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Pennsylvania Businesses Ordered to Shut Down their Physical Operations If Not “Life Sustaining”

UPDATES

3/20/2020: The Wolf administration has updated the list of what it deems a “life sustaining” business. The updated list is here. Business now identified as life sustaining that were not previously included include: forestry, logging, and support activities; mining (including coal and metal ore mining) and support activities; specialty food stores; insurance carriers and related activities (except in-person sales brokerage); insurance and employee benefit funds; accounting, tax preparation, bookkeeping, and payroll; traveler accommodation; and dry cleaning and laundry services. Businesses that were previously designated as “life sustaining” but no longer carry that designation (and therefore must close in-person facilities) include beer, wine, and liquor stores (except beer distributors) and civic and social organizations. The governor’s press release announcing the updates is here. The administration has made clear that this is “an evolving situation and decisions will continue to be made and revisited as needed.”
3/20/2020: Businesses seeking an exemption to the closure Order may do so via this website. Businesses are required to provide a justification as to why the operation is “life-sustaining,” and must state the number of employees required to be on-site to perform the “critical work.” Businesses must also describe plans to comply with CDC guidelines and mitigation efforts.
3/21/2020: Governor Wolf amended the enforcement deadline from his original shutdown Order. Enforcement on non-compliant businesses will begin Monday, March 23 at 8:00 a.m., and not on Saturday, March 21, as previously ordered.
3/21/2020: The Department of Community and Economic Development has issued a set of Frequently Asked Questions and responses to provide additional guidance regarding Governor Wolf’s shutdown Order. The FAQ responses indicate that authorities should make compliance determinations based on the operations of a particular facility, rather than the business as a whole. For example, construction businesses (which are identified as non-“life sustaining”) may continue working on road repair and similar emergency efforts, but must suspend other activities that are not “clearly authorized” as life sustaining. Further, in response to a question about whether businesses may “maintain limited in-person essential personnel for security, processing of essential functions, or to maintain compliance with federal, state or local regulatory requirements,” the DCED states that businesses suspending physical operations pursuant to the Order “must limit on-site personnel to maintain critical functions,” while following social distancing and other mitigation guidelines. The FAQ responses also indicate that enforcement “should be prioritized to focus on businesses where people congregate,” and that although enforcement measures are within the discretion of the state or local agency, the administration expects that enforcement will be progressive, and will start first “with a warning to any suspected violator.” The FAQ responses also clarify that hotels and motels, as well as local governments and municipalities, are not required to cease physical operations.

On Thursday, March 19, 2020, Pennsylvania Governor Tom Wolf ordered all Pennsylvania businesses that are not “life sustaining” to shut down physical operations by Saturday, March 21 at 12:01 a.m. A copy of the Order is here. Such business may continue to operate on a virtual or telework basis, “so long as social distancing and other mitigation measures are followed.”

The Order specifically exempts “life sustaining businesses,” which may remain open subject to those businesses undertaking the same social distancing and mitigation measures. Similarly, the Order allows “businesses that offer carry-out, delivery, and drive-through food and beverage service” to continue operations, subject to the same social distancing and mitigation measures. The Order incorporates a list of life and non-life sustaining businesses, which can be found here.

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

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

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

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

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.