When brokers are lured to a brokerage firm with an upfront signing bonus, they’re required to repay all or a portion of that bonus if they leave the firm.
But what happens when they’re fired or laid off for lack of production in a down market?
Well, Prudential brokers are about to find out. The troubled firm is demanding that laid-off brokers pay the balances on their signing bonuses.
"It’s an outrage," says a Prudential rep who says he has friends who were fired and are now must pay back the part of the bonus they haven’t worked off. "Sure, if a broker goes across the street to another firm with two years left on a five-year [promissory] note, they pay back those two years—or actually the new firm pays it for them. But when you’re fired? That’s going a little too far."
Prudential confirmed that it’s demanding signing bonuses back from laid off or fired reps even though it’s not common practice in the industry.
Calls to Morgan Stanley, UBS PaineWebber and Salomon Smith Barney to check on their bonus policy weren’t returned. A Merrill Lynch spokesperson said it does not demand signing bonuses back from laid off brokers, only from reps fired "for cause."
According to brokers and attorneys, the standard industry practice is to recoup upfront signing bonus money from a fired broker on a case-by-case basis. So, Pru’s blanket policy breaks new ground.
They’re going after every nickel they can find these days," Chicago-based attorney James Eccleston says of Pru. Also, since becoming a public company last December, "it’s under the microscope when it comes to the bottom line," says a rep at the firm.
But there is a way around this dilemma for ex-Pru reps caught in the crossfire, Eccleston says. It’s called the "impossibility of performance" argument. The line of reasoning is that a dismissed broker can’t fulfill the requirement or his or her contract, because the company fired him, not through any fault of his own.
"Obviously, a broker who is fired is thus unable to perform. And it’s the firm that has made that impossible," says Eccleston of Eccleston and Associates. "Contractually, what does the broker have to do? He has to work a certain amount of years and the firm has to employ the broker."
"By firing the broker, the firm has made it impossible for brokers to perform under the contract," Eccleston continues. "That’s a straightforward contract defense. The battle would be convincing an arbitration panel, and that will depend on the facts and circumstances of the case." It’s easier, of course, to win the argument if the broker has no customer complaints and is not a disciplinary problem."
Eccleston also says that a defense strategy might include a countersuit, claiming wrongful termination and damages.
Meanwhile, fired Pru reps are enraged over the matter and are now seeking representation, according to producers still employed at the firm.
"How can you fire a broker for being unproductive in this kind of market?’ asks a rep. "Everyone knows it takes times to build your book and build relationships. If you’re not given time to build those relationships, you’re not going to be productive. The firm knows that."
Prudential confirmed that it’s demanding signing bonuses back from laid off or fired reps even though it’s not common practice in the industry.
Another Pru broker says a former colleague who chose Pru over rival firms because it offered a more attractive signing bonus contends that by demanding the outstanding bonus balance, the firm "is reneging on the very promise" that prompted brokers to join the firm when wirehouses were waging fierce battles to snag big producers.
Eccleston says broker contracts normally do not contain a clause that requires them to return the balance of a signing bonus if they’re laid off or fired.
"Contracts are not that specific," he says. "They take a broad sweep approach, saying that if a broker is fired or leaves voluntarily with or without cause, the note will be due. Sometimes the broker is lucky and the note gives you some argument."