By Brandi O. Brown, J.D.
By forming and engaging in a competitive business, the highly compensated employees failed to comply with the enforceable conditions of the incentive plan.
Affirming a summary judgment decision in favor of an employer, a divided Fourth Circuit panel held that former high-level executives had to return the incentive payments they received from the company, which, in the case of one defendant, amounted to more than $1.4 million. The conditions voluntarily agreed to as part of the incentive plan were enforceable, the appeals court concluded, and the record was clear that the employees failed to comply with them. During the 30-month period applicable under the plan, the employees formed and engaged in a competing staffing business. Judge Diaz dissented (Allegis Group, Inc. v. Jordan, February 27, 2020, Niemeyer, P.).
Incentive plan. As highly compensated executives of Allegis Group, Inc., each of the four employees named as defendants in this lawsuit were offered the opportunity to participate in the employer’s “Incentive Investment Plan.” Under the plan. employees who leave Allegis can receive incentive payments for 30 months following their separation, provided they refrain from competing with Allegis, soliciting its customers, or luring away its employees. Allegis has several subsidiaries, including Aerotek, Inc. and TEKsystems, Inc.
VP left, received payments. The four employees were all high-level employees of Aerotek, a subsidiary which concentrates on staffing scientific, software, and engineering positions for clients. Justin Jordan worked for Aerotek for almost 15 years and eventually became the regional vice president for its mid-Atlantic region. The other defendants were national account managers. All four employees qualified for and elected to participate in the incentive plan offered by Allegis. Therefore, over the months that followed Jordan’s resignation, he received incentive payments that totaled over $1.4 million.
Allegis files suit. However, during that time he also incorporated two companies with the intent of engaging in the staffing industry in the high-end IT and engineering segment. One of the companies began business operations approximately 20 months after he resigned and booked its first revenue four months later. Within a few months of that time, he also contacted two other Aerotek employees regarding the possibility of employing them and, following the expiration of the 30-month period, he officially hired those employees, plus one additional employee. Two of those three employees began to receive incentive payments before Allegis caught on, stopped payments, and filed suit, along with Aerotek and TEKsystems.
The district court granted summary judgment in the company’s favor on the claims made under the incentive plan and ordered the former employees to return the incentive payments, with interest.
Condition precedent. On appeal, the Fourth Circuit majority concluded that the restraints imposed by the plan were enforceable as a condition precedent to payment and that the former employees failed to comply. Looking first at the text of the contract provision in question, the appeals court noted that the contract stated conditions for payment rather than restrictive covenants or forfeiture provisions. The plan provides that incentive payments were offered “subject to the conditions” it stated and that “in order to earn” them, the participant had to comply with the conditions. “In other words,” the court explained, “if and only if the participant complies is he entitled to receive payments.” In that way, the plan “unambiguously imposes conditions precedent for the receipt of payments.”
As long as those conditions are enforceable, they must be strictly complied with in order for the employees to be entitled to the benefit of the bargain. Although the court rejected the employees’ attempt to frame these conditions as functioning like forfeiture provisions and therefore subject to a reasonableness review, it nevertheless stated that they would pass muster under such a standard. And while the court noted that the restrictions contained in the provision “might be broader than would be appropriate in an employment agreement between the defendants and Aerotek,” as executed between the employees and Allegis the analysis was different. The restrictions in that case “must be reasonably tailored to protect the business interests of Allegis and its subsidiaries as measured by Allegis’s stock value.”
No undue hardship. Moreover, the restrictions did not impose an undue hardship on the employees. They voluntarily participated and, upon leaving the company, could have chosen to forego the payments in favor of competing in the market for staffing services during that time. Public policy also favored the freedom to contract for such a plan, the court explained, because both employers and employees benefit under agreements such as the incentive plan involved in this case. “But companies in highly competitive industries might not offer these plans if they were themselves unable to fully benefit from such contractual arrangements.”
Substantial compliance? The appeals court also rejected arguments of substantial compliance by Jordan, as well as a challenge to the district court’s remedy. With regards to the latter, the court explained that its conclusion that the incentive plan made compliance with the challenged contract provision a condition precedent to payment meant that compliance with its requirements was an “all-or-nothing deal,” even if the payments commenced before performance was completed.
Dissent. Judge Diaz dissented, disagreeing with the majority’s “untenable dichotomy between the ‘conditions precedent’ of the Incentive Plan and the ‘restrictive covenants or forfeiture provisions,’” as well as its assessment of the provisions under the reasonableness standard. Unlike the majority, Diaz concluded the plan provisions were unreasonably broad because they encompassed the entire Allegis Group, including eight additional subsidiaries, and as such, it was unenforceable.
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