Restrictive Covenants In Pennsylvania
Rarely a week goes by that we do not receive a call from an employer or an employee following a separation of employment inquiring about what restrictions, if any, exist to prohibit the departed employee from joining forces with a competing business. Clearly the departure of a key employee can pose a grave danger to a company if that employee were to work directly for a competitor. Pennsylvania law, like the laws of other states, provides a measure of protection to employers so that the departure of a single employee does not cripple ongoing business.
The primary tool employers use to protect themselves in such situations is a Restrictive Covenant, more commonly known as a Non-Competition Agreement. Restrictive Covenants preclude certain former employees from competing with their former employers, subject to certain limitations. Likewise, Non-Disclosure Covenants preclude the departed employee from disclosing confidential and proprietary information. While Pennsylvania courts repeatedly comment that such restrictive agreements are not favored, properly drafted Restrictive Covenants, although strictly construed and narrowly interpreted, are enforceable in Pennsylvania. To be enforceable, a Restrictive Covenant must be (1) incident to an employment relationship between the parties, (2) reasonably tailored to protect the employer’s legitimate business interests, and (3) reasonable in geographic scope and duration, and supported by adequate consideration.
The presence of a legitimate, protectable business interest is the threshold requirement for an enforceable Restrictive Covenant. Protectable business interests include the protection of customer relationships, the securing of confidential information, and unique or extraordinary skills developed through specialized employee training programs. On the other hand, employees’ general knowledge of customer information is not a protectable interest, and a company cannot restrict future employment for all employees. For example, a bio-tech firm would have a legitimate protectable interest with regard to its scientists or marketing representatives, but would have no legitimate protectable interest with regard to its maintenance or support staff. The courts will not enforce a Restrictive Covenant against an employee if the employer has no legitimate protectable business interest that is at risk.
Assuming there is a legitimate business interest to protect, the geographic and time limitations must also be deemed reasonable. Restrictive Covenants that preclude employees from soliciting customers or working for competitors that are limited to two years or less are most often enforced. The geographic scope of the limitation is completely dependent upon the nature of the business. In some situations a geographic limitation precluding employment with a competitor within 10 miles of the former employer would be deemed sufficient to protect the employer, whereas in other situations, an employee may be rightfully precluded from working anywhere in North America. If the court finds that either the time or geographic restrictions are too broad, the court is empowered to narrow the limitations to what the court deems reasonable.
Lastly, to be enforceable the Restrictive Covenant must be supported by what the law refers to as “consideration”. That is, the employee must receive something in return for the employee’s execution of a Restrictive Covenant. In many states, continued employment with the employer is deemed sufficient consideration. However, in Pennsylvania continued employment with an existing employer is insufficient. If the Restrictive Covenant is signed contemporaneously at the start of employment, such new employment is sufficient consideration and the Restrictive Covenant will be enforced. On the other hand, if an employer demands an existing employee sign a Restrictive Covenant without giving anything to the employee in return, the Restrictive Covenant will be deemed unenforceable. Therefore, if an employer seeks to have an existing employee sign a Restrictive Covenant, it is incumbent on the employer to provide the employee with financial or other compensation in order to later enforce the Restrictive Covenant.
Typically, a Restrictive Covenant will contain language such that if the employee violates the covenant, the employer is permitted to seek injunctive relief and obtain a court order enjoining the former employee from violating the terms of the covenant. Moreover, depending on the language of the Restrictive Covenant, the court is able to direct the violating employee to reimburse the employer for its attorney’s fees expended in enforcing the Restrictive Covenant, and/or disgorge any monies the employee received as a result of his or her violation. It is, therefore, imperative for employers and employees alike to consult with an attorney familiar with such Restrictive Covenants before drafting and/or executing covenants that can have a significant impact on an employer’s business and on an employee’s livelihood.
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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