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Philadelphia Employment Lawyers: Supreme Court Ruling on Restrictive Covenants

December 14th, 2015

Consideration is something of value given by both parties to a contract that induces them to exchange mutual promises and is a necessary element of a binding contract. Pennsylvania law has been fairly straightforward regarding the consideration required for a valid restrictive covenant in an employment agreement. For example, if an employer wants his or her employees to sign a covenant not to compete or a non-solicitation clause, the agreement must either: (1) be entered into at the beginning of the employment relationship; or (2) include new and valuable consideration if entered into during employment (i.e. post-offer). In other words, if an employer wants to receive the benefit of restricting an employee in this way, it must confer a benefit upon the employee, such as the promise of a new job. If the job has already been accepted, the employer must confer some new benefit upon the employee for the restrictive covenant to be valid.

However, some employers try to side step this requirement by adding “magic language” to their restrictive covenants. This magic language is derived from the Uniform Written Obligations Act (UWOA). Specifically, when an employer and employee enter into a restrictive covenant post-offer, if the employee promises to “be legally bound,” this language appears to do the work of valid consideration. Even though the law is straightforward that consideration is required for a valid restrictive covenant, employers often try this tactic – using the magic language to poke a loophole in the law.

Recently, the Pennsylvania Supreme Court invalidated this employer tactic. In Socko v. Mid-Atlantic Sys. Of CPA, Inc., the Court concluded that such an agreement was unenforceable. According to the Court, the UWOA does not save a post-offer restrictive covenant that otherwise lacks consideration. The Court cited Pennsylvania’s historical policy against covenants in restraint of trade.

For employers, this case makes clear that they must provide some new consideration when entering into a post-offer restrictive covenant. This might be a promotion, a change from part-time to full-time employment, a beneficial change to a compensation package of bonuses, insurance benefits or severance benefits. Or, to avoid this situation, employers should insist on having all new employees enter into restrictive covenants—especially those who will be in contact with customers or have access to sensitive information.

Philadelphia Employment Contract Lawyers at Sidney L. Gold & Associates Assist Clients with Restrictive Covenant Issues

Whether you are an employee who has entered into a post-offer restrictive covenant without consideration, or an employer seeking counsel in drafting employment contracts, Philadelphia employment lawyers at Sidney L. Gold & Associates provide comprehensive representation. At Sidney L. Gold & Associates, we focus solely on employment law. With offices conveniently located in Center City, Philadelphia, we serve clients throughout Pennsylvania, New Jersey and New York. Call us at 215-569-1999 or fill out an online contact form today.

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