Stop calling it a forfeiture — Why the equity-forfeiture workaround is becoming a multistate compliance challenge
This article was first published by Reuters and Westlaw Today: Stop calling it a forfeiture — Why the equity-forfeiture workaround is becoming a multistate compliance challenge
Employers spent years crafting less obvious alternatives to restrictive covenants. Three states just came after them.
Since the beginning of this year, California has barred employers from recouping certain payments when a worker leaves. In late 2025, New York enacted its own version, the “Trapped at Work Act,” aimed at agreements that require repayment if someone quits too soon. This past spring, Washington went further, moving to bring forfeiture provisions directly into its noncompete law.
Three laws, three timelines, all aimed at curbing the growing use of financial consequences tied to an employee’s departure.
As traditional post-employment restrictions have become increasingly legally and politically radioactive, employers have turned to forfeiture and clawback triggers in equity grants, bonus plans, and retirement arrangements, often unaware that they have recreated the same restraint under a different name.
Same restraint, different name
While traditional noncompetes block employees from taking a job with a competitor, a forfeiture provision takes a different, but straightforward approach. An employee who leaves for a competitor forfeits unvested equity rather than facing a lawsuit to block the move. Signing bonuses convert to debt, and deferred bonuses due next year are never paid.
Courts have historically treated these forfeiture-for-competition provisions as legally distinct from noncompetes because they don’t require an injunction. The company simply stops paying and, in some cases, may recoup amounts already paid. But that distinction is now being tested as several states begin to extend restrictive covenant laws to compensation-based restraints.
Multiple states, different approaches
Illinois was an early mover, defining a covenant not to compete under the Illinois Freedom to Work Act (820 ILCS 90/) to include agreements that impose adverse financial consequences on competitive activity. But Washington, New York, and California have taken different approaches to compensation-based restraints, creating a fractured compliance landscape for employers operating across multiple states.
Washington took the most direct approach, simply rewriting its noncompete law in Engrossed Substitute House Bill 1155 to cover any provision that requires an employee to forfeit or repay compensation for competing. Beginning in 2027, unvested equity, deferred bonuses, and clawbacks will be subject to the same near-total ban as a traditional noncompete. Employers that get it wrong face meaningful financial exposure and potential liability for employees’ attorney fees.
New York took a narrower approach under the Trapped at Work Act (New York State Senate, A.B. 9452, https://bit.ly/4wOVeIE), targeting what it calls an “employment promissory note,” any arrangement that requires repayment for leaving too soon. It carved out sign-on bonuses and relocation packages, treating them as recruiting tools rather than as restraints on competition. Enforcement rests with the state, and violations can result in civil penalties.
Under Assembly Bill 692, otherwise commonly known as “stay or pay,” California never uses the term forfeiture. Instead, it bars employers from recovering a broad range of debts, fees, and penalties tied to an employee’s departure, including retraining and immigration costs, liquidated damages, and lost profits.
Employees can sue directly for damages, statutory penalties, and attorney fees. Although the legislation never mentions equity or forfeiture directly, the law’s broad definitions may also put equity forfeiture provisions at risk.
The rest of the map
Beyond these three states, the legal landscape is considerably less settled. Most states lack a statute that directly addresses forfeiture or clawback provisions, leaving those arrangements to general contract principles and the reasonableness standards courts apply to restrictive covenants.
A handful come close by extension. Minnesota’s ban covers any post-employment restriction on an employee, not just agreements labeled as noncompetes. North Dakota’s law, over a century old, voids any contract that restrains a person from working in a lawful profession or trade. It is broad enough to encompass a forfeiture provision, though that theory has not yet been tested in court.
For national employers, uncertainty elsewhere in the country offers little comfort. In most states, the enforceability of these provisions remains unsettled, leaving employers to rely on general contract principles and restrictive covenant law for guidance. Delaware, however, has developed a more substantial body of case law addressing forfeiture-for-competition provisions.
Delaware’s shrinking shield
Because more than two-thirds of Fortune 500 companies, along with most venture-backed startups, are incorporated in Delaware, the state’s treatment of forfeiture provisions is especially significant. Unlike the states discussed above, Delaware has historically taken a more permissive approach to these arrangements, though not without limits.
In Cantor Fitzgerald, L.P. v. Ainslie 312 A.3d 674 (2024), the Delaware Supreme Court has ruled that forfeiture-for-competition provisions in partnership agreements need not satisfy the same reasonableness standard as ordinary noncompetes. Courts typically apply that standard to assess whether restrictions on an employee’s next job are reasonable in scope and duration. Delaware does not require that review when sophisticated parties have freely agreed to the provision.
Later that year, in LKQ Corp. v. Rutledge 37 A.3d 1215 (2024), the court extended that approach beyond partnership agreements, though it left room for intervention when the financial consequences are severe enough to trap someone in their job. That caveat matters because a provision negotiated by sophisticated businesspeople may be treated very differently when imposed on a mid-level manager.
The practical problem for multistate employers
Washington’s ban, California’s uncertainty, New York’s carve-outs, Delaware’s narrowing shield, and the lack of clear rules across much of the country leave employers to determine which standards apply to their workforce. A single national equity plan or bonus agreement can no longer be drafted once and administered the same way everywhere. The same provision can be enforceable in one state, void in another, and untested in nearly all others.
The fix starts with an inventory, not a rewrite. Identify equity grants, deferred bonus plans, training repayment agreements, and retirement arrangements that include forfeiture or clawback triggers. Then assess them based on where affected employees actually work, not on where the plan was drafted or the company is headquartered.
Build review into the compliance calendar. Work with employment counsel to review these arrangements annually, when employees move across state lines, and when relevant laws change. Identify provisions that require state-specific treatment, provide clear instructions to payroll and benefits teams before enforcing repayment obligations, and require legal review before withholding compensation or demanding repayment.
For many employers, a master agreement with state-specific appendices may be more practical than rewriting every plan. The goal is not to eliminate every forfeiture provision. It is to determine where each one can be enforced, where it needs to be modified, and where the law remains unsettled.
The label was never really the point. What matters is whether the financial consequence makes it harder for a worker to walk out the door. Employers still treating equity forfeiture as safely outside restrictive covenant law are embedding compliance risk in their cap tables and bonus plans, one clawback at a time.
