Alerts and Updates
Pa. Superior Court Reiterates That Employers Have to Provide Additional Consideration When Obtaining Noncompete Agreements with Current Employees
May 20, 2014
The Superior Court noted that, at least as to the enforceability of restrictive covenants under Pennsylvania law, it is important to consider the adequacy of consideration when determining whether the post-employment restrictions are valid.
The Pennsylvania Superior Court recently ruled in Socko v. Mid-Atlantic Systems of CPA, Inc., that employers cannot enforce noncompete agreements entered into after the employee has already commenced employment, unless the employee receives additional consideration in the form of a corresponding benefit or beneficial change in employment status in exchange for the restriction.
The lawsuit began when David M. Socko sued basement waterproofing services firm Mid-Atlantic Systems of CPA, Inc., seeking a determination that the noncompete agreement he had signed after he had commenced employment was unenforceable since he had not received any additional consideration. The Superior Court upheld the trial court's finding that a noncompete agreement required by his former employer, Mid-Atlantic Systems of CPA, Inc., was invalid because he was not provided additional consideration.
The courts in some states hold that continued employment constitutes adequate consideration for a restrictive covenant imposed during the employment term, while others require additional consideration to be provided if the restrictive covenant is imposed after the commencement of the employment relationship. The Superior Court noted that, at least as to the enforceability of restrictive covenants under Pennsylvania law, it is important to consider the adequacy of consideration when determining whether the post-employment restrictions are valid. The Superior Court reasoned that when restrictions are included in an initial employment offer or contract, the benefit of the offer of employment offsets the burden of the restrictive covenant, but when the covenant is imposed on an existing employment relationship, the employee must receive some consideration (other than continued employment) in exchange for the restrictions.
What This Means for Employers
In light of this decision, it is vital for an employer in Pennsylvania wishing to impose a noncompete and/or nonsolicitation restriction on current employees to support that restriction with additional consideration other than the continued employment itself, such as a promotion, boost in wages or benefits or other favorable change in employment terms and conditions. This decision also highlights the importance of including restrictive covenants in initial employment contracts to avert the need to provide additional consideration after an employee commences employment.
Employers should evaluate whether restrictive covenants are needed for any individual employee prior to the offer of employment, review initial job offer letters and initial employment agreements to ensure that restrictive covenants have been included in these documents if desired, review restrictive covenants to ensure that they are appropriately worded to maximize enforceability, and provide additional consideration to support any restrictive covenants included in a new agreement that is signed after the commencement of employment. In connection with any acquisition, merger or similar transaction, employers should assess whether these requirements have been met by the predecessor employer, in order to determine whether to secure new agreements restricting solicitation or competition.
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