Pennsylvania Supreme Court Finally Kills Hope That Magic Words Can Substitute for Valuable Consideration in Exchange for Post-Offer Restrictive Covenants

By Daniel Aiken and Vik Jaitly

To most practitioners, Pennsylvania law governing the consideration required for an employment agreement containing a restrictive covenant (e.g., a non-competition clause or non-solicitation clause) has been simple: (1) if the restrictive covenant is entered at the inception of the employment, the consideration to support the covenant is the award of the position itself; (2) if the restrictive covenant is entered during employment (i.e., post-offer), it is enforceable only if the employee receives new and valuable consideration—that is, some corresponding benefit or a favorable change in employment status. To avoid the need to provide a current employee additional consideration, some employers added magic language to their restrictive covenants, based on a statute from 1927, which arguably made a restrictive covenant enforceable without new consideration.

Specifically, the Uniform Written Obligations Act (“UWOA”) states that a written promise “shall not be invalid or unenforceable for lack of consideration, if the writing also contains an additional express statement, in any form of language, that the signer intends to be legally bound.” Thus, according to the terms of the statute, using the magic language, “the parties intend to be legally bound” erased any deficiencies in the consideration actually exchanged. Therefore, despite a significant line of authority requiring valuable consideration for post-offer restrictive covenants, an employer looking to enforce a post-offer covenant that lacked additional consideration could hold out hope of nevertheless enforcing the covenant.

Earlier this week, the Pennsylvania Supreme Court extinguished any flicker of hope with its decision in Socko v. Mid-Atlantic Sys. of CPA, Inc., No. 142 MAP 2014 (Pa. Nov. 18, 2015). There, the employer, Mid-Atlantic, was seeking to enforce a restrictive covenant against a former salesperson, David Socko. When Mr. Socko began his second stint of employment with Mid-Atlantic (he had resigned but was rehired four months later), Mr. Socko signed a new employment agreement containing a two-year noncompetition covenant. While still employed, Mr. Socko signed another, more restrictive, covenant not to compete. That agreement also expressly stated that the parties intended to be “legally bound,” but Mr. Socko apparently did not receive anything of value in return for his signature.

When Mid-Atlantic sought to enforce the agreement signed by Mr. Socko during his employment, Mr. Socko argued that the non-competition clause was unenforceable, as it was not supported by consideration. Mid-Atlantic, citing the parties’ pledge in the agreement to be “legally bound,” contended that the UWOA did not allow Mr. Socko to challenge the validity of the terms of the agreement on the basis of a lack of consideration. Ultimately, the Pennsylvania Supreme Court disagreed. The Court concluded that the UWOA does not save a post-offer restrictive covenant that otherwise lacks consideration. In reaching this conclusion, the Court cited Pennsylvania’s historical disfavor of covenants in restraint of trade and the fact that Pennsylvania courts have, for years, mandated strict compliance with the basic contractual requirement of consideration in the context of post-offer restrictive covenants.

For employers, this case serves as a reminder that they must provide new consideration in exchange for a post-offer restrictive covenant. To avoid this situation altogether, employers should consider whether they should insist, at the time of hiring, on having employees (especially those employees who will be in contact with customers or will have access to sensitive information) enter post-employment restrictive covenants. Agreements entered at the time of hiring are rarely subject to challenge for lack of consideration. Otherwise, employers will need to give up something of value in order to create a binding restrictive covenant. Continued at-will employment—which is sufficient consideration under most states’ laws—is not sufficient under Pennsylvania law. Rather, employers will need to offer more, and Pennsylvania courts have found that the following suffice as new consideration in exchange for a post-offer restrictive covenant: a promotion, a change from part-time to full-time employment, or a beneficial change to a compensation package of bonuses, insurance benefits, and severance benefits. Other valuable promises may also suffice depending on the circumstances.

Beware of the Literal and Hypothetical When Considering Work Rules

By David Woolf

National Labor Relations Board activity in the area of work rules, among other areas, has become the new normal. Employers have come to expect that the Board will find a work rule unlawful if the rule, taken literally, could hypothetically interfere with an employee’s right to engaged in “concerted activities” – legal speak for two or more employees raising issues about the terms or conditions of their employment. Now, the Board is also finding success on appeal.

Most recently, the District of Columbia Court of Appeals decided Hyundai America Shipping Agency, Inc. v. NLRB, a case in which Hyundai appealed the Board’s finding that certain work rules in its handbook violated the National Labor Relations Act because they had a tendency to interfere with its employees’ right to engaged in concerted activities. Those work rules included: (1) a prohibition on employees discussing matters under investigation by the company, (2) a limit on the disclosure of information from Hyundai’s electronic communication and information systems, (3) a prohibition on performing non-work activities during “working hours,” and (4) a provision urging employees to make complaints to their immediate supervisor or human resources employees rather than to fellow employees. The Court affirmed the Board’s decision as to the first three rules, holding that:

A rule prohibiting, as a blanket matter, the discussion of matters under investigation is problematic because it limits an employee’s right to discuss his or her own employment;

A rule prohibiting the disclosure of information on the employer’s electronic systems except to authorized persons is problematic because it could prevent an employee from sharing non-confidential information, including information about the terms or conditions of his or her employment; and

A rule prohibiting an employee from performing non-company work during “working hours” is unlawful because the term working hours – unlike “working time” – could be read to prohibit employees from communicating during breaks.

Interestingly, the Court reversed the Board as to the fourth rule, finding that a rule “urging” employees with a complaint to speak with supervisors or HR rather than co-workers is permissible because it merely urges employees to so act, rather than acting as a prohibition.

So what does this mean for employers? First, the Board’s assault on employer work rules will continue, given that this is an area of frequent disconnect between the Board’s interpretation of the law and common employer practice. Second, employers need to read their rules literally and consider hypothetical scenarios, even when the rule is proper and sensible in 95 percent or more of such scenarios.

For example, an employer can limit employee communications during an investigation, but not all such discussions on a per se basis. The employer should evaluate the issue on a case-by-case basis and consider whether it has a legitimate business justification requiring confidentiality (such as when there is a basis to believe that a disclosure will put evidence at risk or otherwise compromise the investigation). Likewise, an employer may very well expect (legitimately) that its employees will not disclose internal company information, but the rule memorializing that expectation should be limited to confidential information and exclude information about one’s own terms and conditions of employment, so as not to chill the activities of employees who want to talk about their own employment terms. Lastly, it makes all the sense in the world for employers to expect that their employees will perform only work activities while working. But the proper terminology should be used to ensure that employees are not restricted during breaks.

It is noteworthy that, in finding the rule about disclosing information on the employer’s electronic systems improper, the Hyundai Court acknowledged that a “reasonable reader” might understand the rule to be limited to confidential information, which would make it permissible. Unfortunately, “reasonableness” is not the standard; what is possible is. Accordingly, employers would be wise to review their rules carefully and literally to make sure that they are using the most precise language possible to describe the prohibited conduct and that the prohibitions cannot be interpreted – even in a strained way – to limit protected conduct.

Standards of Proof in Employment Wage and Hour Class Actions Remain a Hot Topic for U.S. Supreme Court

By Lawrence J. del Rossi

Last week the United States Supreme Court heard oral arguments in a donning and doffing class and collective action against Tyson Foods, Inc. (see full transcript of oral argument here) that has the potential to dramatically expand the certification of class and collective wage and hour “off-the-clock” actions.

The Fictional “Average Employee”

One of the primary issues in Tyson Foods, Inc. v. Bouaphakeo, No. 14-1146, is whether the plaintiffs’ use of statistical averages in a Fair Labor Standards Act (“FLSA”) case was appropriate to certify a federal Rule 23(b)(3) damages class and to prove liability and damages at trial.  The plaintiffs relied on expert testimony to prove that a class of more than 3,000 workers at an Iowa pork processing plant were owed overtime wages for time spent donning and doffing personal protective equipment and walking to and from their workstations.  At trial, the plaintiffs used statistical evidence of the average donning, doffing and walking times for employees, resulting in a jury verdict against Tyson Foods in excess of $5.8 million.  They relied on individual time sheets and average times calculated by their expert from more than 700 videotape observations of employees putting on and taking off protective gear and walking to their workstations.

Relying on the Supreme Court’s recent employer-friendly class action decisions in Wal-Mart Stores v. Dukes, 131 S. Ct. 2541 (2011) and Comcast v. Behrend, 133 S.Ct. 1426 (2013), Tyson Foods appealed the verdict to the Eighth Circuit Court of Appeals.  It argued that the plaintiffs’ reliance on statistical evidence improperly “presume[s] that all class members are identical to a fictional ‘average’ employee,” which is contrary to the so-called “trial by formula” prohibition in Dukes and Behrend for determining classwide liability and damage.

A divided (2-1) panel of the Eighth Circuit disagreed with Tyson Foods’ positions.  Based on a split in the circuits, the Supreme Court granted certification on (1) whether differences among individual class members may be ignored and a class action certified under Rule 23(b)(3), or a collective action certified under the FLSA, where liability and damages will be determined with statistical techniques that presume all class members are identical to the average observed in a sample; and (2) whether a class action may be certified or maintained under Rule 23(b)(3), or a collective action certified or maintained under the FLSA, when the class contains hundreds of members who were not injured and have no legal right to any damages.

Will Statistical Modeling Be Permitted to Show Classwide Violations Under the FLSA?

Some of the Justices, including the likely swing-vote, Justice Kennedy, appeared skeptical of Tyson Foods’ argument that the plaintiffs could not rely on statistical averages as the mechanism to demonstrate commonality and typicality among workers when there was evidence Tyson Foods did not keep accurate or adequate time records.  Several Justices cited to the burden-shifting framework in off-the-clock cases established after Anderson v. Mount Clemens Pottery Co., 380 U.S. 680 (1946) (where the employer’s records are inaccurate or inadequate and the employee cannot offer convincing substitutes, the burden shifts to the employer to demonstrate the precise amount of work performed or to refute the inference to be drawn from the employee’s evidence).  In addition, Justice Kennedy suggested that Tyson Foods might have waived arguments by not challenging the plaintiffs’ statistical experts at trial, by objecting to bifurcating the liability and damages phases of the trial, and by not seeking a special jury verdict for determination and apportionment of damages among class members.

On the other side, Justices Alito and Roberts questioned whether the use of averaging is appropriate when the job positions and equipment used by workers were undisputedly different among the workers included in the class, and where it was undisputed that some workers did not perform the activities in question and therefore suffered no injury.  Justice Alito asked, “How can you separate the employees who were injured from the employees who were not injured” or “how much time the employees were entitled to” except in “a very slap-dash fashion?”  The Chief Justice echoed this point, stating “once the jury rejects plaintiffs’ “average statistics, . . . there’s no way to tell whether everybody who’s going to get money was injured or not.”

Takeaways

The Tyson Foods case highlights the difficulties employers continue to face when determining whether their workers’ “preliminary” (time spent before the principal work begins) and “postliminary” activities (time spent after the principal work ends) are compensable in the first place under the FLSA. As Justice Alito asked at oral argument, “What do you think an employer should do about recordkeeping when the employer believes that certain activities need not be counted under the FLSA? . . . Is it supposed to keep two sets of records?”  The answer, according to the DOJ’s attorney, is that “Mt. Clemens . . . make[s] clear that the employer is stuck with its mistake . . . .”

Tyson Foods also shows that despite the Court’s decisions in Dukes and Comcast, which many commentators predicted would be the death knell of employment class actions, courts continue to certify classes where the plaintiffs can muster enough evidence (including statistical “averages” through qualified experts) to overcome the presumption of individualized differences among class members.  Further, while the lack of accurate time records is not an insurmountable obstacle to defeating an employee’s claim that he or she (or a group of workers) did not receive overtime for compensable time worked in excess of 40 hours, it could provide an opening under the Mt. Clemens standard for employees to take advantage of “relaxed” standards of proof (“just and reasonable inference”) to show wage violations under the FLSA, which ultimately could allow them to avoid early dismissal and get to a jury.

2015 Elections — Roundup of Employment-Related Ballot Initiatives

By Dennis Mulgrew

Local governments or voters often pass statutes or ordinances on employment-related subjects that require employers to ensure that their policies are compliant not just on a state-by-state basis, but even on a city-by-city or county-by-county basis within the same state. During this past week’s election, voters around the country considered a number of local employment-related ballot initiatives, some noteworthy examples of which are below:

Voters in Elizabethtown, New Jersey Approve Paid Sick Leave

Elizabethtown, New Jersey joins a number of other cities (including several in New Jersey) in enacting a paid sick leave ordinance. Voters approved a measure that requires employers to offer one hour of paid sick time to employees for each 30 hours worked.

Voters in Houston, Texas Reject Anti-Discrimination Ordinance

Many cities have enacted local anti-discrimination ordinances which complement or mirror anti-discrimination statutes under state and federal law. In May 2014, the Houston city council passed an ordinance that would have banned discrimination based on characteristics already protected by federal law (such as age, sex and race), as well as sexual orientation and gender identity, which are not characteristics protected by federal law. In last week’s election, Houston voters rejected the ordinance.  Opponents of the ordinance had labelled it the “bathroom ordinance” and claimed that its provisions concerning transgender people would enable men who wear women’s clothes – and sexual predators – to access public women’s restrooms.

Minimum Wage Measures in Portland, Maine and Tacoma, Washington

Voters in Tacoma, Washington supported a phased-in increase to the city’s minimum wage to $12 by 2018, but rejected a more ambitious increase that would have immediately raised it to $15. Similarly, voters in Portland, Maine rejected a measure that would have increased the city’s minimum wage from $7.50 to $15 in just four years, instead sticking with a hike recently enacted by the city council that would raise it to $10.10 in 2016, $10.68 in 2017, and tie increases from 2018 forward to the Consumer Price Index.

Marijuana Initiatives in Ohio, Colorado and Michigan

The increasing trend toward marijuana decriminalization (and outright legalization) presents multiple issues for employers, including reconciling their drug-free workplace policies with medical marijuana patients’ rights, and whether or not they can punish employees for engaging in what is now deemed to be a legal activity. In Ohio, voters rejected a marijuana legalization measure that would have ended marijuana prohibition in the state. Nonetheless, most analysts believe that the rejection is not reflective of voters’ opposition to marijuana legalization per se, but rather opposition to the specifics of the ballot initiative, which would have granted an effective oligopoly on marijuana production within the state to a small handful of the initiative’s wealthy backers.   In Colorado, voters approved a ballot measure that gives state lawmakers permission to spend (rather than return to state residents, marijuana growers, and recreational users) $66.1 million in taxes collected from the sale of recreational marijuana, further legitimizing the state’s prior legalization of recreational use. And voters in the Michigan municipalities of Keego Harbor and Portage approved initiatives that effectively repealed the city’s prohibition on the possession, use and transfer of up to an ounce of recreational marijuana.

Employers can expect employment-related ballot initiatives similar to those listed above in upcoming elections. For example, building upon the passing of minimum wage increases in San Francisco and Los Angeles, it is likely that in 2016 California voters will consider a measure to increase the minimum wage to $15 statewide by 2021. Multi-jurisdictional employers should keep in mind that their policies may need to be re-evaluated, sometimes on a city-by-city basis, to ensure compliance with voter or legislatively enacted local ordinances and statutes.