Have you seen the Richard Branson quote: “Train people well enough so they can leave, treat them well enough so they don't want to?” This makes a good amount of sense as you want to have the best employees and you want them to stay. Personally, I think that having happy, engaged employees makes for the best business and allows for the most customer satisfaction. You are also secure in knowing that you have loyal employees who treat your business as if it was their own.
But what happens when your best and brightest employees decide to leave? Do you have the right protections in place? Are these protections enforceable?
In Pennsylvania, restrictive covenants, including non-competition and non-solicitation agreements, are enforceable. However, they must be part of valid contracts supported by adequate legal consideration. If they are included in an initial employment contract, there is no issue, as a restrictive covenant that is ancillary to initial employment is considered to have adequate consideration; by accepting the terms of the contract, the employee receives employment.
But what about post-employment restrictive covenants? In Pennsylvania, continued employment is not adequate consideration. Therefore, if there is an employment contract already in existence, there must be additional consideration. This can come in many forms, such as a raise, a promotion, or some other benefit, but it cannot be nominal.
One recent case that addressed Pennsylvania's restrictive covenants was Pulse Technologies, Inc. v. Notaro, 67 A.3d 778 (Pa. 2013). In that case, Mr. Notaro received an offer letter from Pulse Technologies, Inc. (“Pulse”) which contained provisions describing the position, responsibilities, salary, benefits, effective date and confidentiality. The letter also indicated that, on the first day of employment, Mr. Notaro would be required to sign an Employment Agreement with "definitive terms and conditions…contained herein." The offer letter also stated that Pulse would not be able to employ Mr. Notaro if he failed to sign the Employment Agreement. On Mr. Notaro’s first day of work at Pulse, he received the employment agreement which contained a non-competition and non-solicitation agreement. After 5 years, Mr. Notaro decided to leave Pulse for a competitor, at which point Pulse enforced its restrictive covenants.
In Pulse Technologies, Inc., the Pennsylvania Supreme Court decided that despite Mr. Notaro’s receipt of an offer letter that appeared to be a contract, it was simply part of the hiring process and negotiations prior to employment and therefore not a binding contract. The Supreme Court determined that based on the language of the offer letter, the execution of the Employment Agreement was a requirement prior to the initiation of employment. Therefore, the restrictive covenants contained in the Employment Agreement were supported by adequate consideration as they were ancillary to employment and therefore enforceable.
One major takeaway from Pulse Technologies, Inc. is that when intending to create valid and enforceable restrictive covenants that are ancillary to the initiation of employment, be sure to carefully draft offers of employment so that they do not become binding contracts.
If you have any questions regarding either restrictive covenants or business law in general, please contact us.