Restrictive Covenants In Executive Compensation And Severance Agreements

"Bad Boy" and "claw back" restrictive covenants in executive compensation and ERISA severance plans can be an important component of an employer's overall protection of its business from unfair competition.

Restrictive covenants, such as non-competition agreements, are prohibited or disfavored under the law of many states. Employers who wish to limit competition by employees or former employees may, however, be able to circumvent these state laws by adopting an ERISA-governed plan that incorporates a so-called "bad boy" clause, or certain state law-governed plans that offer employees a choice between competing and accepting the compensation offered under the plan.

"Bad boy" clauses are contract provisions that apply to prevent current or former employees from obtaining compensation if, for example, they solicit employees or misappropriate confidential information. A corresponding "claw back" provision enables the employer to recover compensation already paid to