Pennsylvania Employers Consider This: Continued Employment Alone Is Not Sufficient Consideration for a Noncompetition Agreement
Pennsylvania remains one of the few states that still require “new” consideration in order for an employer to bind an existing employee to a noncompetition agreement. Not only does the consideration have to be new, it must also be “legally sufficient.” So, what rises to the level of “legally sufficient” under Pennsylvania law?
Consider this scenario:
Bunny Hop, Inc. (“BHI”), a Pennsylvania corporation headquartered in Philadelphia, hired Phil in 2010 as its Executive Vice President when BHI was just a fledgling internet start-up. Now, in 2014, BHI is a booming Easter egg design company with all sorts of trade secrets, newly developed intellectual property and customers all over the world. BHI has a hunch that Egg Noggin LLC, BHI’s biggest competitor, has its sights set on Phil, so BHI wants to make sure that Phil stays put, and that he does not take BHI’s proprietary information anywhere else. What to do. . .what to do? Aha! A noncompetition agreement!
Here’s the problem: Phil did not sign a noncompetition agreement ancillary to employment (meaning, before he actually started performing any work for BHI). Therefore, BHI will not be able to enforce any restrictive covenant signed by Phil after he already began working for the company, unless BHI provides Phil with “legally sufficient” consideration above mere “continued employment.”
So what is BHI to do? Is it enough for BHI to offer Phil a $500 bonus, the standard annual raise, or an extra two weeks of vacation in consideration for the noncompetition agreement? Not in Pennsylvania.
Below are a few examples gleaned from Pennsylvania court decisions of what will most likely be deemed “legally sufficient” as to render the noncompetition agreement enforceable:
- Any signing bonus greater than $1000.
- A bundle of benefits (where, if any of the components were offered alone, it would be insufficient) including, for example: a small signing bonus; a promise of two weeks advance notice before termination; and a guaranteed two-week severance package upon termination.
- A change in employment status from at-will to a written year-to-year term.
- A change in status from independent contractor to employee.
Consider a slightly different scenario:
BHI hired Ben as an independent contractor in 2013 to come up with some original designs. The independent contractor agreement did not include a restrictive covenant. BHI recently decided that Ben is indispensable to BHI’s design team. So, BHI offered Ben the position of Director of Squiggly Lines. Three weeks after Ben started in the position, Phil decided that Ben should also be bound by a noncompetition agreement so he cannot take his know-how to Egg Noggin LLC (those rascally rabbits!).
In this instance, it would seem as though BHI meets the “legally sufficient” standard by changing Ben’s status from independent contractor to employee; however, Ben did not sign the agreement “ancillary to” the change in status. It is now several weeks later, so the fact that BHI changed his status without his signing the noncompetition agreement likely negates any argument that Ben’s change in status was dependent upon signing a noncompetition agreement. Consequently, BHI is now going to have to offer Ben additional consideration in order to render this after-the-fact noncompetition agreement enforceable.
Lesson Learned: In Pennsylvania, it is always best to obtain an executed noncompetition agreement prior to an employee’s start date or prior to any change in employment status to ensure sufficient consideration.