Employment Contracts & Restrictions Part 2: Legal Requirements
Employment, Individual | April 26, 2017
In my last post, I discussed the types of restrictive covenants that are often in employment agreements and contracts. By way of summary, employers will often try to protect their businesses by asking an employee to agree to not compete against them when the employee leaves, and to not disseminate confidential information as well.
As I discussed, confidentiality is required by employees even in the absence of a written agreement. For that reason, I want to focus mainly on restrictions against competition. Let’s use an example. Let’s say an employer, ACE Accounting, provides accounting and related services to York, Lancaster and Dauphin county businesses and individuals. ACE hires only the best, newly minted accountants, fresh out of college. ACE will spend a small fortune teaching the budding geniuses how to be good accountants. They will be introduced to many of ACE’s clients and will learn marketing skills to acquire even more clients, and how to keep them once they have done so. ACE wants to be sure that these accountants do not later leave and take all of their acquired skills to XYZ Accounting, right across town.
To address this problem, let’s say that ACE asks its new accountants to enter a written agreement that says that when the employee leaves ACE, they will not work for any competitor within 20 miles of any ACE client, and that they will not do so for 10 years into the future. Further, let’s assume that an accountant leaves ACE and sets up an accounting practice at the northern edge of Dauphin County. Is this enforceable?
To be enforceable, according to the law, a restriction against competition must meet 4 basic tests: 1) it must be ancillary or additional to the employment relationship, 2) it must be supported by adequate consideration, 3) it must be reasonably necessary to protect the employer’s legitimate business interests, and 4) it must be reasonable as to time and geographic scope.
Returning now to ACE, because the agreement was entered into at or near the time employment starts it will likely meet tests 1 and 2. Importantly, if ACE waits for awhile and asks an employee to sign an agreement too far into the employment, it will not be binding (i.e., not supported by sufficient consideration) unless the ACE also confers extra pay or benefits, etc., upon the employee.
The need to protect accountants from competing in accounting is likely a legitimate interest of ACE as well, so the third requirement is met. In terms of the fourth item, the fact that the restriction prohibits competition within 20 miles of an ACE client is also fairly reasonable and will likely be upheld. However, the fact that the restriction lasts for up to 10 years may not be enforceable and, if it is a new accountant with few years of work experience as opposed to a veteran accountant, there is a high degree of probability that a court will find the 10 years to be unreasonable and, therefore, unenforceable. Instead, a court is likely to cut that number of years way back.
A larger point to be gleaned here is that what is and is not reasonable in terms of time limitations, geographic scope, or a legitimate interest of an employer, is often the subject of court proceedings. In my next blog post I intend to discuss what those legal proceedings look like.
If you need help drafting, interpreting, or enforcing restrictive covenants and employment agreements, please contact the Pennsylvania employment lawyers serving York, Lancaster, Dauphin and surrounding counties at www.yourlawfirmforlife.com.