Employment Contracts and Restrictive Covenants

Most employment relationships in Georgia are “at will,” meaning that the employment can be terminated for any or no reason, so long as it is not an illegal reason, e.g. illicit discrimination. That said, companies do enter into employment contracts with employees, typically executives, which provide durational terms of service and which may set forth how the employment may be terminated with or without cause, coupled with different compensation consequences for each outcome. Thus, litigation regarding employees who are not “at will” frequently centers around whether the circumstances precipitating the termination met the contractual definition of “cause.” However, contractual issues may also arise with respect to “at will” employees – frequent examples include allegedly unpaid commissions and, of course, restrictive covenants, such as non-competition and non-solicitation agreements. Atlanta employment attorney Justin Scott has a wealth of experience dealing with employment contracts, both in drafting them and in negotiating and litigating contractual disputes.

With or Without Cause

As the Georgia Supreme Court has held, “when an employment contract requires that termination be ‘for cause’ only, and the employer fires the employee without cause, a substantive breach occurs, and the employee would be entitled to seek full compensatory damages.” Savannah College of Art & Design v. Nulph, 265 Ga. 662-63 (1995). These compensatory damages may include the compensation and benefits that the employee would have received if the contract had not been terminated or may be spelled out by the contract itself.

As to “cause,” what constitutes cause to terminate the employment relationship will almost certainly be articulated in the contract. However, that does not foreclose ambiguity or factual disputes. For example, if “cause” includes employee misconduct or unsuccessful job performance, there may very well be disputes as to what constitutes misconduct or successful job performance, as well as divergent versions of events.

Commissions

Georgia precedent provides that terminated employees, including at-will employees, may bring suit for “the amount of compensation due [them], based upon services actually performed by [them] up to the time of [their] discharge…” E.D. Macy Mills, Inc. v. Keith, 183 Ga. App. 357, 359 (1987); Yearwood v. Southern Life Syst., Inc., 243 Ga. App. 348, 350 (2000) (same). This includes commissions that were effectively earned and vested prior to termination. Typically, the key issue in such disputes is whether the employee earned the commissions based on services rendered before the termination of employment; when and how commissions are earned may or may not be set forth in the applicable contract. Contact Atlanta employment attorney Justin Scott for assistance with disputes regarding entitlement to commissions or other employment compensation.

Restrictive Covenants

In 2011, Georgia enacted the Restrictive Covenants Act, which upended Georgia’s historical hostility to restrictive covenants as restraints against trade and open competition. Now, O.C.G.A. section 13-8-50 provides that “reasonable restrictive covenants … serve the legitimate purpose of protecting legitimate business interests and creating an environment that is favorable to attracting commercial enterprises to Georgia and keeping existing businesses within the state.” Accordingly, the statute declares enforceable “contracts that restrict competition during the term of a restrictive covenant, so long as such restrictions are reasonable in time, geographic area, and scope of prohibited activities…” O.C.G.A. § 13-8-53(a). Post-employment restrictions, however, are only permitted with respect to certain enumerated types of employees, which include individuals who (1) “customarily and regularly” solicit customers or prospective customers, (2) “customarily and regularly” engage in “making sales or obtaining orders or contracts for products or services to be performed by others; (3) are executive employees; or (4) “[p]erform the duties of a key employee or professional.” Id.

As to the reasonableness of restrictive covenants, the statute establishes some presumptions, which include:

1. in the context of former employees not involved in the sale of a business, “a court shall presume to be reasonable in time any restraint two years or less in duration and shall presume to be unreasonable in time any restraint more than two years of duration, measured from the date of the termination of the business relationship;”
2. with respect to non-competition agreements, a presumption of reasonableness for a geographic territory “which includes the areas in which the employer does business during the employment relationship” provided that either (a) the “total” distance is reasonable, (b) the agreement contains “a list of particular competitors as prohibited employers for a limited period of time…”, or (c) both.

Regarding non-solicitation agreements, the Restrictive Covenants Act provides that they are generally enforceable so long as they are limited to the employer’s customers or prospective customers with whom the employee had “material contact” during employment and prohibit the solicitation of such persons or entities regarding “products or services that are competitive with those provided by the employer’s business.” O.C.G.A. § 13-8-53.

Prior the enactment of the Restrictive Covenants Act, Georgia courts would not modify or “blue pencil” unreasonable restrictive covenants and, if any restrictive covenants in an agreement were found to be invalid, Georgia courts would void the entire restrictive covenant agreement. However, the Georgia statute now permits courts to modify unreasonable restrictive covenants to make them enforceable. O.C.G.A. § 13-8-51(11). But such modification is not mandatory and at least two courts have declined to revise an overly broad non-competition agreement to make it enforceable. See LifeBrite Lab, LLC v. Cooksey, 2016 WL 7840217, at *1, 7 (N.D. Ga. Dec. 9, 2016); ID Tech., LLC v. Hamilton, 2014 WL 12703272 (N.D. Ga. March 24, 2014).

Contact Radford Scott LLP at (678) 780-4880 for assistance with employment contract issues, or contact the firm online here.