In Grace Hunt IT Solutions, LLC v. SIS Software, LLC, et al., Judge Lauriat of the Business Litigation Session of the Massachusetts Superior Court recently held that an IT consulting firm could not enforce non-compete agreements against employees who left after the company decreased their base salaries and implemented a new compensation structure in which employees could earn bonuses based on billable hours that equaled or exceed the amount of their previous base salaries, because the change materially affected the employment relationship.
Plaintiff Grace Hunt IT Solutions, LLC (“Grace Hunt”) provides software management consulting services. Pursuant to an Asset Purchase Agreement effective September 30, 2011, Grace Hunt became the successor and assignee of Grace Hunt, LLC, of which defendants John S. Joyce, George Olsen, and Robert Remick were all employees. Pursuant to the purchase, defendants became employees of Grace Hunt.
Defendants Joyce and Olsen had previously signed non-compete agreements with Grace Hunt, LLC. After the purchase, Grace Hunt sent the individual defendants offer letters outlining the terms of their employment, each of which included a provision stating that they would be required to sign a new non-compete agreement. They were also told that the Grace Hunt planned to implement a different compensation structure and change eligibility for fringe benefits. According to the defendants, their base salary was decreased by 20 percent, but they were informed that they could earn the difference through bonuses based on billable hours. The individual defendants signed and returned their offer letters, but they refused to sign the non-compete agreements that accompanied those letters.
In late October 2011, SIS Software, LLC (“SIS”), a software consulting company based in Georgia, contacted Joyce about opening a Boston office. Knowing that Olsen and Remick were unhappy at Grace Hunt, Joyce forwarded them SIS’s contact information. SIS made all three employment offers and, in early December, they all resigned from Grace Hunt. Each defendant informed certain clients that they were leaving Grace Hunt, though they claim that they did not encourage clients to switch consultants. According to Grace Hunt, several clients ultimately moved their business to SIS.
On January 6, 2012, Grace Hunt filed a breach of contract claim against all defendants in the Superior Court, alleging that, while still employed by plaintiff and shortly thereafter, the individual defendants communicated with and solicited its clients on behalf of SIS. Additionally, Grace Gunt sought to enforce the defendants’ original non-compete agreements against them.
Judge Lauriat found that, although the original non-compete agreements sought to protect a legitimate business interest (customer goodwill), they were nonetheless unenforceable because, under Massachusetts law, non-compete agreements are voided by “material changes” in employment relationships between employees and employers. In making a determination as to whether there was such a material change in the relationship, “courts have considered it extremely significant that the employer sought to have the employee[s] sign a new non-compete agreement.”
The Court concluded that defendant Remick could not be bound by the terms of the non-compete agreement because he never signed any employment or non-compete agreement with Grace Hunt, LLC. As to Joyce and Olsen, sufficient evidence suggested that the change in their compensation plan was significant. That their fringe benefits were better, Judge Lauriat held, is “immaterial” because “under the new compensation plan, Joyce and Olsen would have made significantly less, at least until there was sufficient work to enable them to bill enough hours to be eligible for bonuses.”
The case serves to warn employers that any material change in the employer-employee relationship, including a compensation package modification, may void a non-compete agreement.