On November 18, the Pennsylvania Supreme Court issued a new and very detailed opinion on the enforceability of non-compete agreements. We often get questions about whether non-compete agreements are enforceable. In case of David Socko v. Mid-Atlantic Systems of CPA, Inc., the Supreme Court provides a detailed answer.
David Socko was employed as a salesman by Mid-Atlantic Systems of CPA, Inc., a basement waterproofing company. He was hired in 2007, resigned in 2009 but was re-hired four months later. At the end of 2010 while continuing his employment with Mid-Atlantic, he signed a new non-compete agreement but was not offered any additional benefit such as a promotion, pay raise, bonus, or other compensation. Socko resigned in 2012 to take a job with a competitor and Mid-Atlantic sought to enforce the non-compete agreement.
Our courts have long held that an employer must offer additional compensation or another benefit of value in exchange for a non-compete agreement signed by an employee who is already employed by the employer. Mid-Atlantic tried to circumvent this requirement by the language in the non-compete agreement, which stated that the parties “intended to be legally bound” by the terms of the non-compete agreement. Under the Uniform Written Obligations Act (UWOA), a Pennsylvania law passed in 1927, an agreement is enforceable even if there is no consideration (benefit) offered in exchange for a promise if the contract contains an express statement that the signer intends to be legally bound.
Mid-Atlantic’s argument did not prevail. In rejecting the argument, the Pennsylvania Supreme Court made several important holdings.
- A non-compete agreement is disfavored by the courts as a restraint of trade because it places a heavy burden on an employee attempting to earn a living.
- Although non-compete agreements are disfavored, a court will enforce them if the employer follows the proper process when it creates and executes the agreement.
- New Employees: A covenant not to compete is enforceable if it is contained in an employment agreement signed when the employee first accepts employment.
- The non-compete restriction requires a specific signed agreement. A policy or a statement in a handbook is not sufficient, unless it is signed by the employee.
- The employee must be offered a job and accept the position with the understanding that a non-competition covenant is part of the agreement.
- Existing Employees: If the employer wants to create a non-compete agreement after the employee is already employed, the employer must offer new consideration.
- This situation is not unusual. An employee may develop skills or knowledge in the course of his or her employment that an employer wants to protect. The employer may not want the skills and knowledge learned during the course of the employee’s work to be used against the employer if the employee finds other work.
- To enforce a non-compete agreement with an existing employee, the employer must offer additional benefits to the employee, such as a promotion, a change from part-time to full-time employment, or a material change to the employee’s compensation package, such as a bonus, additional insurance benefits, severance benefits, or a pay increase.
- Continued employment by itself, even where the employee is an employee at will and can be terminated at any time, is not adequate consideration to make a non-compete agreement enforceable.
Employees are a business’s most important assets. They possess knowledge and skill that is difficult and costly to replace. It takes time and costs money to train an employee. Therefore it is appropriate for a business to protect its investment by asking its employees to sign agreements that include non-compete provisions, as well as promises to keep business information confidential and promises not to solicit co-employees, vendors, and customers if the employee changes jobs.
Our employment law attorneys are prepared to guide employers through the changes in the law to create enforceable agreements. Contact us if you have questions, when you need a non-compete agreement, to enforce a non-compete agreement, and for all of your employment law needs.