February 8, 2024

On January 29, 2024, the Delaware Supreme Court upheld the enforceability of a forfeiture-for-competition provision in a limited partnership agreement in Cantor Fitzgerald, L.P. v. Ainslie. This provision allowed Cantor Fitzgerald to withhold payments from former partners’ capital accounts if they engaged in competitive activities within four years of leaving the partnership. Initially invalidated by the Delaware Chancery Court, which treated it like a traditional non-compete agreement subject to a reasonableness standard, the Supreme Court reversed this decision. The court emphasized Delaware’s policy of contractual freedom and the principle of giving maximum effect to partnership agreements under the Delaware Revised Uniform Limited Partnership Act (DRULPA).

The Delaware Supreme Court concluded that forfeiture-for-competition clauses should be evaluated under the “employee choice” doctrine, which upholds the enforcement of agreements absent unconscionability or bad faith. Unlike traditional non-compete agreements, forfeiture provisions allow employees to choose between competing and forfeiting benefits. The court highlighted that traditional non-compete agreements restrict an employee’s livelihood, warranting reasonableness review due to policy concerns. However, forfeiture-for-competition provisions do not restrict an employee’s ability to work or provide services, thus warranting different analytical frameworks.

Additionally, the court distinguished forfeiture-for-competition clauses from liquidated damages provisions, stating they set up a condition precedent to payment rather than penalties for breach of contract. The ruling aligns with Delaware’s precedent and the majority “employee choice” approach in other jurisdictions, such as New York, which support contractual freedom.

Contrary to recent trends in the U.S., including proposed bans by the Federal Trade Commission (FTC) and enacted bans in states like California, the ruling suggests that non-competes can be enforceable if properly tailored and warranted. The court’s explicit distinction between forfeiture-for-competition provisions and employee non-competes may limit its broader applicability in employment law, however. Businesses should consider alternative measures like garden leave provisions and non-solicitation covenants to protect their interests while respecting employees’ freedom of choice.

To read how CASTAYBERT PLLC can assist you with employment law matters, click here.

January 30, 2024

Employers must carefully consider the confidentiality and severance clauses they include in their agreements, as they may inadvertently violate whistleblower protection laws. Recent enforcement actions by the Securities and Exchange Commission (SEC) have resulted in significant fines for violations of Rule 21F-17, which prohibits actions that impede individuals from reporting potential securities law violations directly to the Commission.

Common clauses in employment agreements, confidentiality agreements, non-disparagement provisions, and settlement agreements have been found to violate Rule 21F-17. These include confidentiality clauses that restrict employees from disclosing information to government regulators without prior consent, clauses that prohibit employees from initiating contact with regulators, and settlement terms that prevent employees from collecting awards from whistleblower programs. Recent enforcement actions against companies like D.E. Shaw, Activision Blizzard Inc., and The Brink’s Company demonstrate the SEC’s commitment to enforcing Rule 21F-17.

Private employers, along with entities in customer and vendor agreements, must also comply with these regulations, as shown by SEC actions against Monolith Resources LLC and J.P. Morgan. Employers should also be aware that other federal agencies, including the Department of Justice (DOJ), the Department of Labor, the IRS, the Department of Transportation, and the Commodities Futures Trading Commission, also have similar whistleblower protection rules. Compliance with these agencies’ rules is equally important.

To avoid penalties, employers should review their policies and agreements to ensure compliance with Rule 21F-17 and other applicable regulations. This involves including carve outs for communications with regulators and ensuring that clauses are not overly broad and do not impede whistleblowing activity. Given the SEC’s demonstrated commitment to enforcing Rule 21F-17, compliance is essential to avoid possible penalties and other legal consequences.

To read how CASTAYBERT PLLC can assist you with employment law matters, click here.

January 16, 2024

On November 30, 2023, Governor Kathy Hochul declined to sign a proposed bill banning the use of non-compete agreements between employers and employees in New York. Expressing concerns about the overbroad nature of the proposed ban, Governor Hochul believes it failed to strike the right balance in safeguarding low and middle-income workers and acknowledging the greater bargaining power of higher-income workers. Instead of endorsing a wholesale ban, Governor Hochul proposed a minimum salary requirement of $250,000 for employees to be subject to such agreements. Based on the Governor’s remarks, it appears that New York may follow the lead of other states like Illinois and Maryland in establishing minimum income thresholds rather than a complete ban on non-competes. Given New York’s significant economy of about $2 trillion, monitoring the state’s next steps will be essential for both employers and employees in the state.

To read how CASTAYBERT PLLC can assist you with employment law matters, click here.

January 16, 2024

Traditional non-compete agreements have faced increased judicial scrutiny, and several states have passed laws restricting their use. Some states have banned non-competes for low-wage workers. Others have limited them for specific categories such as technology and healthcare professionals. In response, employers may want to consider using garden leave provisions as an alternative to non-competes.

Differences between Garden Leave and Non-Compete Provisions

Under typical notice provisions, employees actively work during their notice period. By contrast, under garden leave provisions, employees are relieved of their duties and responsibilities during their notice period. So employees on garden leave remain employed and are paid a salary, and therefore, continue to owe a duty of loyalty to their employer. This prevents them from working for a competitor during the garden leave period. In this way, the garden leave functions like a traditional non-compete but is challenged less often than non-competes.

During the garden leave period, the employer generally can:

1. Remove employees from their active duties.
2. Exclude employees from the workplace.
3. Prevent employees from contacting staff and customers or clients.
4. Limit or cut off access to the employer’s computer systems, email and other documents, and information.

Benefits and Drawbacks of Garden Leave

Advantages of garden leave include a higher likelihood of enforcement due to shorter and paid durations. Garden leave also protects employers by extending the duty of loyalty throughout the garden leave period and allowing smoother transitions in client relationships. Drawbacks include the cost of paying non-working employees, shorter durations compared to non-competes (usually 30 to 90 days while typical non-compete periods last 6 to 18 months), and potential logistical issues regarding electronic access if the employee must perform transitional duties. Some courts are also reluctant to enforce garden leave provisions because doing so would require the court to order employees to continue an at-will employment relationship against their will.

Drafting Considerations for Employers That Want To Use Garden Leave Provisions

To maximize the employer’s protections and increase the likelihood of enforcement, when drafting garden leave provisions, employers should:

1. Require signed agreements and ensure the employee’s clear acknowledgment of the provision.
2. Identify covered employees. Garden leave provisions are generally not used for low-level employees but may be useful for employees with substantial access to trade secrets and other confidential information, and sales or other employees responsible for developing relationships with clients.
3. Define garden leave period. Periods of 90 days or less are the most common, but some can last up to six months. Garden leave periods for much longer than that are more likely to be challenged, especially in non-negotiated agreements. The most important factor to determine the garden leave period is the protectable interests at stake. Employers should consider (1) the nature of the employee’s position and (2) the particular concerns associated with the position. Employers may have incrementally longer garden leave periods for employees with greater responsibility.
4. Determine employee compensation during the garden leave period, ensuring regular salary and benefits at a minimum.
5. Reserve employer’s right to exclude employees from the workplace and restrict access.
6. Explicitly reserve employer’s discretion to waive or modify garden leave restrictions in writing.
7. Consider combining garden leave with non-compete and non-solicitation provisions for added enforcement avenues. 

To read how Castaybert PLLC can assist you with employment law matters, click here.

December 20, 2023

On September 14, 2023, Governor Kathy Hochul signed Assembly Bill 836 (A836) into law, restricting New York employers, including asset managers, access to prospective or current employees’ personal, private social media accounts. The law aims to protect employee privacy and prevents employers from taking adverse actions against individuals who refuse to provide such access. An earlier post discusses the key changes under the new law in more detail.

For asset managers, of particular concern is the potential conflict between A836 and the Securities and Exchange Commission’s (SEC) enforcement efforts focused on “off channel” business communications. The SEC has settled actions with several registrants for failing to retain business communications made through alternative methods, including text messages and electronic messaging applications. The SEC asserts such failures could be in breach of recordkeeping requirements under federal securities law. Because A836 restricts employers from requesting access to employee personal accounts, it raises the question of how asset managers can comply with both the SEC’s recordkeeping rules and the new New York law.

Compliance with the SEC’s rules and A836 is possible because of A836’s limited scope and its exceptions related to regulatory compliance. First, A836 applies only to personal accounts used “exclusively for personal purposes,” excluding accounts for business or mixed-use purposes. The law also expressly exempts employer-provisioned accounts used for business purposes if the employee was informed of the employer’s right to access. Second, the law does not restrict employers from complying with duties “to monitor or retain employee communications established under federal law or by a self regulatory organization,” including the SEC’s recordkeeping rules. Other exemptions, such as publicly available information and voluntary provision of access information for misconduct investigations, may also apply to data collection by asset managers.

Asset managers should carefully design and assess their compliance programs to navigate the potential tension between A836 and SEC rules. It is advisable that asset managers:

• Ensure that employees receive notice that employers may need access to personal accounts also used for business purposes;
• Act cautiously if an employee refuses to participate in a retention program applying to personal accounts to comply with A836’s prohibitions on certain adverse employment actions resulting from a refusal to grant access to purely personal accounts; and
• Understand exemptions and establish clear protocols to prevent inadvertent access to personal communications during reviews.

To read how Castaybert PLLC can assist you with employment law matters, click here.

November 7, 2023

On September 14, 2023, the Governor of New York Kathy Hochul signed Assembly Bill 836 into law, restricting New York employers access to prospective or current employees personal, private social media accounts. New York now joins over 25 other states that have enacted similar laws related to the scope of workplace use of personal social media accounts. Job applicants and employees in New York will now have increased privacy for social media posts if their accounts are private and used exclusively for personal purposes.

The key changes of the bill include:

• Prohibiting employers from requesting or requiring job applicants or current employees to disclose their social media login information to the employer.
• Prohibiting employers from requesting or requiring job applicants or current employees to login and access their personal accounts while in the presence of the employer.
• Prohibiting employers from requesting or requiring job applicants or current employees to reproduce photos, videos, or other information on their personal social media accounts.
• Prohibiting an employer from discharging, disciplining, or penalizing an employee for refusing to disclose information related to their personal social media account.
• Prohibiting an employer from refusing to hire an applicant if they do not disclose information related to their personal social media account.

It is important to note these changes only apply to “personal” social media accounts, which are defined as accounts or profiles on an electronic medium “used exclusively for personal purposes”. Further, this law only applies to private accounts, as employers may still look at or use information that is publicly available on a prospective or current employees public social media accounts. Employers may lawfully access an employee’s private social media account if the social media account is used for the employers business purposes, but must provide the employee with notice of their right to request access.

It is advisable for employers who are based in or operate in New York to review and modify their policies on prospective and current employee social media accounts, as these changes become effective March 12, 2024.

To read how Castaybert PLLC can assist you with employment law matters, click here.

July 20, 2023

On June 13, 2023, the New York Court of Appeals reversed the New York Appellate Division, First Department’s decision in The Moore Charitable Foundation et al. v. PJT Partners, Inc. et al. This decision has a significant impact on who can bring claims against employers for employee misconduct suits in New York, particularly when the employer is a financial institution or law firm doing business in New York.

Negligent supervision and retention claims typically occur when an individual takes action against an employer who failed to discipline or terminate an employee whom the employer knew was unsuitable or potentially harmful. Under already established case law, employers owed a duty of care to existing customers of a business. In Moore Charitable Foundation, however, the Court expanded the scope of the employer’s duties recognizing that an employer can be held legally responsible for injuries and damages caused by an employee’s misconduct to prospective customers, even when the employer did not have notice of previous misconduct by the employee.

The majority in Moore Charitable held that, “when an employer has notice of its employee’s propensity to engage in tortious conduct, yet retains and fails to reasonably supervise such employee, the employer may become liable for injuries thereafter proximately caused by its negligent supervision and retention”.

The Court further explained that a “defendant is on notice of an employee’s propensity to engage in tortious conduct when it knows or should know of the employee’s tendency to engage in such conduct”. The Court held the employer in this case had sufficient constructive notice because the employee had engaged “in ‘excessive high-risk securities trading’ from personal accounts during work hours” and “began drinking to excess during the workday”.

Accordingly, an employer in New York could now be found liable for a negligent supervision and retention claim if they (1) actually know of employee misconduct or (2) should have known given the individuals history/prior events showing a propensity to commit a wrongful act.

The dissent argued that the majority decision poses significant threats to financial institutions, banks, and law firms doing business in New York because “permitting all potential customers to sue employers for an employee’s fraud … would result in an unmitigated proliferation of claims”.

To read the full opinion written by Judge Cannataro in The Moore Charitable Foundation et al. v. PJT Partners, Inc. et al., click here.

To read how Castaybert PLLC can assist you with employment law matters, click here.