RRBDLAW.COM -- 917-520-2836 -- EMPLOYMENT AGREEMENTS AND RESTRICTIVE COVENANTS

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EMPLOYMENT AGREEMENTS AND RESTRICTIVE COVENANTS

PART II: RESIGNATION OR TERMINATION

Following the honeymoon.

Okay, so it didn't work out as you had hoped. They kept cutting your payout and the promised sales and administrative support never materialized. So, you asked around, found a better firm, and are getting ready to quit. On the other hand, maybe it just wasn't a good fit --- you know, the Branch Manager was a jerk or the corporate culture was too stifling. As a result, you just never managed to produce. Of course, you also started getting to work at 10:30 a.m., leaving at noon for lunch, playing a round of golf, and going home. So, if you're going to be honest, they had every right to fire you. Whatever the motivation, whatever the result, the employment is clearly coming to an end.

Time to re-read the employment agreement

Every employment agreement I've seen provides for a number of contingencies in the event of resignation or termination. Most notably a period of time comes into play during which so-called restrictive covenants prevent or limit you from interacting with your clients. Regardless of whether you resign or are fired, the industry jargon refers to the ending of the employment relationship as a "termination." Take a look at a Form U-5 and you will see that it is referred to as a Uniform Termination Notice for Securities Industry Registration and provides for a number of possible terminations:

Voluntary (I quit),
Deceased (I died),
Permitted to Resign (known as the PTR, "we plan on firing you but if you are prepared to resign now, we'll let you"),
Discharged (you're fired!), and
Other (none of the above).

FPRACTICE POINTER:

The phrase "termination for cause" has two meanings.

In popular usage, it means that you were fired for doing something wrong. But the concept of "wrong" falls within two distinct classes. In one sense, it may simply mean that you didn't produce enough commissions or you weren't the type of team player your employer desired. In another sense, it may mean that you were caught stealing money from widows and orphans. Consequently, causedoes not always mean that you did something illegal. It simply means that the employer perceived it had a legitimate right to terminate you, for business reasons or otherwise.

In legal usage, termination for cause generally has a more narrow meaning. In this sense, a contract or an agreement defines the "causes" under which an employee may be terminated. Such definitions routinely include insubordination; violations of company policies or of industry rules, regulations, or laws; conviction of a felony or certain misdemeanors, inability to maintain the required industry registrations, lack of production, etc. Consequently, if the employer intends to stay within the terms of the employment contract and avoid getting sued for breach, any termination thereunder must fall within the defined categories of "cause."

If you are alleged to have engaged in some activity which is deemed "cause," but there is a legitimate question as to that fact and you can successfully argue that before a court or arbitration panel, the BD may be required to pay damages for such a wrongful termination. Make sure you understand what constitutes "cause" before signing any employment agreement.

You made me do it, I didn't want to do it

A cute twist that some firms throw into an employment agreement is that the restrictive covenants kick in not only if you resign or are fired for cause, but also if you "provoke," "cause" or "instigate" your termination. Now there's an interesting angle. You didn't quit. We didn't fire you for cause. But you provoked your termination. I've never really understood why a BD wouldn't fire an employee for cause, when said employee engaged in conduct provoking his or her termination. This type of language is never precise, always results in lots of disputes, and seems calculated for back-door dalliances by the BD.

Non-Solicitation

Assuming that you quit, were terminated for cause or became a provocativeterminator, things will get nasty . . .and quickly. First, the BD will provide in the employment agreement that you will agree not to solicit accounts. Typically, BDs will seek to impose a one-year non-solicitation period, effective from the date of termination.

Now what exactly does this restrictive covenant (the non-solicitation clause) say? Well, the employment agreement you signed usually says that "I agree for a period of one year following my termination not to . . ." and then lands the old one-two punch. Generally you agree not to solicit by mail, phone, meeting, or any other means. Further, as if uncertain that they've covered all the bases, the BD then added that you cannot engage in solicitation directly or indirectly.

A somewhat funny story
A client signed an employment agreement with a non-solicitation provision. He never had an attorney review it and only came to me after his former employer sued him for breach of the non-solicitation provision. The client swore on a stack of bibles that he did not violate the non-solicitation agreement. He said he would take a lie detector test to support his contention that he had not mailed anything to any former account, had not phoned any former account, had not met with any former account, in fact, had not communicated with any former account in any way.
I was puzzled because according to the lawsuit, my client was accused of soliciting dozens of his former accounts. Further, my client admitted that many of those accounts were now resident at his new employer. Never one to be daunted by asking the stupid question, I inquired as to how all those accounts managed to migrate from the former to the present employer. My client, and to his credit he answered me sincerely and without any sense of the absurd, proudly stated that he had his cousin telephone the former accounts . . . but that he personally never engaged in any direct or indirect contacts.
Okay, so file that one under impermissible indirect solicitation.

The definition of an Account

The employment agreement usually defines an Account in the broadest terms favorable to the BD:existing accounts, leads, and prospects. In some agreements the non-solicitation provision describes an Account as either a client you served during your employment or one whose name became known to you during your employment.

Do you get the point? It's the one at the end of the dagger in your back!
The definition of an Account in many agreements is not limited to current clients generating commissions. It is expansive and includes not only all accounts currently generating commissions but may also cover dormant clients and non-existent clients (that is, leads and prospects).
What's a lead? What's a prospect? The employer will argue that leads and prospects are individuals and entities whose names became known to you during your employment. Well what if it was someone I met during a round of golf on my day off or through my spouse? Read the fine print in the agreement. Very often, the language will say that you are prohibited from soliciting leads or prospects that you learned about during your employment in any capacity.Meaning? Well, firms argue that if you were employed with us from 1996 through 1999 and you generated a lead or prospect during that time, it's ours . . . period. There's no such thing as a time out.

But what exactly is involved in soliciting?

A typical definition of solicitation starts off by restricting such conduct for one year and generally describes the activity as initiating any contact or communication of any kind.So arguably, and most importantly, client initiated contacts or communications do not necessarily fall within the category of solicitation. However, employers aren't that stupid and frequently specify that solicitation entails RR initiated contact or communication for the purpose of "inviting, encouraging, or requesting any account to engage in proscribed activities.

Although employment agreements often define the proscribed activities with different nuances, the substantive prohibitions tend to fall within three general categories:

No attempts to transfer accounts from the old BD to the new BD;
No attempts to open a new account at the new BD; and
No attempts to interfere in the account's relationship of the former BD.

The next installment: Breach, injunctions, and damages

I am in the process of assembling an online library of employment agreements and restrictive covenants. Please send me copies of such documents (feel free to delete your name if you so desire). Additionally, if you have been served with letters of complaint or pleadings, please include those. I will then assemble a free online library so that RRs may consult the agreements and better understand the differences among employers and within a given firm.

Send to bsinger@singerfru.com

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