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.

UWOA Exception Does Not Apply to Noncompete Agreements in Pennsylvania

By: DeMaris E. Trapp

The Pennsylvania Superior Court recently reaffirmed Pennsylvania’s longstanding position that employers must provide valuable consideration to employees who enter into noncompete agreements. In a case of first impression, the court held that a statement in a noncompete agreement with an existing employee that the parties “intend to be legally bound,” as set forth in the Uniform Written Obligations Act (“UWOA”), does not constitute adequate consideration.

In Socko v. Mid-Atlantic Systems of CPA, Inc., the employer argued that its noncompete agreement with a former employee was enforceable because the agreement expressly stated that the parties “intend to be legally bound.” The former employee entered into the agreement after he began working for Mid-Atlantic Systems of CPA, and he did not receive any benefit or change in job status in exchange for signing the noncompete. The employer argued that the language itself sufficed to enforce the agreement because Section 6 of Pennsylvania’s UWOA prevents the avoidance of a written agreement for lack of consideration if the agreement contains an express statement that the signer intends to be legally bound.

The court rejected the employer’s argument, pointing to Pennsylvania’s established view of restrictive covenants as a disfavored restraint of trade and significant hardship on bound employees. Accordingly, Pennsylvania courts have long held that noncompete agreements must be supported by valuable consideration, even though other types of contracts may be upheld by continuation of at-will employment, contracts under seal, or nominal consideration.

Employers seeking to enforce noncompete agreements in Pennsylvania are now on notice that language stating that “the parties intend to be legally bound” will not relieve them of the requirement to provide actual and valuable consideration to employees in exchange for execution of the agreement. If an employee signs the agreement at the start of employment, then the consideration is the job itself. When the employment relationship already exists, however, employers must provide consideration in the form of benefits—such as raises or bonuses—or a change in job status, i.e., a promotion.

Philadelphia Pregnancy Accommodation Law: Notice Requirement Begins on April 20, 2014

By: DeMaris E. Trapp

On January 20, 2014, Philadelphia Mayor Michael Nutter signed into effect an amendment to the city’s Fair Practices Ordinance: Protections Against Unlawful Discrimination that expressly includes pregnancy, childbirth, or a related medical condition among those categories protected from unlawful discrimination.

The city law covers employers who do business in Philadelphia through employees or who employ one or more employees.  Before this amendment, employers’ obligations under city, state, and federal antidiscrimination laws only required them to treat employees with pregnancy-related issues no worse than any other disabled employee with respect to accommodations.  Now employers are not only prohibited from denying or interfering with an individual’s employment opportunities on the basis of pregnancy, childbirth, or related medical conditions, but employers also are required to make reasonable accommodations on these bases to an employee who requests it.  The legislation’s non-exhaustive examples of reasonable accommodations include restroom breaks, periodic rest for those who stand for long periods of time, assistance with manual labor, leave for a period of disability arising from childbirth, reassignment to a vacant position, and job restructuring.  Employers have an affirmative defense under the law for failing to accommodate an employee if such accommodations would cause an undue hardship.

Employers should take note that this law increases the burden on them to provide reasonable accommodations, since examples like reassignment and job restructuring have traditionally not been required under similar federal and state laws that mandate accommodations for individuals with disabilities.  Thus, employers should review their policies and other written materials regarding employee accommodations to ensure that they reflect the increased protections afforded by the amendment.  Employers were required to provide written notice to its employees of the protections under this amendment by April 20th or post the notice conspicuously at its place of business in an area accessible to employees.  The Philadelphia Commission on Human Relations has provided a model notice to employees, which can be found at: http://www.phila.gov/HumanRelations/PDF/pregnancy_poster.pdf.

PEPping Up the Economy and Employers

By: Maria L.H. Lewis

On October 26, Governor Tom Corbett (R-PA) signed into law the Promoting Employment Across Pennsylvania Act (PEP) (House Bill 2626).  This law is touted as an attempt to create new jobs in Pennsylvania and promote economic development.

What does this mean for thousands of Pennsylvania employers?  If you are able to create at least 250 new jobs in Pennsylvania within 5 years (with 100 of the new jobs created within the first 2 years), you will be eligible to retain 95% tax witholdings for the persons employed in the new jobs.  Under the Act, the employer may select to remit all of the personal income tax witheld from employees then receive a rebate of the tax from the Commonwealth.

Job creators grow while growing the economy in the process.  These tax savings may provide opportunities for employers to further increase their number of employees beyond the initial 250 or reinvest in other areas of the business.  Presumably, the Commonwealth benefits as well.  More persons employed in the Commonwealth lead to economic growth through purchasing power and sales tax revenues.

There are restrictions and critiques.  Non-profit entities, religious organizations, utilities, restaurants/bars, gambling establishments, retail stores, and education or public administration offices need not apply.  Plus, an open question remains whether the program amounts to an employee paying an employer for his/her job.

To take advantage of this opportunity, employers must enter into an agreement with the Department of Community and Economic Development (DCED).  Any interested employer should move quickly because the ceiling for the program in Pennsylvania is $5 million per year.  This Act expires January 1, 2018.

Federal Court Holds that FLSA’s “Fluctuating Workweek” Method Violates Pennsylvania Law

A recent decision out of the Western District of Pennsylvania, Foster v. Kraft Foods Global, Inc., Civ. No. 09-453 (W.D.Pa. August 27, 2012), highlights the challenges employers face in simultaneously complying with both local and national wage and hour regulations.  In Foster, the court held that the “fluctuating workweek” method of overtime compensation – which is expressly permitted by the FLSA – is not permitted under Pennsylvania law.

Under the fluctuating workweek method, an employer pays a nonexempt employee a fixed weekly salary, regardless of the number of non-overtime hours worked.  This method is generally used in industries in which an employee’s hours change unpredictably from week to week based on factors such as customer demand or seasonal variation – e.g., lawn maintenance companies, golf courses, or the travel industry.  In using this method, the employer benefits from significant cost savings over traditional methods of overtime calculation and the employee benefits from the stability of a fixed weekly salary.

There are five requirements for using the fluctuating workweek method.  The employee’s hours must fluctuate from week to week; the employee must receive a fixed salary that does not vary with the number of hours worked (excluding overtime); the salary must be high enough that the employee’s regular rate of pay is at least the minimum wage; the employer and employee must have a clear mutual understanding that the salary is fixed; and the employee must receive overtime compensation equal to at least one-half the regular rate for all hours worked over forty.

In Foster, the court’s analysis focused on this last requirement.  The court held that “the payment of overtime under the FWW method, at any rate less than one and one-half times the ‘regular’ or ‘basic’ rate,” is impermissible under the Pennsylvania Minimum Wage Law.  We’ll be watching this decision (if appealed) and subsequent cases closely, because if this interpretation of the Minimum Wage Act is upheld, the primary advantage to the employer in utilizing the fluctuating workweek method is eliminated.  In the meantime, Pennsylvania employers who use this method to compensate nonexempt employees should reconsider their policies, given that it may no longer result in cost savings.  Moreover, this case should serve as a reminder that, although many local wage and hour regulations are modeled after (and in some respects identical to) the FLSA, compliance with the FLSA does not guarantee compliance with local statutes.

To Compel Discovery Of A Party’s Social Media Content In Pennsylvania, There Must Be A Hook

By: Kate S. Gold and Aaron M. Moyer

Pennsylvania trial courts have been particularly active in the past few years in issuing opinions regarding how much, if any, of a party’s non-public Facebook and other social media content are subject to discovery in litigation.  A July 2012 opinion issued by Judge Wettick in Allegheny County, Trail v. Lesko, highlights these increasing discovery disputes and outlines the recent trends of the courts addressing the disputes.  As Judge Wettick found, courts have compelled very broad access to social media content in cases where one party has articulated that the publicly available portions of the other party’s social media site contains information relevant to the prosecution or defense of a claim.

Although there are no appellate court opinions on this subject matter in Pennsylvania, there are several trial court opinions.  On the one hand, some of the cases permit very broad access to Facebook and other social media content.  For example, at least three written opinions in Pennsylvania since 2010 have required the party from whom discovery is sought to provide his or her username, password or other login information to the requesting party. In these cases, the requesting party provided the court with specific evidence from the individual’s publicly accessible pages showing the likelihood that full access to the social media account would garner further relevant information.  In Zimmerman v. Weis Markets, Inc., the plaintiff claimed personal injuries from a workplace injury and his public profile said he enjoyed “ridin” and “bike stunts” and showed pictures of him with a black eye and his motorcycle both before and after the workplace accident at issue in the litigation.  And, as one Pennsylvania trial court put it in McMillen v. Hummingbird Speedway Inc., “[w]here there is an indication that a person’s social network sites contain information relevant to the prosecution or defense of a lawsuit, . . . and given [the case law’s] admonition that the courts should allow litigants to utilize ‘all rational means for ascertaining the truth,’ . . . and the law’s general dispreference for the allowance of privileges, access to those sites should be freely granted.”

On the other hand, a number of Pennsylvania trial courts, in written opinions, have completely denied any and all access to a party’s social media content.  Many of the requesting parties in these cases failed to identify any compelling or specific reason for obtaining access to the other party’s non-public social media content.  These courts have concluded that the mere fact that a party has a social media account, without anything more, is insufficient to justify broad discovery access to the account.

In Trail, Judge Wettick provides a comprehensive review of Pennsylvania’s case law addressing this question.  Judge Wettick also highlights cases from a number of other jurisdictions, which are generally consistent with the approach of Pennsylvania courts that have addressed this question in that the other jurisdictions tend to require some factual predicate suggesting the existence of relevant information prior to ordering access to the information being sought.  Unlike Pennsylvania, though, some other jurisdictions have sought to establish more of a middle ground between wholesale denial of the request for social media content and unlimited access to the user’s profile.  Judge Wettick reached what is perhaps the obvious conclusion from these cases: litigants seeking access through discovery to a party’s Facebook or other social media content must show that there is a sufficient likelihood that the discovery requested will provide relevant evidence that is not otherwise available.  Further, Judge Wettick said the court must consider the level of intrusiveness as balanced against the need for the discovery.  Although courts are still wrestling with this question and the answer will continue to evolve, the courts seem to fall back on the age-old principle that discovery should not be an unbridled fishing expedition into a party’s private information.  However, with a big enough hook (i.e., publicly accessibly portions of the social networking site suggesting that further relevant postings are likely to be found by access to non-public portions), Pennsylvania courts are willing to provide very broad access to a party’s social media content.