Can a Salary Reduction Make a Non-Compete Invalid?

Last month, a Texas Court of Appeals found that an employer who breached an employment agreement with an employee by changing his status to an independent contractor could not enforce that employee’s non-compete restraints contained in the employment agreement.

In that case, although the employee was contractually entitled to be paid as such, receive health benefits, and contribute to a 401K account, the employer decided to convert him into an independent contractor. The employee never consented to the change in the status, as it would deprive him of being eligible for health benefits and prevent him from contributing to a 401K account. Nevertheless, the company proceeded to pay him and treat him as an independent contractor. When the employee left, the company sued to enforce the non-compete clause contained in his employment agreement.

The court denied the company’s request for an injunction that would stop the employee from competing finding that:

An employer cannot wrongfully breach a provision of an employment contract that is favorable to the employee (such as reducing his wages without his consent and without contractual authority to do so) an then go into a court of equity to secure, by injunction, the enforcement of another provision favorable to it.”

The Court further clarified that it was denying the injunction because: “[The Company] breached a portion of the [employment] agreement that was favorable to [the employee]; [the Company] cannot then attempt to obtain enforcement of the portion of the [employment] Agreement favorable to [the Company] through an injunction.

Of course, if an employer is not contractually obligated to pay a certain salary or provide other benefits to an employee, than a change in such benefits by the employer would not be a breach of an employment agreement. This is most often the case with at will employees, whose salary and any terms and conditions of employment can be changed any time. Moreover, if an employee remains with the employer after the employer has unilaterally changed the salary or benefits in violation of an employment agreement, this may result in a waiver of the breach by the employee.

BOTTOM LINE: A breach of an employment agreement by the employer, including a reduction in salary without employee consent (where such consent is legally required) may cause that employee’s non-competition restraints to become unenforceable. Thus, employers should proceed cautiously when making decisions that can violate employment agreements as such violations may have the unfortunate consequence of invalidating non-compete restraints.

Leiza Dolghih is a labor and employment board certified partner at Lewis Brisbois Bisgaard & Smith LLP in Dallas, Texas and a Co-Chair of the firm’s Trade Secrets and Non-Compete Disputes national practice. Her practice includes commercial, intellectual property and employment litigation. You can contact her directly at Leiza.Dolghih@LewisBrisbois.com or (214) 722-7108.

2 comments

  1. My current employer cut my pay by 40% during COVID and made me a broker over night with a BS 70% commision on closed deals (hired to do analytics in 2017 and overnight turned into a used car sales man in April 2020), my other option is to QUIT the firm. Brokers in my industry rarely make $20K year one in the role and with covid, people are leaving the industry. I didn’t want a gap in my resume so I had to take the BS opportunity with pay at almost poverty level. I am currently looking for a new job and will most likely hire a lawyer shortly to get out of the agreement if by God’s grace I land a new opportunity. It’s frustrating the company gets to have it’s cake and eat it too. More needs to be done to protect employees than just terrible employers to bait employees in, over promise on various fronts and after the fact stop training and then cut pay.

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