Reminder: A Material Change in Compensation Arrangement can Void a Non-compete

April 3, 2012

A Massachusetts Superior Court recently reminded employers that a previously valid non-compete agreement may become unenforceable against an employee if the employer implements a new salary structure.

In that case, employees had signed non-competition agreements with their original employer. After the assets of the original employer company were purchased by a new company, the new employer requested that the employees sign new offer letters and new non-competition agreements. The new employer proposed to decrease employees' base salaries by approximately 20%, but allow the employees to make up the difference by way of potential bonuses earned based upon billable hours. The employees signed the new offer letters, but refused to sign the new non-competition agreements. The employees later resigned from the new employer company and began working for a competing business, taking some clients with them. The new employer sought to enforce the original non-competition agreement against the employees.

However, under settled Massachusetts law, non-compete agreements may be voided by any "material change" in the employment relationship between the employee and the employer. Here, the court held that the new salary structure was a "material change" because under it, the employees would have received significantly less compensation. This change in the employment relationship was enough to render the original non-compete agreement ineffective against the employees who resigned.

The lesson for employers: be mindful that any change to your business structure that materially affects the employer-employee relationship may allow employees to escape the chains that bind them under a prior non-competition agreement.