Because New York generally disfavors restrictive covenants, employers often use “forfeiture-for-competition clauses” in separation agreements to discourage former employees from competing. These clauses prevent former employees from receiving severance benefits—like severance pay and stock options —if they engage in competitive activities post-employment. While they can serve as a deterrent, their enforceability is far from guaranteed.
Are These Clauses Enforceable?
Courts will likely closely scrutinize forfeiture-for-competition clauses when determining their enforceability. New York courts generally disfavor non-compete clauses, requiring them to be reasonable and necessary. They are subject to strict scrutiny due to public policy concerns about restricting employment. However, one key exception — the Employee Choice Doctrine — may allow them. The doctrine is based on the premise that if the employee has a choice between preserving their rights by refraining from competition or risking forfeiture by competing, there is no unreasonable restraint on the employee’s liberty to earn a living.
Key Factors That May Affect Enforceability:
- Voluntary Departure vs. Termination: If an employee voluntarily resigns and engages in competition, courts may be more likely to enforce the clause, as the employee has chosen to forgo their benefits in exchange for competing. However, if an employer terminates an employee without cause, courts may be less inclined to enforce the restriction, as it may unfairly penalize the employee for circumstances beyond their control.
- Legitimate Business Interests: The employer must demonstrate that the forfeiture for competition clause is necessary to protect a legitimate business interest, such as safeguarding confidential information, trade secrets, or client relationships. If the clause is overly broad or not directly tied to a valid business need, courts may rule it unenforceable.
What Employers & Employees Should Do
- Employers: Ensure clauses are well-structured, clearly define forfeited benefits, and align with legal precedent. Avoid overly broad restrictions that could be deemed unreasonable.
- Employees: Understand the implications before signing and seek legal counsel if necessary. Be aware of how these clauses might impact future employment opportunities.
Final Takeaway
Forfeiture-for-competition clauses may be a powerful deterrent, but are tricky. Employers must draft and negotiate them carefully, and employees should assess their impact.
Canales PLLC
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