Breaking Your Employment Contract

So you signed an employment contract with a lot of stuff in it and don’t know what to do.

There are at least four different provisions in your employment contract that you’ll want to consider when deciding whether to quit your job:

  1. Non-compete provisions
  2. Non-solicitation provisions
  3. Reimbursement for training costs
  4. Whether you’ll get paid your last paycheck

On the flip side, if you’re an employer, these are some of the provisions you’ll need to consider when negotiating contracts with your employees.

The first thing to understand is that an employment contract might say something, but the words on a page don’t always mean what they appear to say. The reason is two-fold.

First, there are laws on the books that limit the ability of parties to agree to terms in a contract. Examples include the N.C. Wage and Hour Act and the Federal Labor Standards Act. (For instance, you cannot agree to work for less than the minimum wage, even if both parties are otherwise willing to do so.)

Second, in certain limited circumstances, courts in North Carolina might not enforce a contract that’s unfair for public policy reasons.

Non-Compete Provisions

A non-compete provision is a form of a restrictive covenant, or a limitation on someone’s ability to enter into a contract. Essentially a non-compete says an employee cannot perform their trade or profession within a certain geographical area for a certain amount of time. A good non-compete lays out exactly what type of work is prohibited. These have become increasingly common in all sorts of employment contracts.

If You’re an Employee
You should know that restrictive covenants are disfavored by the courts. As a matter of public policy, competition is freely encouraged in our economy. And employees need to be able to work to feed their families and put a roof over their head. The courts will consider these interests when striking down unreasonable non-compete provisions.

If you’re an employee and worried about leaving your job because of a non-compete you signed, do not assume that you are bound by the words on the page. It is possible that the courts will refuse to enforce your employer’s non-compete. It’s tough to draw hard-and-fast rules on what the courts will deem as “reasonable,” but you should consult an attorney if you’re worried about whether an employer will hold you to a non-compete.

If You’re an Employer
There are some legitimate business interests that are protected by non-competes that the courts will consider. Businesses have an interest in protecting their customers and their investment in workers and training. But on the whole, non-competes are disfavored.

Don’t think you can put anything you want in a non-compete and that it will be upheld in court. Non-competes must be reasonable. The courts will look to make sure they’re reasonable in terms of scope (What type of competing work is prohibited?), geographical range (How far does the prohibition reach? Mecklenburg County, all of North Carolina, all of the United States?), and duration (How long does the prohibition last?).

If the court decides a provision in a non-compete is unreasonable, the judge will take their pen and strike through any unenforceable provisions (what we call the “blue-line rule” in North Carolina).

As an employer, you should consult with an attorney to help advise you on drafting a reasonable, enforceable non-compete.

Non-Solicitation Provisions

Non-solicitation agreements are another form of a restrictive covenant, but they are more likely to be enforced by the courts because the business interest is considered more legitimate.

If You’re an Employee
If you’re an employee considering whether to quit your job, you should pay particular attention to any non-solicitation provisions in your employment agreement. A judge will frown upon you if you take a customer list from your former employer and solicit business from those customers after forming a new company. Be careful here or you could be in hot water.

If You’re an Employer
Non-solicitation agreements are on your side. They’re more likely to be enforced because a business’s interest in protecting its customers from being cherry picked by a former employee is greater than a business’s interest in making sure that their former employee, say a plumber, cannot perform plumbing work again after leaving your company.

There are a couple different kinds of non-solicitation provisions:

  • One that prevents an employee from soliciting or trying to get the business of the employer’s current or future customers
  • One that prevents the employee from soliciting any of the employer’s employees to leave their work and come work for the employee who is leaving

If you think about it, these types of non-solicitation agreements make sense. Employees have access to all sorts of customer lists. They may have contact information for customers, and they know who’s interested in different types of services. So if they leave to start their own company, they could very easily try to pick off the previous employer’s customers. And the only reason they had access to that information was because of their employment. The courts view that as an unfair stealing of customers and will enforce non-solicitation more often than non-competes.

Reimbursement of “Training Costs”

Some employment contracts include language such as, “If the employee leaves the company [within X amount of time], the employee must reimburse the company [X dollars] for its training expenses.” This is what’s called a “liquidated damages” provision. I see a surprising number of these provisions in employment contracts.

Companies can lawfully require reimbursement of their legitimate training costs. However, like non-competes, courts will pay close attention to these types of liquidated damages provisions when deciding whether to enforce them against an employee.

There are two basic tests to any liquidated damage provision. In order to be enforceable:

  • The amount of damages has to be difficult to ascertain. For instance, if you have a contract with someone who is going to buy five widgets for $3 each and you provide them the widgets, but they don’t pay you, then your damages are $15. That’s pretty easy. Liquidated damages have to be harder to calculate. In other words, if it’s easy to calculate the cost of an employee’s training, then a liquidated damages provision would not be appropriate.
  • Whatever number you come up with in advance has to be reasonable. Here’s that reasonableness component again. The court will take a look at whether the agreement is actually fair, rather than simply enforcing whatever was agreed upon number.

If You’re an Employee
Sometimes employers use these provisions, in combination with a broad non-compete provision, in a way that seems intended to limit your ability to leave. As an employee considering whether to quit, you might be afraid you will have to pay the employer a bunch of money that you don’t have.

If the liquidated damages provision says you have to repay the company $10,000 for its training costs, but it didn’t do anything to train you or only spent $500 to train you, then the courts will say that’s not reasonable and they’ll refuse to enforce it. Consult an attorney if you’re worried about being sued. It might not be as bad as you think.

If You’re an Employer
Don’t make the mistake of thinking that you can require employees to pay an unreasonably high amount in training costs to you. Consult with an attorney when drafting an employment agreement.

The Last Paycheck

Can an employer deduct money from your final paycheck as reimbursement for training costs? It depends.

If You’re an Employee
This is where the N.C. Wage and Hour Act (NCWHA) and Federal Labor Standards Act (FLSA) come into play. The NCWHA provides protections for employees against unlawful deductions from your paycheck by your employer. Before your employer can deduct any money from your paycheck, they must first have your written authorization to do so. If your employer didn’t get your written authorization, it cannot deduct any money. Period.

Even with a written authorization to deduct money from your paycheck, an employer still must pay you at least minimum wage. Under the FLSA, they cannot lawfully deduct all of the money from your paycheck to reimburse training expenses and give you $0 as your last paycheck.

If You’re an Employer
Make sure to consult an attorney before implementing a policy of deducting money from your employees’ paychecks. There are requirements on what that written authorization must look like. The penalties for failure to observe the rules under the NCWHA and FLSA can be substantial. Both laws provide for damages in the amount of double the illegally withheld amounts, plus attorney’s fees to the employee.

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