On November 18, 2015, the Pennsylvania Supreme Court decided Socko v. MidAtlantic Systems of CPA, Inc., No. 142 MAP 2014 (Pa. 2015), holding that a restrictive covenant entered into after an employee has begun working must be supported by adequate consideration.
Employers often seek to have employees enter restrictive covenants (also known as covenants not to compete) in order to protect themselves against employees using confidential information or taking unfair advantage of customer relationships gained during employment. Courts, however, disfavor such agreements, as they make it more difficult for employees to earn a living.
All contracts need to be supported by “consideration,” which means that something must be given in exchange for the promises made in the contract. Generally, if a restrictive covenant is entered at the time an individual begins employment, the fact of the new employment constitutes adequate consideration for the restrictive covenant. Restrictive covenants entered into after the employment relationship has been established, however, must be supported by consideration other than the continuation of the employment relationship.
Pennsylvania has a statute called the Uniform Written Obligations Act, 33 P.S. § 6 (“UWOA”), which provides that, if a contract states that the signers “intend to be legally bound,” the contract will not be invalid or unenforceable for lack of consideration.
In Socko, the parties entered a restrictive covenant after the commencement of the employment relationship. The restrictive covenant agreement contained the language required under the UWOA. Accordingly, the employer argued that the restrictive covenant was enforceable, despite the lack of consideration, because of the UWOA language.
The court disagreed, holding that restrictive covenants are an exception to the language of UWOA. Because of the long history of courts disfavoring restrictive covenants, the court held that, for a restrictive covenant entered after the commencement of the employment relationship to be enforceable, an employee must receive “new and valuable consideration” for the covenant.
What Does This Mean For You? If you want to enter into a restrictive covenant with an employee with whom your company has an ongoing employment relationship, you must make certain that the agreement contains new and valuable consideration. The Socko court noted that such consideration may include: a promotion, a change from part-time to full-time employment, or a change to a compensation package of bonuses, insurance benefits, and severance benefits. In addition to ensuring there is adequate consideration, any restrictive covenant must: (1) be ancillary to an employment relationship; (2) have restrictions that are reasonable as to duration and geographic extent; and (3) only have the restrictions necessary to protect the legitimate interests of the employer.
If you have any questions about this or any other employment or labor law issue, please contact Whitney Rahman at (717) 509-7237 or at email@example.com.