Pennsylvania Supreme Court Reminds Employers To Get Employee Signatures On Covenants Before They Start Work

The recruitment and onboarding process can be fast-paced as employers and recruits go back and forth on salary, title, benefits, and more. Sometimes an impending deadline pushes the parties to move quickly, such as the start date for a big project for which the new recruit will be a key part of the team. In their anxiousness to just get started after an important recruit agrees to join the company, business leaders may be tempted to let the new hire start work while the parties “work out the details” of an employment agreement – potentially including the exact terms of restrictive covenants such as non-compete and non-solicit provisions. However, the seemingly reasonable decision to give an employee time to review a proposed agreement, and perhaps discuss it with personal counsel before signing, could leave you with an unenforceable agreement according to a recent decision by the Pennsylvania Supreme Court. The recent decision in Rullex Co., LLC v. Tel-Stream, Inc., emphasized that, in order for a restrictive covenant to be enforceable based on a job offer (and without any additional consideration), the parties must have agreed on the covenant’s provisions at the time employment commences.

Case Facts And Decision

In the Rullex case, it was undisputed that the restrictive covenant was signed after work had begun. But Rullex, seeking to enforce a restrictive covenant against a former subcontractor, argued that the covenant was ancillary to the commencement of employment and no additional consideration was necessary to enforce it because it presented the restrictive covenant on the day he began work and simply gave him time to review it. The defense argued that because there was no agreement as to what the terms of the covenant would be as of day one of work, simply getting the job was clearly not the consideration given by the company in exchange for the covenant, as he already had the job before there was any agreement on terms. Therefore, the defense argued, some new consideration given to him by the employer would have been necessary to support the covenant agreed to subsequent to commencement of work.

The Pennsylvania Supreme Court agreed that since events move fast in the business world, it might be difficult to have a restrictive covenant executed on the first day of employment even if the parties agree to such a covenant as a condition of employment. With this in mind, the Court held that a restrictive covenant executed after the first day of employment could still be enforceable without additional consideration, but only if the parties have agreed on the essential provisions of the covenant at the commencement of employment. The Court reasoned that there was no meeting of the minds on the restrictive covenant when he started work since Rullex told the subcontractor to review the contract and left open the possibility that some of the terms could be negotiable and potentially changed. As a result, the Pennsylvania Supreme Court affirmed the lower court’s refusal to grant a preliminary injunction to enforce the covenant.

Takeaways

When hiring an employee in a state such as Pennsylvania, where a covenant signed after the inception of employment requires the employer to give the employee some valuable new consideration beyond mere continuation of employment, you must be assiduous about making sure that new recruits sign any required restrictive covenants prior to commencement of employment. In a majority of states, the need for consideration can be satisfied by continuation of employment for some substantial period of time following execution of a “midstream,” i.e., a covenant signed after inception of employment. But a meaningful minority of states require something new, such as a promotion or a bonus or participation in a stock plan for which the employee previously was not eligible.  

While the Rullex opinion leaves open the possibility that restrictive covenants signed shortly after the commencement of employment may still be enforceable without additional consideration, the best practice for employers in any state is to have new employees execute noncompete agreements and other restrictive covenants prior to commencement of their employment. If this turns out not to be possible in a given scenario, you should make clear and document that restrictive covenants of a specified nature and scope are a condition of employment prior to having a new employee start work. Importantly, you should not give new hires an employment agreement containing restrictive covenants and allow them to start work while leaving open the possibility that the terms are subject to negotiation and revision. 

The details of what constitutes adequate consideration, and when or how it must be given, vary from state to state. Indeed, with a proliferation of state-level restrictive covenant legislation in recent years, state laws governing restrictive covenants are becoming increasingly different from each other. As a result, it is more important than ever for a multi-state employer to take into account the demands of individual state laws in order to maximize the likelihood of a successful program of restrictive covenant enforcement. When it comes to restrictive covenants in the United States, one size has never fit all locations, but this is even more true now than it ever has been.