When are Agreements that Restrict an Employee’s Next Job Enforceable?
Most employers do not want their employees to leave the company and take employer’s current or potential customers to a new company. To avoid this, employers may require new or existing employees so sign agreements such as non-competition agreements or non-solicitation agreements. But, are they enforceable?
These agreements contain restrictive provisions (called covenants) which restrict an employee from doing things the employer believes will hurt his business. The most typically restrictions prohibit an employee from competing with his or her employer while working for employer and also at later jobs. Competing includes things such as soliciting the employer’s customers or employees to move with the leaving employee.
Restrictive covenants are not favored by Pennsylvania courts. Therefore, in order to be enforceable, the restrictive covenant agreement (1) must relate to employment; (2) must be reasonably limited in both time and territory; and (3) must be supported by adequate consideration.
The requirement that the restrictive covenant must relate to employment is probably the least difficult of the three to determine. The restriction must relate to the employment relationship and the services being rendered by the employee for the employer.
Secondly, the restrictive covenant must be reasonably limited in both time and territory. For instance, prohibiting the employee from going to work for a competitor located with 1000 miles for 10 years would, in most instances, been seen as unreasonable. The reasonableness of this restriction depends upon the facts and circumstances of a particular employment relationship, and further requires an analysis of the services performed by the employee and the extent of the restriction necessary to protect the employer from losing customers to the former employee.
The requirement of adequate consideration often can cause problems for employers. Consideration is the exchange of something of value by one party for something in return. Consideration in the workplace is the employee’s services given in exchange for compensation and/or other benefits. Benefits might include paid health insurance or contributions to a retirement plan. Determining what is adequate consideration requires an evaluation of what each party gave and received. For example, if an employee signs the restrictive covenant agreement at the time he is hired, adequate consideration to the employee is the compensation and benefits he will receive for performing the job. However, if the restrictive covenant agreement is presented to an employee who is already employed, additional consideration (e.g. pay increase, bonus, other benefits) or change in status (e.g. promotion) must be given to the employee in order for the restrictive covenant to be enforceable. Pennsylvania courts have held that merely agreeing to continue to keep the employee in the job is not adequate consideration to support an employee’s agreement to a restrictive covenant.
Since employment relationships vary, the details of that relationship and the needs of the employer and employee should be examined by an experienced employment law attorney in each case to determine enforceability of restrictive covenant agreements. If you are an employer or employee, and you have questions regarding the enforceability of a restrictive covenant, please feel free to contact one of our employment law attorneys at 610-323-7464.