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Is a Clawback of a Cash Bonus for Regulated Employees a Restraint of Trade or Denial of Wages Under N.Y. Law?

Over recent weeks, several banks that we are aware of have handed to thousands of their FINRA-regulated employees onerous new clawback agreements with the condition that if they do not sign them they will not receive their 2012 bonuses. This only the beginning of the bad news. These new clawback agreements contain provisions that allow the bank to clawback part of an employee's earned and paid cash bonus merely because the employee resigns during the ensuing two or three years. Thus, for example, a bank can clawback part of the 2012 bonus (already paid and taxed in 2013) if the employee leaves during 2015.

This use of clawback provisions in employment-related agreements raises serious issues. For starters, the primary impetus for instituting clawbacks in the financial services industry was to punish employees who acted in a manner detrimental to the bank (e.g., by taking excessive risk or in other ways harming the institution) -a move largely precipitated by the financial crisis of 2008 and various regulations promulgated thereafter. Now, it appears that merely resigning is considered bad enough conduct to warrant punishment -- not just by forfeiting unvested deferred compensation but also by having to pay back a cash bonus already earned, paid, and taxed.

These agreements are overbroad and overreaching in so many ways. They run afoul of FINRA arbitration decisions holding that bonuses are part of employee's overall earned compensation and are not purely discretionary. Further, clawbacks of vested and earned bonuses may violate the New York Labor Law.

This pernicious new practice sends a message to Wall Street employees that the rules relating to bonuses are changing and that the "claws are out," even on cash earned and paid out for services rendered.

Please visit the professional bio of Wendi Lazar at the Outten & Golden LLP website.

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