INITIAL OFFER LETTER OF EMPLOYMENT ALMOST INVALIDATES RESTRICTIVE COVENANT

On May 29, 2013, the Pennsylvania Supreme Court decided an interesting case regarding how an initial offer letter to a prospective employee can potentially impact a restrictive covenant in an employee’s employment agreement. Before discussing this case, we need a very brief summary regarding what courts look to when deciding whether to enforce a restrictive covenant.

In Pennsylvania, the law is clear that a restrictive covenant (non-compete or non-solicitation of clients or employees for example) is valid and enforceable against an employee under certain conditions so long as the covenant does not impose an illegal restraint of trade. There are many different components that make a restrictive covenant enforceable. However, this post will only focus on the timing requirement.

To be enforceable, a restrictive covenant has to be part of the initial employment terms at the time the offer of employment is made to the employee. The key is that there must be no employee/employer relationship at the time the covenant is being imposed. The restrictive covenant must be part of the overall prospective terms of employment. A restrictive covenant will always fail where the employer seeks to impose the covenant on an unsuspecting employee (already employed by employer) and offers no additional consideration (value) in exchange for the additional restriction.

With this as background, we can now better understand what the Pennsylvania Supreme Court was grappling with. In this case, an employee resigned from his position at one company and went to work for a competitor. The former employer sought a preliminary injunction to stop its former employee from working for a competitor. What prompted this case to travel through the appellate courts was the wording of the offer letter. The courts were struggling with the issue of whether the offer letter that the employee signed was the actual employment contract and not the later agreement titled “Employment Agreement” that the employee signed on his first day of work. The “Employment Agreement” and not the offer letter contained the restrictive covenant.

If the offer letter was the actual employment agreement because it contained all the essential terms of employment, the restrictive covenant would not have been enforceable. The reason for this conclusion under the fact scenario above would have been that the employee had already accepted his position with the company when he signed the offer letter and thus received no additional consideration when he signed his “employment agreement” with the company on his first day of work.

Luckily for the former employer the Pennsylvania Supreme Court reached the conclusion that the offer letter was just part of the overall process and not the employment agreement. The offer letter clearly stated that employment was conditioned upon the signing of an employment agreement. However, be warned, you cannot simply include language in your offer letter to indicate that employment is conditioned upon the signing of an employment agreement as concurring opinions by certain of the Justices stated their problems with just such a broad holding.

The important point to take away from this case is that once again, word choice matters. Offer letters are important in summarizing the terms of employment but care must be given not to overstep so that the offer letter becomes the actual employment agreement. The attorneys at Danziger Shapiro have frequently assisted their clients by reviewing and/or drafting offer letters before they are sent to prospective employees. If you have any questions regarding the offer letter – employment agreement process or any other matter affecting your business, please feel free to contact us at Danziger Shapiro, P.C.