequences:

• Commissions are wages. Labor Law section 191 also requires that a commission salesperson's terms be set out in a signed writing, and where the employer has no such writing, the statute permits the employee's account of the terms to be presumed correct. New York courts have held that when a commission is earned depends on the parties' agreement, and absent an agreement, on when the salesperson produces a ready, willing, and able buyer.
• A guaranteed or formulaic bonus is usually wages. If the plan states a formula tied to your results and the employer retains no meaningful discretion, the label "bonus" does not control.
• A discretionary bonus pool tied to firm profitability is usually not wages, which pushes the claim into contract, quantum meruit, or a promissory theory.
• Executives are not excluded. Seniority and high pay do not remove Labor Law protection for the covered categories, although certain provisions of Article 6 apply differently to employees serving in an executive, managerial, or administrative capacity above a compensation threshold, which is an argument employers raise and which has to be analyzed provision by provision.

See wage payment claims and final paycheck claims.

The "You Must Be Employed on the Payment Date" Clause

This is the provision that defeats most executive bonus claims, and the one most worth fighting. Plans commonly require active employment on the date bonuses are paid, which allows a company to terminate an executive in February and refuse the bonus earned across the prior calendar year.

New York courts will enforce a clear condition of this kind where the compensation is genuinely discretionary. The arguments that succeed against it are specific: the compensation was earned rather than discretionary and therefore constitutes wages that cannot be forfeited by such a condition; the employer prevented satisfaction of the condition by terminating without cause, implicating the implied covenant of good faith and fair dealing; the plan language does not actually say what the employer claims; the condition was inconsistently applied to others; or the executive resigned for good reason after the bonus was effectively earned. Whether the termination was voluntary or involuntary is frequently dispositive, which is another reason not to resign without advice.

Deferred Compensation and Top-Hat Plans

Nonqualified deferred compensation arrangements for a select group of management or highly compensated employees, commonly called top-hat plans, occupy their own legal territory. They are generally covered by the federal Employee Retirement Income Security Act but exempt from its participation, vesting, and funding rules, which means the plan document controls substantive entitlement to a degree that would not be permitted in a qualified plan.

The consequences for a claimant are procedural and significant. A claim for benefits ordinarily must be brought under the federal statute rather than as a state law contract claim, which can mean the state claim is preempted. You generally must exhaust the plan's internal claims and appeals procedure before suing, and failing to do so can end the case. Where the plan grants the administrator discretionary authority to interpret its terms, courts often review the denial deferentially rather than deciding the question fresh, which makes the administrative record built during the appeal the record you will litigate on. And because these plans are unfunded by design, the executive is a general unsecured creditor of the company if it becomes insolvent, whatever the account statement says. Rabbi trusts provide protection against a change of heart, not against insolvency.

Handled correctly, the internal appeal is not a formality to get past. It is the case.

Equity the Company Says You Forfeited

Disputes over equity usually turn on documents rather than on fairness:

• Was there cause, as the plan defines it, which is often a different and broader definition than the one in the employment agreement. Where the two conflict, which controls is a real question.
• Was the vesting date reached, including whether a notice period, garden leave, or severance period counts as continued service. Many plans stop vesting at the last day worked rather than the end of the severance period.
• Did a good reason resignation occur, and was it properly noticed within the plan's deadline.
• Is the post-termination exercise window running, typically ninety days, and does the dispute toll it. It usually does not, which means vested options can expire while the parties argue.
• Is a repurchase right being exercised at the correct price, and is the valuation defensible.
• Does a forfeiture for competition provision apply, and does the employee choice doctrine support it given how the employment ended.

For partnerships and funds, carried interest and profits interests raise their own problems: whether the interest was ever documented, vesting and clawback on departure, the good leaver and bad leaver distinction, and whether distributions on unrealized investments are payable at all. Undocumented promises of carry are common and are litigated on emails, term sheets, and course of dealing.

Section 409A, Briefly

Nonqualified deferred compensation is subject to federal timing rules, and a settlement or renegotiation of deferred amounts can create a tax problem for the executive rather than the company, including an additional tax on the recipient. Severance can also be structured to fit within available exceptions. The point for a claimant is that how and when a disputed amount is paid matters, not merely how much. Our detailed discussion is at the negotiated exit of an executive.

Where the Claim Gets Decided

Many executive agreements and equity plans contain arbitration clauses, and where they do, the forum is usually determined before the merits are reached. Arbitration is faster and private, which cuts in different directions depending on whether the executive wants leverage from publicity or protection from it. Federal law limits the enforceability of pre-dispute arbitration agreements for sexual harassment and sexual assault claims at the claimant's election, which can affect a multi-claim case. New York's own limitation on mandatory arbitration of discrimination claims has generally been held preempted by federal arbitration law in cases governed by it. See arbitration and mediation and arbitration.

Deadlines

New York breach of contract claims are generally subject to a six-year limitations period, and Labor Law wage claims to a six-year period as well. Claims under a top-hat plan may be governed by a contractual limitations period in the plan document, which can be much shorter and is often enforced. Equity documents frequently contain their own notice and claim deadlines. The exercise window on vested options is the shortest clock in most matters, and it is unforgiving. We start every engagement by mapping the deadlines, because in this area an expired ninety day window has cost executives more than any adverse ruling.

You can contact us by phone at 212-233-1233 or by email at [email protected].