Florida Executive Compensation: Carried Interest and Terminated Employees

Those who have been—or will be—denied their due have strong claims to recover what they have been promised and what they earned. Employees can now breathe that sigh of relief.

December 21, 2022  |  Commentary by Josh Migdal and Michelle Genet Bernstein, Daily Business Review

Private equity executives nationwide collectively breathed a sigh of relief only a few months ago when Sen. Kyrsten Synema (D. Ariz.) held up the passage of the Inflation Reduction Act up until taxation of carried interest as ordinary income was removed.

Carried interest is a right to a profit in an investment to the general partner of a private equity fund, hedge fund or venture capital fund. Executives at these companies often have contractual nondiscretionary rights to receive a portion of the carried interest. These executives anxiously await the end of the cycle, when, they hope, the assets accumulated result in a profit via a disposition or recapitalization, thereby monetizing their carried interest.

But what happens if you are an executive with contractual entitlement to a portion of a carried interest and are terminated?

Fret not. Florida law precludes an employer from renouncing compensation or other benefits that vest while the contract is in force. That said, terminated at-will employees have viable causes of action to seek recovery for these vested rights.For decades, Florida courts have consistently held that employers cannot avoid paying their employees—including vested profit participation rights, commissions, or other forms of deferred compensation—simply by terminating their employment. That holds true even though Florida is an “at-will” employment state, where employers generally have the right to terminate employees at any time and for any reason. Those Sunshine State employees are entitled to participate in profits or earn commissions, provided they “earned” it during their employment, even if the profits or commissions were collected post-termination.

How do you determine whether these valuable rights have “vested” and how they can be vindicated?

Far too often, employment contracts are inartfully drafted and leave executives to wonder about the answer to that question. A first step is for executives to look at not only their employment agreements but also the documents governing the investment funds with which they work. In the private equity context, rights to the carried interest generally vest on the date the operating agreement or governing documents of the fund are executed. That is because those documents include provisions that explicitly provide rights to share in profits, typically pursuant to a distribution waterfall that describes the method by which cash flow and capital are distributed to the fund’s investors.

Put simply, the executive’s right to the carried interest vests at the time, with the only open item as to the amount he is owed based on the monetization of the profit. This vested right is monetized when a profitable capital event triggers distribution pursuant to the waterfall structure so that the carried interest can be paid as required by the fund’s governing documents.

It is also settled law that it is a breach of the implied covenant of good faith and fair dealing to terminate an employee or otherwise act in bad faith to avoid paying an employee compensation that is not salary. In the Focus Management Group case, a former employee asserted a claim for breach of the implied covenant (among other claims) based on his assertion that the employer unilaterally and improperly reduced his performance-related compensation. See Focus Managment Group USA v. King, 171 F. Supp. 3d 1291, 1297–98 (M.D. Fla. 2016). The employer offered the employee performance-related compensation in order to “yield aggregate compensation opportunities that should be in line with employee’s expectations,” and that the parties agreed that the bonus would be discretionary in nature. The court held that the employer owed the employee a duty to exercise its contractually reserved discretion in good faith in order to protect the employee’s reasonable expectation. See also Community Design v. Antonell, 459 So. 2d 343 (Fla. 3d DCA 1984) (once services for which bonus was promised were completed, employer’s contractual duty to act in good faith in recommending bonus arose).

In line with the economic instability and subsequent pullback of the private equity industry, it is anticipated that the issue of vested rights to deferred compensation being eliminated due to termination will become more prevalent. But, those who have been—or will be—denied their due have strong claims to recover what they have been promised and what they earned. Employees can now breathe that sigh of relief.

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Josh Migdal represents clients such as banks, public and private companies, real estate developers, investors and owners, tech entrepreneurs, gaming operators, family offices and hotels.

Michelle Genet Bernstein is a complex commercial litigator and trial lawyer with experience in matters involving structured finance, complex financial products, real estate and hospitality.

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