Non-Compete Covenants in Pennsylvania

April 24, 2018

by Robert Sebia, Esq.

Pursuant to Pennsylvania law, restrictive non-compete covenants are enforceable only if they are: (1) ancillary to an employment relationship between an employee and an employer; (2) supported by adequate consideration; (3) the restrictions are reasonably limited in duration and geographic extent; and (4) the restrictions are designed to protect the legitimate interests of the employer. Socko v. Mid-Atl. Sys. of CPA, Inc., 633 Pa. 555, 569, 126 A.3d 1266, 1274 (2015).

As with other contracts, for an employment agreement containing a restrictive covenant to be enforced, consideration is crucial, whether the covenant is entered into prior to, during, or after employment ends. Thus, to be valid, a covenant not to compete must be consummated with the exchange of consideration. Capital Bakers Inc. v. Townsend, 426 Pa. 188, 231 A.2d 292, 293–94 (1967). Generally, if a non-compete clause is executed at the inception of the employment, the consideration to support the covenant may be the award of the position itself. An employee’s promotion to a new position within the company also constitutes sufficient consideration. Jacobson & Co. v. Int’l. Environment Corp., 427 Pa. 439, 235 A.2d 612, 618 (1967).

Nevertheless, when a non-compete clause is required after an employee has commenced his or her employment, it is enforceable only if the employee receives “new” and valuable consideration—that is, some corresponding benefit or a favorable change in employment status. Sufficient new and valuable consideration has been found by our courts to include, inter alia, a promotion, a change from part-time to full-time employment, or even a change to a compensation package of bonuses, insurance benefits, and severance benefits. Socko, 633 Pa. at 569–70 (2015). Without new and valuable consideration, a restrictive non-compete covenant entered into after the employment has commenced is likely unenforceable.

The enforceability of non-compete covenants is fact specific and depends on the individual circumstances and facts at hand.

If you are a business owner and are concerned about the non-compete covenants you use to protect your business, or if you are an employee and have questions about an after the fact non-compete you were required to sign, one of the attorneys at HRMM&L would be happy to help you navigate these often complex issues.

Questions Every Business Must Ask

Q. Has your business recently reviewed its legal structure to determine whether it is set up in the most advantageous manner for legal and tax purposes, considering recent developments and changes in the law?

Q. Do the owners of your business have a current, updated buy-sell agreement which controls how ownership interests in the business are to be transferred in the event of an owner’s death, disability or termination of employment?

Q. Have the owners of your business developed a succession plan to define how ownership and authority will transition upon the death or retirement of the present owners?

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