PA Supreme Court Confirms “Magic” Language Cannot Save Otherwise Unenforceable Non-Compete Agreement

The Pennsylvania Supreme Court recently re-affirmed the principle that in order to have an enforceable non-compete agreement in Pennsylvania, the agreement must be supported by adequate consideration and that a statement merely agreeing to be “legally bound” doesn’t meet that requirement. The Court ruled against a waterproofing company hoping to enforce a non-compete agreement against one of its former salesmen.  The employer did not provide consideration but unsuccessfully based its argument on language from a 1927 state law called the Uniform Written Obligations Act (“UWOA”). The full opinion, Socko v. Mid-Atlantic Systems of CPA Inc., can be read here.

In the Socko case, after the start of his employment, a salesman (Socko) signed a non-compete agreement. The salesman was not given any additional consideration (such as a raise or access to new, confidential information) but the agreement did state that the parties intended to be “legally bound.” In seeking to enforce the non-compete, the employer attempted to rely on the UWOA which provides 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.” The “magic” statutory language seems pretty clear, so the employer should easily win, right?  Several employers had won on this issue in prior Pennsylvania federal court decisions, so they felt optimistic about their chances.  However, the issue is ultimately controlled by state law, and that is interpreted by the Pennsylvania Supreme Court.

The Supreme Court rejected the employer’s approach. It noted that, while courts typically do not inquire into the adequacy of consideration, “the area of restrictive covenants in employment contracts is an exception to the general rule” and a non-compete agreement is unenforceable in Pennsylvania unless the employee receives an actual benefit in consideration for his/her agreement. Recognizing that non-competes have historically been disfavored by courts as a restraint on trade that prevent a former employee from earning a livelihood, the Court concluded that the salesman’s agreement lacked actual, valuable consideration and struck down the agreement as unenforceable.

What does this all mean? Well, without the availability of the UWOA’s “magic” language, for a non-competition agreement to be enforceable in Pennsylvania, non-compete agreements must be entered into either at the commencement of employment or, if entered during employment, supported by new and valuable consideration. In addition to the required consideration, the non-compete must also be reasonably necessary for the protection of an employer’s legitimate business interests and reasonably limited in scope, duration, and geographic coverage. In plain English, to be enforceable in court, the Agreement needs to be reasonable and either a) signed at the start of employment or b) supported by other adequate consideration (such as a monetary payment or a promotion).

Because reliance on the UWOA had been an iffy proposition for years, employers not wishing to test the parameters of the law had been following the consideration rules for years despite the potential beneficial language of the UWOA. The proposition that non-competes are generally disfavored by Pennsylvania courts and valuable consideration is needed to enforce them is not news to them. However, If you wish to review your current non-compete agreements or explore entering into non-competition agreements or other restrictive covenants for your employees (or if your business is considering hiring somebody subject to a non-competition agreement), contact any of the attorneys in the McNees Labor & Employment Group for guidance. If a competitor is trying to enforce a non-competition agreement on you or you are seeking to enforce a non-competition agreement against a current or former employee, legal action could be necessary within a matter of days, if not hours. If you find yourself in a situation where you need to prevent or stop the release of trade secrets or other confidential business information, contact the McNees Injunction team for immediate assistance.

So No New FLSA Overtime Regulations Until Late 2016?

You may recall that, in late June 2015, the U.S. Department of Labor issued a Notice of Proposed Rulemaking seeking public comment on proposed changes to the Fair Labor Standards Act’s  “white-collar” overtime exemption regulations. The DOL’s proposed rule changes would more than double the minimum salary required for the FLSA’s white-collar exemptions from the current $455 to approximately $970 per week, with additional potential increases each year based on inflation.  Also, while the DOL did not propose specific changes to the exemptions’ duties tests, it invited public comment on the subject, hinting that changes to the duties tests likely would be forthcoming in the final regulations.

The period for public comment on the proposed rules closed in September.  Since September, observers have speculated about when the DOL would issue final binding regulations.  Many commentators believed that we would see final rules likely sometime in late 2015/early 2016.  Employers have begun reviewing their pay practices to being planning for the implementation of the final regulations, which likely will require conversion of many employees currently treated as overtime exempt to non-exempt status or significant changes to the pay of these employees to meet the anticipated increased minimum salary requirement.

Earlier this month, the DOL finally indicated when we could expect the final FLSA overtime exemption regulations, and the answer came as a surprise to many.  As reported by the Wall Street Journal last week, Solicitor of Labor Patricia Smith said during a panel discussion at the American Bar Association’s Labor and Employment Law conference in Philadelphia that the DOL did not expect to issue the final regulations until “late 2016.”  (The WSJ article noted that this comment elicited “gasps” from the attendees in the audience, confirming that the wage and hour laws can be much more exciting than we think!)

This news is a bit surprising, as the DOL seems to be waiting until the very end of the Obama administration to issue the final regulations.  That said, employers now know that they will have more time than initially expected to prepare for the likely sweeping changes we anticipate to the FLSA white-collar overtime exemption regulations.

Because of the significance of the expected changes to the exemption tests, this delay does not mean that employers should put off thinking about these issues.  Now is still the time to begin developing a strategy to access and address the exempt status of many white-collar workers.  This delay is good news for employers, but not an excuse to avoid the issue.  Advance planning and preparation will only help employers address what likely will be the most significant changes to the overtime exemption tests we have ever seen.

Pennsylvania Strengthens Crimes Code to Remove Certain Exceptions for Crimes Committed By Union Representatives

Pennsylvania Governor Tom Wolf recently signed a bill into law amending the Pennsylvania Crimes Code. The law eliminates the “union intimidation” loophole and removes certain exceptions that had applied to crimes committed during the course of or in connection with a labor dispute.

Sections 2709(e), 2709.1(e), and 2715 (c.2) of the Crimes Code deal with the crimes of harassment, stalking, and threatening to use a weapon of mass destruction. Prior to the recent amendments, a perpetrator could escape conviction for one of these crimes merely by relying upon the fact that his or her misconduct was committed in furtherance of a union’s labor dispute with an employer.

The impetus for this much-needed legislation may have been the announcement in February 2014 of federal indictments against 10 Ironworkers Local 401 leaders related to the December 2012 burning and vandalism of a Quaker meetinghouse construction site in Philadelphia.  The U.S. Attorney alleged that Local 401 representatives set fires, started riots, and took crowbars to non-union contractors who had ignored threats against hiring non-union employees.  Several union leaders had earlier been acquitted of charges brought under the state crimes code based upon their reliance on the labor dispute exceptions referenced above. In July 2015, a Philadelphia labor leader was sentenced to over 19 years in prison for his role in overseeing this “years-long campaign of sabotage, arson, and intimidation to keep members of his Ironworkers Local 401 employed.”

It is anticipated that the recently-enacted amendments will be of great assistance to those employers, typically, though not always, non-union, who have been subjected in the past to extreme acts of misconduct as exemplified by the Philadelphia incidents.  Too often innocent employers and employees have suffered the consequences of vandalism, violence, stalking, etc., merely because they have lawfully desired to maintain their non-union status.  Hopefully, as these changes to the law become publicized and better known to union leaders and members, the new law will deter such individuals from committing such serious crimes and acts of violence against innocent persons.

Pittsburgh Paid Sick Leave Act Goes Into Effect January 11, 2016

The City of Pittsburgh recently became the second city in Pennsylvania to enact a paid sick leave law, with Mayor William Peduto signing the Paid Sick Days Act into law on August 13, 2015.  While the Act is facing legal challenges, Pittsburgh’s City Controller recently posted notice  that the Act is effective January 11, 2016.  The City Controller also posted to the city’s website two documents employers are required to post where employees can easily read them.

The Act is applicable to employers situated in or doing business in the City of Pittsburgh with one or more employee, and requires those employers to provide paid sick time to both full-time and part-time employees.  Similar to the Philadelphia law, the Act exempts several categories of workers from the term “employee,” including independent contractors, state and federal employees, members of construction unions covered by a collective bargaining unit, and seasonal employees.

A few key provisions of the law:

  • Employees of employers with 15 or more employees accrue a minimum of 1 hour of paid sick time per 35 hours worked in Pittsburgh, up to 40 hours of paid sick time per year, unless the individual employer designates a faster accrual rate or higher amount.
  • Employees of employers with fewer than 15 employees also accrue a minimum of 1 hour of paid sick time for every 35 hours worked in Pittsburgh, unless a faster accrual rate is designated by the employer, accruing up to 24 hours of unpaid sick time during the first year in which the Paid Sick Leave Act is effective and 24 hours of paid sick time thereafter, unless the individual employer designates a higher amount.
  • Accrual begins on the effective date of the Act for those currently employed, and upon commencement of employment for new employees. Employees can begin to use their accrued time beginning on the 90th calendar day following the commencement of employment.
  • Employees may use sick time in the smaller of hourly increments or the smallest increment that the employer’s payroll system uses to account for absences or use of other time.
  • Accrued time shall carry over to the next calendar year (as defined in the Act) unless at least the maximum amount of paid sick time is provided at the beginning of each calendar year.
  • Employers with collective bargaining agreements or paid leave policies which meet the Act’s paid leave accrual requirements and make such leave available for use in accordance with the purposes and conditions of the Act need not provide additional sick time.
  • Employers are not required to pay out any accrued but unused paid sick time upon the end of employment, and are not required to compensate employees for lost wages or commissions as a result of using paid sick time.
  • Sick time can be used to care for the employee’s or employee’s family member’s mental or physical illness, injury or health condition; need for medical diagnosis, care or treatment of a mental or physical illness, injury or health condition, or need for preventative medical care; when an employee’s place of business is closed or to care for a child when the child’s school or place of care is closed by order of a public health official due to a public health emergency; or to care for a family member whose presence in the community jeopardizes public health due to exposure to a communicable disease, as determined by health authorities.
  • Retaliation is prohibited, and employers must provide written notice to employees that retaliation is prohibited and that employees may file a complaint with the designated agency if they are retaliated against or denied sick time as required by the Act.
  • Employers must provide written notice that employees are entitled to sick time and the amount of sick time, as well as the terms of use guaranteed by the Act.

Although the Act is facing legal challenges, companies with operations in Pittsburgh should consider reviewing their current sick and paid leave policies to ensure they are compliant when the Act goes into effect and should stay tuned for further updates.

Deflategate: Four Games and Four Lessons for Unionized Employers

This week would have marked the return of Tom Brady, had his four game suspension not been reversed by the United States District Court for the Southern District of New York.  Much ink has been spilled over Brady’s suspension for his [alleged] involvement in using deflated footballs and the subsequent cover up, and Brady’s appeal of that suspension.  But is there really anything of real value to learn from this case?

Yes, if you are a unionized employer, there are some valuable lessons to be learned.  Here are four (one for each game Brady would/should have served) key takeaways for unionized employers.

  1. Employees must be on notice that conduct is inappropriate. Although it is laughable that Brady did not know he was doing anything wrong by encouraging the use of deflated footballs, the court held that Brady was never advised that he could be subject to disciplinary action for being aware of the use of deflated footballs and not reporting it.  As many of you know, work rules take on a whole new meaning in a unionized setting.  Often, these work rules are litigated and take on their own unique meaning.  In the Brady case, the rules regarding inflation of footballs was apparently given to the NFL clubs, not the players.  The court found that Brady was not put on notice that his knowledge of the deflated footballs could result in discipline; and therefore, he should not have been disciplined for that conduct. The takeaway: draft a clear and concise code of conduct and make sure every employee signs an acknowledgement of receipt of the code.
  2. Employees must be on notice of possible disciplinary penalties.  The court also concluded that even if Brady knew he could be subjected to discipline for failing to report the deflated footballs, he was not on notice that he would be suspended four games for such conduct.  The level of discipline was based on the NFL’s performance enhancing drug policy, but Brady argued that his conduct was more in line with an equipment or uniform violation, which would only result in a fine. The takeaway:  make sure you have a well crafted discipline policy that grants you significant discretion with respect to disciplinary action for violations of your code of conduct.
  3. Employees must be required to cooperate fully in an internal investigation.  Brady apparently destroyed his cell phone, which held relevant evidence, almost immediately after his initial meeting with the NFL’s outside investigators.  That is absolutely shocking and outrageous.  It is also shocking that the court did not take issue with this conduct.  But the court found that no NFL player had ever been disciplined for failing to cooperate with an internal investigation in the past. The takeaway: although we question that such a rule is really necessary (like a specific written rule against theft or fighting), make sure your code of conduct requires cooperation during internal investigations.
  4. Prior to issuing disciplinary action, employees should be afforded some level of due process.  Although a formal hearing will not be necessary in every case, some level of due process should be provided before discipline is rendered.  In many instances, employers benefit from these informal meeting by obtaining key information.  Employees should be advised, generally, of the nature of the charges against them and should be afforded the opportunity to respond to those charges.  In addition, any subsequent appeal process should not only be impartial, but should avoid even the appearance of impropriety.  A review of the court’s decision leaves one with the impression that the court had an issue accepting the NFL’s role as both prosecutor and judge, even though the NFL Players Association had specifically agreed to that approach.  

Please keep in mind that some of the changes recommended above will require prior negotiation with the appropriate union.  But now would be a good time to review your code of conduct and your disciplinary policies and procedures to determine what if any changes you would like to make.

Also, it does appear that the court’s decision may have confused the role of the arbitrator, NFL Commissioner Roger Goodell, and the NFL’s discipline issuing office. In several instances the court appears to indicate that it was Goodell himself that issued the discipline, rather than Troy Vincent, the Executive Vice President in charge of discipline.  As a result, there may have been confusion regarding the appropriate standard of review for evaluating Goodell’s role as the arbitrator reviewing Vincent’s imposition of discipline.  One could argue that the decision lacks the appropriate deference to be afforded an arbitrator under federal labor law. The NFL has appealed the court’s decision, and the NFL may take up this issue on appeal.