Are Financial Disincentive Provisions Enforceable? What Recruiters Need to Know

Law firm partnership agreements increasingly include financial disincentive provisions tied to departures. These provisions include, but are not limited to, forfeiture of earned compensation, and clawbacks of bonuses and/or other compensation. Whether these provisions are enforceable turns on a factspecific inquiry involving which law governs, how the firm applies the provision in practice, and — most importantly — the provision’s practical effect on lawyer mobility and client choice. For recruiters, spotting financial disincentive provisions early in the process can have a material impact on the economics of the deal and result in additional savings for your candidates.

“Whether these provisions are enforceable turns on a fact specific inquiry involving which law governs, how the firm applies the provision in practice, and — most importantly — the provision’s practical effect on lawyer mobility and client choice.”

The majority view throughout jurisdictions is that financial disincentive provisions that deter competition are unenforceable based on public policy. Courts and state bars have concluded that provisions penalizing lawyers for joining a competitor violate professional conduct rules that prohibit agreements restricting a lawyer’s right to practice after leaving a firm, apart from bona fide retirement arrangements. This view also protects clients’ freedom to choose counsel. New York and Illinois follow this majority approach. By contrast, a minority of jurisdictions, including California, Pennsylvania, and Wisconsin, permit certain financial disincentive provisions tied to competition under certain circumstances.

The New York City Bar Association recently issued Formal Opinion 20253, which directly addresses financial disincentive provisions and concludes that firms may not impose financial penalties or disincentives that discourage lawyers from leaving to join a competitor because such provisions contravene Rule 5.6(a)(1). See Formal Opinion 2025-3: Permissibility of Financial Disincentives Associated With a Lawyer’s Departure from a Law Firm. The opinion emphasizes that the dispositive question is the provision’s realworld effect. If, in operation, a term deters competition or impairs client choice, it is impermissible — even if drafted as a facially neutral provision. Two practical considerations guide the analysis: (1) whether an objective observer, informed by the facts, would conclude the clause inhibits competition, and (2) whether the firm has applied the clause to penalize partners because they left (or plan to leave) for a competitor.

At the same time, not all departurerelated provisions are necessarily problematic. Provisions that apply uniformly regardless of a lawyer’s next role, or that serve legitimate, noncompetitive purposes, are generally enforceable. The key is that the provision does not function as a penalty for competing, and its terms and application are consistent among departures, regardless of whether the attorney is leaving to join a competitor law firm, take an in-house position, or take a position with the government.

For recruiters, the implications are immediate. Financial disincentive provisions can meaningfully reduce a candidate’s nearterm economics. It is, thus, important for recruiters to flag the presence of financial disincentive provisions in a candidate’s partnership agreement, side letter, or any other applicable agreement. Particular attention should be paid to clauses that condition payment of earned compensation on noncompetition, impose forfeiture, trigger a claw back if joining a competitor law firm, or vary treatment of the departing lawyer based on the lawyer’s destination after leaving the current law firm.

The bottom line: Focus on the practical effect. If a term penalizes competitive departures or chills client choice, expect heightened enforceability risk in majorityview jurisdictions, even where contract language appears neutral. Ultimately, counsel should be retained to assist with the assessment of contractual provisions and provide advice about how these thorny issues should be navigated.

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