In Gallaher, et al. v. Ciszek, et al., 2022 NCBC 67, Chief Business Court Judge Louis A. Bledsoe, III, recently held that three neonatologists who continued to work after their employer unilaterally reduced their salaries—even if only to complete a 90‑day notice period of termination—waived their claims for breach of contract.

The plaintiffs in the case were long-time employees of the defendants, Cape Fear Neonatology Services, P.A. (“Cape Fear Neo”) and its founder, Thomas Arthur Ciszek, in providing neonatology services at Cape Fear Valley Medical Center (the “Hospital”) in Cumberland County.  The plaintiffs signed employment contracts that provided for annual salaries and that required 90 days’ notice to terminate the contracts without cause.  Over the years, Cape Fear Neo raised the plaintiffs’ respective salaries.

In June 2018, the plaintiffs, Ciszek, and others held a contentious meeting to discuss Ciszek’s then‑approaching retirement.  Ciszek ended the meeting by pledging to reduce the plaintiffs’ salaries to their original contract rates.  Unsurprisingly, the plaintiffs began looking for other jobs.

On January 25, 2019, the plaintiffs executed employment agreements with the Hospital and notified Cape Fear Neo of their intent to terminate their existing employment contracts in ninety days.  One week later, the plaintiffs received their bi-monthly paychecks—all of which had been reduced to their original salary rates.  Identical memos attached to these paychecks read, “Compensation has been adjusted to meet the terms of your employment agreement.”

The plaintiffs terminated their employment with Cape Fear Neo on April 30, 2019, and began work for the Hospital on May 1.  They sued the defendants on September 24, 2019, for, among other claims, breach of their employment contracts by unilaterally reducing their salaries.

The court agreed that the defendants had breached the contracts.  The defendants conceded that they had modified the plaintiffs’ contracts over the years by raising their salaries.  Any failure to pay the increased amounts without additional modification would breach the modified contracts.  The defendants argued that unilaterally reducing the plaintiffs’ salaries had modified the contracts again under North Carolina’s at-will employment law.  The court disagreed: because this purported change in employment terms came without some new consideration, the defendants had not modified the contracts but breached them.

Nonetheless, the defendants prevailed on their motion for summary judgment because the plaintiffs had waived the breach.  The court recited four requirements of such a defense: (1) the waiving party has not breached the contract; (2) the breach is not a total repudiation of the contract; (3) the waiving party is aware of the breach; and (4) the waiving party intentionally waives their right to excuse their own performance by continuing to perform or by accepting the other party’s partial performance.

The plaintiffs met each of these requirements: (1) they had not breached the contracts; (2) the defendants had not totally repudiated the contracts because they continued to pay some salary; (3) the plaintiffs were aware of the salary reduction; and (4) the plaintiffs continued to perform until the end of the 90-day notice period and accepted reduced pay during that period.  The court acknowledged but could not accept the plaintiffs’ protests that “they were contractually obligated to work the remainder of their ninety-day notice periods and felt ethically responsible to continue caring for the infants” at the Hospital.  Whatever their reasons, the plaintiffs continued to perform and accept the defendants’ partial performance.  Consequently, even though the court held that the plaintiffs had not “consented” to their salary reductions, they had waived their claims for breach of contract.

The takeaway: North Carolina’s employment-at-will policy does not permit employers to unilaterally reduce wages set forth in a contract without new consideration.  But when an employer does so, employees that continue working—even when they do not consent to the change—risk waiving any eventual claim for breach of contract.