by Douglas Ferguson, May 2021
In today’s competitive business arena, restrictive covenants or non-compete agreements are often found in employment contracts. These restrictive covenants not only help the employer retain existing clients but also serve to prevent former employees from departing the company with insider knowledge and carrying that to a new employer in the same industry. While restrictive covenants in employment contracts are an effective tool to help your company maintain a competitive edge, employers must be aware of certain requirements imposed by the courts of the Commonwealth of Pennsylvania to ensure that those restrictive covenants are ultimately enforceable.
Under Pennsylvania law, restrictive covenants are enforceable only if they are: (1) ancillary to an employment relationship between an employee and 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. See Hess v. Gebhard & Co., Inc., 570 Pa. 148, 157, 808 A.2d 912, 917 (2002).
One of the most overlooked questions regarding the enforceability of restrictive covenants in employment contracts is whether there was adequate consideration. To determine whether there was adequate consideration, courts will examine the intent of the parties. Was the restrictive covenant “an auxiliary part of the taking of regular employment”? See Beneficial Finance Co. of Lebanon v. Becker, 422 P.A. 531, 536 (1966). Or was the restrictive covenant “an after-though to impose additional restrictions on the unsuspecting employee”? See Id. at 536. In the latter case, the employer’s restrictive covenant may not be enforceable due to lack of consideration.
There is no bright line rule in Pennsylvania as to when the restrictive covenant must be executed; such agreements may be signed before or after employment commences. Rather, if the restrictive covenant was executed after employment commences, the court will focus on the intent of the parties and whether the restrictive covenant was incident to the employment relationship. If the restrictive covenant was not incident to the employment relationship, there must be new consideration for the additional terms.
Eisenberg, Gold & Agrawal, P.C. is an experienced business law firm with the expertise required to ensure that your company’s non-compete agreements are tailored to the requirements of the laws of the Commonwealth of Pennsylvania.