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Recently over at The Workplace there was a question regarding an employee withholding valuable information that they developed in their spare time. According to their employment contract all intellectual property they develop, regardless of work hours, belongs to the company.

The company also recently slashed the incentive program that the employee has been generating a significant amount of their income from. (A quick estimate provided a $60k/year difference in income for said employee.)

Since the employee only spent their off hours developing this intellectual property for the obviously significant incentive money, is the employee entitled to any compensation or the right to retain the property?

Since I don't have the actual contract I will simply assert for the purpose of this question that the contract has no stipulations regarding this.

As I am in the United States myself, I am mostly concerned with answers from the US. However, I would be interested to hear how this would be handled elsewhere as well.

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    At least in California blanket assignments of IP to the employer may be unenforceable. I think in other states it requires compensation. Which leads to the question here: if the company unilaterally changes the compensation, does it void the previous agreement.
    – Charles E. Grant
    Commented Mar 24, 2019 at 19:01
  • Is it at-will employment?
    – Harper - Reinstate Monica
    Commented Mar 24, 2019 at 22:11
  • @Harper For US so in most cases yes. But that wouldn't effect existent intellectual property, would it?
    – Summer
    Commented Mar 24, 2019 at 22:18
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    This question is problematic because it assumes/insinuates the contract was valid in the first place, which is quite possibly not true and depends on the (country and state) jurisdiction. "As I am in the US myself, I am mostly concerned with answers from the US." Are you aware this is a state law matter, and there are 50 different states in the US? Also, there are lotsa other countries. I think the question is more valuable the more different jurisdiction answers we get.
    – smci
    Commented Mar 25, 2019 at 7:53
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    @smci I am addressing the OP's contract law question ("Can a significant change in incentives void an employment contract?", emphasis added), which primarily is about contract voidability and unilateral alterations to the parties' exchange of considerations. Contract law can be irrelevant to you if you expect all IP issues to be sorted out first, but my perception is that the OP and the majority of the audience are rather more interested in --and indeed more frequently exposed to-- contract issues as formulated in the question than in the incidental context of IP matters.
    – Iñaki Viggers
    Commented Mar 25, 2019 at 13:26

1 Answer 1

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Can a significant change in incentives void an employment contract?

Yes, because a party's unilateral, significant imposition which the counterparty did not expect strikes the premise of a contract/agreement being entered knowingly and willfully. Here, the contract or relevant portion thereof is voidable by the employee, because the employer's belated imposition is tantamount to a misrepresentation as contemplated in the Restatement (Second) of Contracts at § 164(1).

The contract clause regarding an employee's off-work hours might be unenforceable as unconscionable, more so where the incentive being slashed represents a significant portion of an employee's income (since it reflects that the employee's salary is not that high so start with). See the Restatement at § 177, 178, and 208.

is the employee entitled to any compensation or the right to retain the property?

Yes, but the applicable alternative --compensation vs. withholding the IP-- depends on what agreement the employee reaches with the employer.

I presume what prompts this part of your question is the mention --in the Workplace SE post-- that the engineer rejected the employer's bid (offer is somewhat of a misnomer) of $25,000 for the employee's off-work IP.

The engineer's reluctance is rightfully cautious. Prior to accepting the employer's proposal, it is in the engineer's best interest to ensure (with enough specificity in a new contract) the terms and conditions of that proposal, lest the employer subsequently argue that the payment of $25,000 encompassed any and all subsequent IP produced by the employee during his employment there.

Likewise, insufficient caution by the engineer regarding the aforementioned proposal may permit a finding that the parties' subsequent conduct reflects the engineer's acceptance of the new conditions (including the slashing of incentives).

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  • Thank you. Out of interest, would there have been legally sound source of action the employer could have taken to change the incentives without voiding an employment contract? Would something akin to a grace period (or some form of limited grandfathering) have changed the legal outcome?
    – Gregory Currie
    Commented Mar 25, 2019 at 2:57
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    @GregoryCurrie : It is cretainly within the power of the two parties to negotiate a new contract to replace the old contract. However, you seem to want to bypass this method. What mechanism would seem fair to you for the employee to change the terms of the employment contract without such renegotiation?
    – Eric Towers
    Commented Mar 25, 2019 at 3:35
  • I must admit, I am reading this question in the context of the linked question, where the additional compensation is not guaranteed. From what I can gather regarding that situation, the employer could choose not to use any patents, and I suppose that would be the "out" for the employer if it's no longer viable for them to use it.
    – Gregory Currie
    Commented Mar 25, 2019 at 3:48
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    @GregoryCurrie The contract does not seem to compel the parties to meet some minimum yearly amount pursuant to the extra incentives. Thus, the company may justifiably withdraw from, or basically rescind, that portion of the contract. The problems are that (1) the company purports it now expects to get something for essentially nothing (by scaling back or slashing incentives), and (2) the materiality of the former incentive might have reasonably been the employee's basic assumption that induced him to accept and retain employment there (hence my reference to the Restatement at § 164).
    – Iñaki Viggers
    Commented Mar 25, 2019 at 12:57
  • The Restatement (Second) of Contracts is available here, now that the law firm of the link in this answer removed that resource and posted some useless "overview of contract law" instead.
    – Iñaki Viggers
    Commented Jan 3, 2020 at 15:32

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