NY High Court Must Clarify Employee Choice Doctrine

Judge Parker said the court would affirm the ruling of Southern District Judge George B. Daniels, who dismissed the suit for failure to state a claim, if the state Court of Appeals concluded that the constructive discharge test applied. Otherwise, it could vacate and remand for further proceedings.

The Case

The suit involved a dispute between Paul M. Morris and Schroder Capital Management International and Schro-der Investment Management North America Inc., for which Morris worked as a senior vice president and head of domestic equities from January 1997 until April 2000. In his 3 full years of employment, he received an annual salary of $225,000 and year-end bonuses that were significantly in excess of his salary. Schroder deferred portions of these bonuses each year and designated them as deferred compensation. Deferred compensation did not vest for 3 years. In all, Morris accrued $2.9 million.

Over the course of his employment, Morris alleged, Schroder reduced the amount of assets over which he had responsibility from $7.5 billion to $2.5 billion, and eliminated funding for his U.S. equity research operation. Morris claimed that the company intended to eliminate his position. Feeling like he was stuck in a 'dead-end job,' he informed the company in February 2000 that he would be leaving. His resignation was effective April 13, 2000.

Morris went on to establish a hedge fund in New York, which he said was neither in actual or potential competition with his former employer. But Schroder determined that he had violated provisions of his employment agreement by starting a competing business. The company said Morris was no longer entitled to his deferred compensation benefits. Morris sued for breach of contract. Judge Daniels recognized that the New York common law employee choice doctrine was controlling, and that the decisive question was whether Morris quit or was fired.

The judge concluded that Morris could not state a claim because his 'working conditions at the time of his resignation were not so intolerable that a reasonable person would have been forced to leave the job.' In reaching his conclusion, Daniels borrowed the constructive discharge standard from the federal employment discrimination law.

Unresolved Issue

On appeal, the Second Circuit noted that Daniels' would be correct, if the constructive discharge standard was the proper one.

'This unresolved issue of New York law raises legal and policy issues that we believe are best resolved by the New York Court of Appeals,' Parker wrote. 'As Morris has argued, the standards for constructive discharge in federal employment discrimination may, to some extent, derive from a premeditated policy choice to encourage employees to stay in the employment relationship as long as possible and try to work out their discrimination claims within the work setting and through administrative processes. Whether the policy considerations that undergird constructive discharge in the employment discrimination context are at all applicable to the New York common law employee choice doctrine context is a question we believe is best left to the New York Court of Appeals in the first instance.'

Judges Joseph M. McLaughlin and Guido Calabresi concurred on the ruling.

Tom Perrotta is a reporter for The New York Law Journal, a sister publication of this newsletter, in which this article originally appeared.

A federal appeals court has put a $2.9 million employment lawsuit by a former investment banker on hold until the New York Court of Appeals can answer an undecided question of state law.

A unanimous panel of the Second U.S. Circuit Court of Appeals said it was unclear how judges should determine whether an employee quit or was 'involuntarily terminated' under the New York common law employee choice doctrine. While a trial judge in this suit had relied on the 'constructive discharge' test from federal employment discrimination law, some other test could apply, the appeals court said.

'Unfortunately, neither the New York Court of Appeals, nor any other New York state court, has provided guidance on what legal test courts should apply when an employee claims that he was 'involuntarily terminated' and that the employee choice doctrine should not apply,' Judge Barrington D. Parker wrote for the panel in Morris v. Schroder Capital Management International, 05-cv-0823.

Judge Parker said the court would affirm the ruling of Southern District Judge George B. Daniels, who dismissed the suit for failure to state a claim, if the state Court of Appeals concluded that the constructive discharge test applied. Otherwise, it could vacate and remand for further proceedings.

The Case

The suit involved a dispute between Paul M. Morris and Schroder Capital Management International and Schro-der Investment Management North America Inc., for which Morris worked as a senior vice president and head of domestic equities from January 1997 until April 2000. In his 3 full years of employment, he received an annual salary of $225,000 and year-end bonuses that were significantly in excess of his salary. Schroder deferred portions of these bonuses each year and designated them as deferred compensation. Deferred compensation did not vest for 3 years. In all, Morris accrued $2.9 million.

Over the course of his employment, Morris alleged, Schroder reduced the amount of assets over which he had responsibility from $7.5 billion to $2.5 billion, and eliminated funding for his U.S. equity research operation. Morris claimed that the company intended to eliminate his position. Feeling like he was stuck in a 'dead-end job,' he informed the company in February 2000 that he would be leaving. His resignation was effective April 13, 2000.

Morris went on to establish a hedge fund in New York, which he said was neither in actual or potential competition with his former employer. But Schroder determined that he had violated provisions of his employment agreement by starting a competing business. The company said Morris was no longer entitled to his deferred compensation benefits. Morris sued for breach of contract. Judge Daniels recognized that the New York common law employee choice doctrine was controlling, and that the decisive question was whether Morris quit or was fired.

The judge concluded that Morris could not state a claim because his 'working conditions at the time of his resignation were not so intolerable that a reasonable person would have been forced to leave the job.' In reaching his conclusion, Daniels borrowed the constructive discharge standard from the federal employment discrimination law.

Unresolved Issue

On appeal, the Second Circuit noted that Daniels' would be correct, if the constructive discharge standard was the proper one.

'This unresolved issue of New York law raises legal and policy issues that we believe are best resolved by the New York Court of Appeals,' Parker wrote. 'As Morris has argued, the standards for constructive discharge in federal employment discrimination may, to some extent, derive from a premeditated policy choice to encourage employees to stay in the employment relationship as long as possible and try to work out their discrimination claims within the work setting and through administrative processes. Whether the policy considerations that undergird constructive discharge in the employment discrimination context are at all applicable to the New York common law employee choice doctrine context is a question we believe is best left to the New York Court of Appeals in the first instance.'

Judges Joseph M. McLaughlin and Guido Calabresi concurred on the ruling.

Tom Perrotta is a reporter for The New York Law Journal, a sister publication of this newsletter, in which this article originally appeared.