They left Morgan Stanley. Now these advisors want their deferred comp

Morgan Stanley might call some of the money that wealth managers earn during their time at the firm "deferred compensation" and say it's not owed to employees who leave.

But a group of ex-Morgan Stanley employees are arguing that they should be paid the money nonetheless, and are now pressing their claims in a class-action suit in federal court in New York. Immediately at stake in the dispute is $4 million the dozen or so ex-employees say they're entitled to despite their decision to leave Morgan Stanley and take up employment elsewhere.

But the bigger question is whether deferred compensation plans fall under the federal Employee Retirement Income Security Act of 1974. The act, known as ERISA, generally applies to retirement plans but can also take in other types of benefits. 

Douglas Needham, a lawyer representing the plaintiffs in the Morgan Stanley case, said in an interview that there probably are ways that firms can deny former employees deferred compensation after they've left for another company. Unfortunately for Morgan Stanley, Needham maintained, its payment plan falls squarely under ERISA, which means the money has to be paid.

"There are a lot of technical aspects of it, but our point here is that Morgan Stanley's deferred compensation program was illegal," Needham said. "By the structure and nature of its deferred compensation program, it was subject to ERISA. And ERISA has what are called vesting rules, which mean that you can't forfeit the amount owed in your account."

A Morgan Stanley spokesperson declined to comment on the case.

Cancellation rule

In a memorandum filed in June 2022, lawyers representing Morgan Stanley stated that the deferred compensation plan is used to encourage employees to stay with the firm. Advisors are told when they sign on that they have to wait a set period of time — usually four to six years — to receive any deferred payments.

If they leave before then, they're subject to what's known as the "cancellation rule." That generally means they're out the money.

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Morgan Stanley does allow certain "humanitarian" exceptions to the rule, which can kick in when someone loses a job because of a disability, planned retirement or layoffs. But the firm is strict about withholding deferred payment from advisors who leave simply because they want to work elsewhere.

"Oftentimes, it would be a six-figure amount of money that this person would no longer have a right to because of Morgan Stanley's what they called the cancellation rule," Needham said.

The Morgan Stanley lawyers argue in their 2022 memorandum that the plaintiffs, who were at Morgan Stanley from 1996 to 2020, were offered "deferred compensation conditioned on certain express terms, including that the award would not be earned if the (financial advisor) left Morgan Stanley before it vested." 

"Each plaintiff left Morgan Stanley before the vesting date and thus failed to earn some or all of their deferred compensation," the lawyers added.

Comp plan

According to a Morgan Stanley 2018 compensation plan submitted to the court, advisors' deferred compensation isn't taken out of their base salaries. Rather, it comes out of their share of the revenue they've made for the firm over the previous 12 months. The proportion withheld varies from 15.5%, for advisors who generate $5 million or more, to 1.5%, for advisors who generate less than $240,000.

A memorandum filed on Tuesday by the advisors in the class-action suit argues that they earned their deferred compensation when they made money for Morgan Stanley.

"The 'work' was performed when the revenue was generated," according to the memo. "While Morgan Stanley's compensation program defers receipt of payment for this work, this deferral cannot result in a forfeiture of deferred compensation that should have been vested under ERISA."

Needham said the stakes in the case are big. They extend not only to the named plaintiffs in the current class-action suit but also roughly 40 other former Morgan Stanley advisors who have similar claims to press. The plaintiffs are seeking not only the deferred compensation they contend they're owed but also interest.

On to arbitration

Their next chance to argue their case will come not in the regular court system but before arbitration panels run by groups like the Financial Industry Regulatory Authority and Judicial Arbitration and Mediation Services, or JAMS. In a opinion handed down on Nov. 21, federal judge Paul Gardephe found that the plaintiffs had agreed in documents signed with Morgan Stanley that arbitration is the correct forum for these types of disputes.

But in reaching that decision, Gardephe did not give Morgan Stanley everything it wanted. The judge also found that Morgan Stanley's deferred compensation plan falls under ERISA. Gardephe held that the sort of deferred payments offered by Morgan Stanley are not akin to year-end bonuses many firms use as performance incentives.

"In sum, Morgan Stanley's deferred compensation programs result in the deferral of income to the post-employment period within the definition of ERISA," Gardephe wrote.

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That finding prompted Morgan Stanley on Dec. 5 to file a motion calling on the judge to clarify and reconsider his decision. The firm's lawyers argued in part that no one had asked the court to decide whether the compensation plan fell under ERISA, only if arbitration was the proper forum for hearing the related claims.

In their response memo filed on Tuesday, the plaintiffs contended that Morgan Stanley has in fact argued that ERISA doesn't apply to its deferred compensation plan. Morgan Stanley is showing disappointment now, according to the memo, only because the decision didn't go its way.

Morgan Stanley's lawyers note in their Dec. 5 memo that they've already taken two similar cases before arbitration panels and won favorable decisions both times. But that was before Judge Gardephe issued his ruling firm's deferred compensation plan falls under ERISA.

"Although the Court's discussion of ERISA's application should not bind future arbitration panels, the inclusion of that discussion in the Court's order risks confusing the issues and causing prejudice to Morgan Stanley as a result," the lawyers wrote.

Needham said he's hopeful that the court's finding will bode well for the plaintiffs as they prepare to take their cases up individually for arbitration.

"With regard to Morgan Stanley, they subjected themselves to ERISA by the way they designed their deferred compensation program," Needham said. "And in doing so, they subject themselves to ERISA's vesting rules, which were then violated."