A few weeks ago, we provided the most Frequently Asked Questions regarding the employer reporting requirements under The Patient Protection and Affordable Care Act (the “ACA”), which are generally effective beginning January 1, 2015, with the applicable reports filed in early 2016.  That post – Part 1 of 2 – focused on the FAQs regarding Form 1095-C (Employer-Provided Health Insurance Offer and Coverage), which generally must be filed on behalf of all full-time employees. This post – Part 2 of 2 – focuses on the FAQs regarding Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage), which is the transmittal accompanying the Form 1095-Cs an Applicable Large Employer is required to file with the IRS. In addition, on December 28, the IRS issued Notice 2016-4, which extends the filing deadline for both Form 1094-C and Form 1095-C.  This extension is discussed further below.  The FAQs related to Form 1094-C are listed below:

Q1:  Which employers are required to file Form 1094-C and when is the filing due?

A1:  Generally, all “Applicable Large Employers (“ALE”) are required to file with the Internal Revenue Service a Form 1094-C, which accompanies copies of each Form 1095-C prepared and filed on behalf of its full-time employees. An ALE is one with 50 or more full-time and full-time equivalent employees.  A small employer (i.e. under 50 FTEs) that self-insures its health benefits must file a different transmittal form – Form 1094-B.

Filing Deadline Delay:  Notice 2016-4 delays the Reporting Requirements under the Affordable Care Act.  The dates below apply for 2015 only. Notice 2016-4 extends the due dates:

  1. for furnishing to individuals the 2015 Form 1095-B, Health Coverage, and the 2015 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from February 1, 2016, to March 31, 2016, and
  1. for filing with the IRS the 2015 Form 1094-B, Transmittal of Health Coverage Information Returns, the 2015 Form 1095-B, Health Coverage, the 2015 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and the 2015 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, from February 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically. This notice also provides guidance to individuals who might not receive a Form 1095-B or Form 1095-C by the time they file their 2015 tax returns.

Q2: If we are a member of a controlled group of companies, do we have our own filing obligation?

A2:  Yes.  Each member of a controlled group must complete its own Form 1094-C (Transmittal) and Form 1095-Cs for its full-time employees. Employers filing more than one Form 1094-C will identify one Form 1094-C as the “Authoritative Transmittal”.

Q3:  How does an employer count its full-time and total number of employees for Part III of Form 1094-C?

A3:  Columns B and C of Part III of Form 1094-C ask for counts of full-time employees and total employees. Any one of the following methods may be used to count employees each month:

  • Employee count on the first day of the month;
  • Employee count on the last day of the month;
  • Employee count on the 12th day of each month;
  • Employee count as of the first day of the first payroll period that starts during each month; or
  • Employee count as of the last day of the first payroll period that starts during each month.

Regardless of the method selected, a consistent approach must be used for each month of the year.

Q4:  What are the Line 22 Certifications of Eligibility, and can an ALE check more than one option on Form 1094-C, line 22?

A4:  The Line 22 Certifications of Eligibility include:

  • Qualifying Offer Method – the ALE made a Qualifying Offer to one or more of its full-time employees for all months during the year in which the employee was a full-time employee. A “Qualifying Offer” is an offer of minimum essential coverage to the employee, spouse, and dependents that is affordable based upon the Federal Poverty Level safe harbor.
  • Transition Relief Qualifying Offer Method (95% Offer Method) – the ALE made a Qualifying Offer for one or more months of calendar year 2015 to at least 95% of its full-time employees.
  • Section 4980H Transition Relief – the ALE is eligible for section 4980H Transition Relief because: (1) the ALE had fewer than 100 full-time employees, including full-time equivalent employees (50-99 Transition Relief), or (2) the ALE had 100 or more full-time employees (and full-time equivalents) and qualifies for a reduced penalty in 2015.
  • 98% Offer – the ALE offered affordable health coverage (using any of the safe harbor standards) providing minimum value to at least 98% of its employees (and dependents) for whom it is filing a Form 1095-C employee statement. If the 95% Offer applies, the “Full-Time Employee Count” in Part III, column (b) of Form 1094-C is not required to be completed.

An ALE should check all options that apply as it is possible that an employer may be able to apply different options to different segments of its employee population.

Q5:  When is an ALE member eligible to use the alternative method of reporting for Qualifying Offers?

A5:  If an ALE has made a Qualifying Offer for all 12 months of the year to one or more full-time employees (and the employee did not enroll in self-insured coverage), the ALE may use an alternative reporting method for those employees who received a Qualifying Offer for all 12 months of the year.

Alternative Reporting:  As an alternative to furnishing the employee with a copy of Form 1095-C filed with the IRS, the employer may furnish a statement containing certain information and stating that because the employee received a Qualifying Offer for all 12 months of the year, the employee is not eligible for the premium tax credit. This alternative may not be used by an employer that sponsors a self-insured plan with respect to any employee who has enrolled in the coverage under the plan because the employer is required to report that coverage on Form 1095-C.

If you have any questions regarding the ACA or Form 1094-C, please contact any member the McNees Labor and Employment Law Practice Group.

Earlier this year, we told you that Pittsburgh became the second city in Pennsylvania to enact a paid sick leave law, providing, in part, that employers were required to provide employees a minimum of 1 hour of paid sick time per 35 hours worked, with the maximum accrual dependent upon the number of employees.  In September, a group of plaintiffs, including the  Pennsylvania Restaurant & Lodging Association, mounted a legal challenge against the Act.  Now, the Court of Common Pleas of Allegheny County has ruled that the Act is “invalid and unenforceable.”

The plaintiffs claimed that the City did not have the authority to enact the ordinance under what is known as the Home Rule Charter and Optional Plans Law.  That law provides that a home rule municipality, such as Pittsburgh, “shall not determine duties, responsibilities or requirements placed upon businesses, occupations and employers” unless expressly provided by statute.  The Court determined that the Act did just that, in violation of the Home Rule Charter and Optional Plans Law.  While the Court noted there is a statute which permits municipalities with boards or departments of health to enact ordinances pertaining to disease prevention and control, the Court found the City does not have the authority to adopt such an ordinance, as it does not have a department or board of health.  Finally, although the Act itself cited to the Second Class City Code, the Court found that the Code is not applicable to home rule municipalities.

As a result, companies with operations in Pittsburgh need not update their sick and paid leave policies to comply with the Act.  However, they should continue to stay tuned for any developments and further updates.

Among the many requirements imposed by the Affordable Care Act, none are more controversial than the excise tax to be imposed on expensive health plans. This provision of the law, commonly known as the “Cadillac Tax,” would impose a 40% excise tax on group health plans to the extent their total annual premium costs exceed $10,200 for single coverage and $27,500 for family coverage (cost thresholds are indexed for inflation). In other words, a plan offering single coverage with a total annual premium of $11,200 (i.e. $1000 above the tax threshold) would owe an excise tax of $400 for each participant who elects that coverage option. The Cadillac Tax, originally scheduled to take effect in 2018, was expected to generate much of the funding necessary to finance the tax subsidies that are available to low-earning participants in the ACA health insurance exchanges. The Tax was also intended to motivate employers and carriers to find ways to reduce the cost of employee health coverage. However, carriers, employers, and unions alike have criticized the Cadillac Tax since the ACA was passed in 2010 – and that criticism intensified as the Tax’s 2018 effective date approached.

On December 18, 2015, President Obama approved a spending and tax package that includes a two-year delay of the Cadillac Tax effective date. The excise tax will now not take effect until 2020. The new law also makes the Cadillac Tax deductible for employers.

With a presidential election in 2016, the Cadillac Tax was sure to become a frequent speech topic for candidates pledging to “repeal or replace” the ACA. The two-year delay will likely reduce the degree to which candidates focus on the Cadillac Tax; however, the ACA is sure to draw attention from candidates in both parties. Interestingly, the new effective date also happens to fall in a presidential election year. Assuming the Cadillac Tax remains part of the ACA, it is possible that another delay may be proposed four years from now. In the meantime, it’s not entirely clear how the tax subsidies for participants in the ACA insurance exchange will be financed.

We have talked with you in the past about the risks of allowing employees to pool or share tips. This is a pretty common practice in the food service industry, but there can be concerns because of the complexity of compliance with the Fair Labor Standards Act and state wage and hour laws. We also previously wrote about a decision that offered some guidance on how to implement tip pools safely. It turns out that the case, Ford v. Lehigh Valley Restaurant Group, is also a cautionary tale.

According to various news outlets, the case recently settled for about $1.3 million.

If you are still allowing employees to pool or share tips, please work with your wage and hour counsel to make sure the tip pools are structured appropriately.

In a recent opinion, the Pennsylvania Superior Court upheld a judgment in favor of a healthcare employee that alleged wrongful termination of employment following her repeated refusal to work mandatory overtime. The judgment included damages of $121,869.93 and an order reinstating the employee to her former position. The Court’s opinion focused on the question of whether an employer’s violation of Act 102 can form the basis of a wrongful termination action. The Court answered that question affirmatively in the case of Roman v. McGuire Memorial.

Pennsylvania’s Act 102, the Prohibition of Excessive Overtime in Healthcare Act, generally provides that a covered health care facility may not require an employee to work in excess of a predetermined and regularly scheduled work shift. This prohibition is aimed at limiting situations where employees of covered health care facilities are “mandated” to work overtime with little or no advance notice. Health care facilities covered by Act 102 include most hospitals and long-term care facilities.

In this case, the employee alleged that she was terminated after her fourth refusal to work overtime mandated by her employer, a covered healthcare facility. The employer had a policy in place requiring direct care workers to work mandatory overtime. The employee claimed that she informed her employer that she could not accept mandatory overtime due to child care responsibilities. She also claimed that she informed her employer that the policy of mandating overtime was in violation of Act 102. After she was terminated, the employee filed a lawsuit claiming wrongful termination in violation of Act 102’s prohibition on mandatory overtime.

Although Act 102 generally prohibits retaliation against an employee for refusal to accept overtime mandated in violation of it, the law does not provide for a specific right to file a lawsuit. Instead, Act 102 contemplates administrative penalties to be enforced by the Pennsylvania Department of Labor and Industry.

The employer argued that because the statute had defined how the act would be enforced it could not also form the basis of  a private cause of action for wrongful termination. The Pennsylvania Superior disagreed, holding instead that Act 102 could form the basis of a wrongful termination claim because it did not specifically provide for an exclusive remedy.

At the core of the Court’s decision is the ever evolving concept of at-will employment and the recognized exceptions to it. Although an employee at-will, the employee successfully argued that her termination was wrongful because it violated a clear public policy of the Commonwealth prohibiting excessive mandatory overtime as set forth in Act 102. Pennsylvania employers should recognize that while the doctrine of “at-will” employment is still alive and well, the exceptions to it are many and growing. Termination of an employee that asserts a right protected by law is often enough to support a claim of wrongful termination.

For some time now, the U.S. Department of Labor’s Wage and Hour Division (“WHD”) has been taking a progressively more aggressive approach to wage and hour compliance, marked by increased staffing/resources and more frequent investigations.  Certain industries, like construction and gas/oil industry employers, are now frequent targets, but no business is immune from the government’s reach and the potential for a time consuming and costly wage and hour investigation.  Unfortunately for employers, the potential for significantly increased damages is now also part of the equation.  More specifically, the WHD is pursuing not only back wages but also liquidated damages for overtime violations under the Fair Labor Standards Act (FLSA).  Liquidated damages are assessed in an amount equal to any unpaid wage/overtime liability.  With double damages, liability can become quite significant, particularly when multiple employees/collective action claims are involved.

While the FLSA has always provided for liquidated damages, the WHD traditionally pursued only back wages in connection with an administrative investigation.  Liquidated damages were typically pursued only in litigated cases (whether employee initiated or filed by the WHD on behalf of one or more employees).  Now, however, the WHD appears to be assessing liquidated damages almost as a matter of course as a normal part of the investigation process, thus subjecting employers to double liability (back pay plus an equal amount in liquidated damages) in the event an employer is determined to have violated the FLSA.

Although the FLSA recognizes a “good faith defense” to the assessment of liquidated damages, establishing that the defense applies is difficult.  An employer must demonstrate that it acted in good faith (such as by seeking and relying in good faith on the specific advice of counsel in advance of a violation) and had reasonable grounds to believe that its actions were in compliance with the FLSA.  The defense is very narrow and cannot be established by showing that the employer did not intend to violate the law, did not know that it was violating the law, acted based on pure mistake or ignorance, or that its employees are otherwise paid well.

Waiting to address these issues until after the DOL knocks at your door is a mistake that many employers all too often regret.  The smart employer is proactive, not reactive.  The best way for an employer to minimize and protect against wage and hour liability is to conduct internal audits and review compensation, payroll and recordkeeping practices.  Start now and conduct periodic audits going forward, to ensure and maintain compliance with wage and hour laws and to allow for an opportunity to correct issues of concern before you are faced with an outside investigation or lawsuit.  Audits should include review of employee classifications and payroll practices, how salary is paid and deductions are applied, how work time is tracked and recorded, and how overtime is calculated and when wages are paid, all to ensure that employees are properly classified as either exempt or non-exempt and that all practices, classifications, and payment methods are legally compliant with the FLSA and Pennsylvania’s Minimum Wage Act and Wage Payment and Collection Law.

The McNees Labor & Employment Practice Group can assist you with conducting internal audits, reviewing your employment practices, and responding to any DOL compliance inquiry. Please do not hesitate to contact any member of our group for assistance with these issues and any questions you may have.

According to a recent announcement by the Office of UC Service Centers, employers in Pennsylvania can expect that telephone calls will now be part of the state’s fact-finding process in connection with initial eligibility determinations for unemployment compensation benefits.

In the past, when a former employee filed a claim for UC benefits, the employer received a written form questionnaire issued by the local Service Center seeking the information needed to make an initial eligibility determination (such as the nature of and reasons for the claimant’s separation from employment).  According to the announcement, Service Center claims examiners will now call employers to request this information over the phone. It appears, however, that an employer still may elect to provide most of the information relevant to the initial eligibility determination in writing.  An employer who chooses not to participate in telephone fact-finding will be expected to inform the examiner of the nature of the separation and provide an email or fax number to which written fact-finding requests can be sent.  In addition, it is the employer’s responsibility to ensure that its response is complete and provided in a timely manner.

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Separately, it is important to keep in mind that whether the response is provided by phone or in writing, by law an employer’s UC reserve account will be charged for claimant overpayments resulting from a failure to respond or an inadequate or untimely response.  An employer’s response to a request for information in connection with a UC claim will be considered untimely if not provided within the response time allotted (14 days) and inadequate if “the response misrepresents or omits facts that, if represented accurately or disclosed” would have been the basis for denying benefits.

Other than the announcement itself, there does not appear to be any additional information available at this time concerning the intention of state UC authorities to move toward telephone and away from paper based fact-finding at the initial stage of the process. Even so, at the very least employers should expect to receive telephone calls from local UC Service Centers requesting employment and separation information in connection with UC claims. While it should go without saying that truthfulness and cooperation are always recommended when providing information to the state in response to UC claims, the exercise of caution is also warranted when the circumstances involve former employees/separations that are complex, adversarial, or otherwise problematic. In these cases, it is best that the employer ask for the opportunity to provide a written response. Providing a prepared written response versus an immediate/on-the-spot verbal response is likely to reduce the margin for error and enhance the effectiveness of the response.

Contact any of the attorneys in the McNees Labor & Employment Practice Group if you have a question about this post or need assistance with evaluating, responding to, or contesting UC claims.

The following blog post is Part 1 of a 2 part series exploring frequently asked questions regarding the Affordable Care Act’s Employer Reporting Requirements. Part 2 will focus on frequently asked questions related to Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage) and will be posted in the near future.

The employer reporting requirements under The Patient Protection and Affordable Care Act (the “ACA”) are generally effective beginning January 1, 2015, with the applicable reports first filed in early 2016. The purpose of the reporting requirements – particularly those relating to employers – is to enforce the pay or play provisions of the ACA. Therefore, accurate and timely completion of the required Forms 1094-C and 1095-C is necessary to ensure penalties are not imposed. As the reporting deadline looms, many employers still have questions regarding the ACA’s reporting requirements and how best to comply with those requirements. The following is a list of the most frequently asked questions we are receiving from employers regarding the Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) under the ACA’s reporting requirements.

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Q1:  Which employers are subject to the ACA’s reporting requirements?

A1:  Generally, all “Applicable Large Employers (“ALE”) are subject to the reporting requirements. An ALE is one with 50 or more full-time and full-time equivalent employees. A small employer (i.e. under 50 FTEs) that self-insures its health benefits is also subject to the reporting requirements.

Q2:  On whose behalf must we prepare and file a Form 1095-C?

A2: A Form 1095-C must be filed for each full-time employee who worked for at least one calendar month during the reporting year. A full-time employee is a common-law employee averaging at least 30 hours of service per week (or 130 hours per month). An employer is not required to prepare and file a Form 1095-C for variable hour employees who are in an initial measurement period for all months of employment during the relevant calendar year.

Q3:  If an employee was hired midway through the month with coverage effective immediately, which code would be used on Form 1095-C?

A3:  The indicator code used will depend on the type of coverage offered to the employee (even if he or she waived coverage) and will only be entered for the first full month that coverage was offered. Therefore, even though coverage is offered mid-month, the Code Series 1 indicator will be entered in the first month in which coverage is offered for each day of the month. Note that the codes specify the type of coverage offered to an employee, the employee’s spouse, and the employee’s dependents. Therefore, the specific code that is used will depend on the coverage offered.

Q4:  For line 14 of Form 1095-C, how do we report partial months of coverage due to termination of employment?

A4:  An employer is only considered to have offered health coverage for months during which coverage is offered for the full month. However, an exception applies to terminated employees. If an employee terminates before the end of a month, but the employee would have had coverage for the entire month if they had not terminated, the employer can treat them as having been offered coverage for the entire month.

Q5:  How is COBRA coverage reported?

A5:  Under recent IRS guidance, for the first full month of COBRA coverage, Code 1H applies (No Offer of Coverage) in Line 14 and Code 2A (Employee not employed during the month) applies in Line 16.  If the plan is self-insured, the same codes apply for the period of COBRA coverage, however, for the applicable months of coverage, Part III is completed showing the months the individuals are covered under the plan – either as employees or COBRA beneficiaries.

Q6:  When reporting the cost of coverage, what dollar amount is reported on Line 15?

A6:  For Line 15, which is completed only when Codes 1B, 1C, 1D or 1E are used in Line 14, only the monthly single-only premium amount is used for the base level plan meeting minimum value requirements.  Therefore, if an employer offers a PPO, HMO and a HDHP (high deductible health plan), with the HDHP as the base plan meeting minimum value requirements, the monthly premium for the HDHP is entered in Line 15 (regardless of whether the employee is enrolled in that plan).

Q7:  Are there circumstances under which an employer can provide a simplified statement to employees rather than a copy of Form 1095-C?

A7:  Yes. If the employer makes a “Qualifying Offer” to the employee for all 12 months of the calendar year, and the employee does not enroll in self-insured coverage, then the employer is permitted to send a simplified statement to the employee containing specific information in lieu of a Form 1095-C. A Qualifying Offer is one in which an ALE offers minimum essential coverage that provides minimum value to full-time employees, their spouse and dependents, and the coverage offered is affordable based upon the 9.5% of the Federal Poverty Level safe harbor.

If you have any questions regarding the ACA or Form 1095-C, please contact any member of our Labor and Employment Law Practice Group. Stay tuned for Part II!

Whether meal breaks count as compensable hours worked for non-exempt employees under the Fair Labor Standards Act can be a thorny issue for employers. The FLSA regulations provide that meal periods during which an employee is “completely relieved of duty for the purpose of eating regular meals” do not count as hours worked. 29 C.F.R. § 785.19. Generally, an employee must be given 30 minutes or more and must be completely relieved of his or her duties for a period to qualify as a bona fide unpaid meal break.

But what if the employer places various restrictions on non-exempt employees during unpaid meal breaks?  For example, what if the employee is prohibited from leaving the employer’s premises without prior authorization during an unpaid meal break? What if employees also must remain on call to perform work at a moment’s notice during a meal break?

The Third Circuit recently issued a decision in which it, for the first time, clarified the test to be used to determine whether restrictions placed on employees during meal periods make the periods compensable hours worked, even if the employee did not actually perform any work during the meal period.

The Case

In Babcock v. Butler County, a group of corrections officers at the Butler County Prison alleged that the Prison’s policy of providing one-hour meal periods, of which 45 minutes were paid and 15 minutes were unpaid, resulted in unpaid overtime compensation in violation of the FLSA. They claimed that the entire hour of the meal period should be treated as compensable hours worked, due to restrictions placed on them during the meal periods. Specifically, during the meal periods, the officers could not leave the prison without prior authorization and were required to remain in uniform and be on call and in close proximity to emergency response equipment in the event of an emergency. The Prison filed a motion to dismiss the complaint, arguing that the meal periods were not hours worked because the officers received the “predominant benefit” of the meal period. The District Court agreed and dismissed the complaint.

The officers appealed, and in a 2-1 precedential decision, a panel of the Third Circuit affirmed the dismissal. Following the lead of the majority of other courts of appeals, the Third Circuit adopted the “predominant benefit” test, which asks whether the employee is primarily engaged in work-related duties during the meal period. By doing so, the Third Circuit expressly rejected the alternative and more restrictive “relieved from all duties” test.

The Third Circuit noted that the “predominant benefits” test is a “fact-intensive inquiry” that assesses the “totality of the circumstances to determine, on a case-by-case basis, to whom the benefit of the meal period inures.” After reviewing the facts alleged in the complaint, the Third Circuit majority concluded that, despite the restrictions imposed on them, the officers on balance received the predominant benefit of the unpaid meal periods. The Third Circuit majority also considered the parties’ collective bargaining agreement, noted that officers must be paid for the entire meal period if it is “interrupted” by work,  and concluded that the CBA’s protections on overtime compensation also supported its conclusion.

Circuit Judge Greenaway filed a dissenting opinion, stating that the majority used a “flawed application” of the predominant benefit test and erroneously relied on the CBA to dismiss the complaint.

Takeaways for Pennsylvania Employers

Because the Third Circuit Court of Appeals has jurisdiction over Pennsylvania, the Babcock decision provides a number of clarifications and reminders for employers in Pennsylvania.

  1. Restrictions on non-exempt employees during meal breaks, such as restrictions on leaving the employer’s facilities and requiring that the employees remain on call during the meal break, do not necessarily make the meal time compensable hours worked under the FLSA.
  2. The proper analysis is whether those restrictions are so significant and expansive that the employer, and not the employee, predominantly benefits from the meal time.
  3. This case considered “uninterrupted” meal breaks. Even if the restrictions are not onerous, employers should treat meal breaks as compensable hours worked if the employee is interrupted by work duties at any point during the meal break. In other words, if an employer wishes to make meal breaks for non-exempt employees unpaid, it should have policies and procedures in place to ensure that employees know (1) not to perform any work, such as answering calls or responding to e-mails, during a meal break unless expressly instructed by management to do so, and (2) to report any interrupted meal breaks to ensure they receive compensation for them.

Meal break cases present significant liability concerns for employers, as they easily can become class action lawsuits covering many employees. The Babcock decision helps employers and employees by providing some clarity in this often murky issue. Employers should be vigilant and have and enforce lawful meal break policies to ensure that unpaid meal breaks do not become a troublesome and expensive class-based lawsuit.

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.