Wednesday, August 4, 2010
Cut In Salary Usually Does Not Void Non-Compete Clause (Leibowitz v. Aternity, Inc.)
Clients frequently ask whether a cut in salary or commissions will void an existing non-compete obligation. Like most covenant-related questions, the answer largely depends on the contract language itself.
Employers often will address the issue of salary and compensation in an agreement that also contains a non-compete restriction. That agreement ought to contain a clear provision that allows an employer to change or modify a stated salary, benefit, commission rate, or bonus without affecting the validity of other obligations.
As a New York court (applying Massachusetts law) recently found, this is more than enough to answer an employee's claim that a cut in a commission rate somehow invalidates a restrictive covenant.
What is less clear is a contract that contains no language whatsoever allowing the employer the ability to adjust salary up or down without compromising the non-compete covenants.
If the language of the compensation terms can be read as creating an obligation on the employer's part to pay a certain salary (or even allowing for salary to be increased from time to time), then an employee may have a pretty good case that a unilateral reduction amounts to a breach of contract. Again, all depends on the language of each contract, but the employee's argument clearly is strengthened in this situation.
A more difficult case for the employee would be a contract that just says nothing at all about compensation. Of the contracts I am asked to review, well over half deal with covenants or post-termination obligations only and are utterly silent as to compensation and benefits. This presents a much more difficult issue for an employee, and if she seeks to invalidate the covenant, then she almost certainly will need something else in her favor.
Perhaps the salary cut or commission rate decrease can increase the court's sympathy for a departed employee faced with a non-compete restriction, but standing alone it is a weak defense. An employee is going to need some other contributing factor to escape a contractual obligation. It is relatively easy for an employer to justify compensation reductions based on financial performance, new competitors, or some other external market force, and this normally has nothing to do with the interest to be protected through a non-compete agreement.
Court: United States District Court for the Eastern District of New York
Opinion Date: 7/14/10
Cite: Leibowitz v. Aternity, Inc., 2010 U.S. Dist. LEXIS 70844 (E.D.N.Y. July 14, 2010)