For years, employers in Pennsylvania have known that there are two paths to obtaining a valid restrictive covenant from an employee. Employers may secure such a promise when they hire a new employee; the start of employment alone is sufficient consideration to obtain enforceable restrictive covenants. By contrast, if employers want a restrictive covenant sometime later in the relationship, they have to pay extra: as the Supreme Court made clear in Socko v. Mid-Atlantic Sys. of CPA, Inc., 633 Pa. 555 (2015), such a promise requires "new and valuable consideration," such as increased compensation, new benefits or a promotion.
But when no "new and valuable consideration" exists, does the restrictive covenant have to be signed on or before the first day of employment? The Pennsylvania Supreme Court resolved this issue earlier this week in Rullex Co. LLC v. Tel-Stream Inc. and Yuri Karnei. While best practices would entail employers securing executed restrictive covenants prior to an employee's first day of work, or at the latest on the first day, the Court held that restrictive covenants executed after the first day can still be enforceable so long as an employer and a new employee have agreed to the "essential terms" of the restrictive covenant prior to the start of employment.
Rullex presented a novel situation where the parties briefly discussed the restrictive covenant at the commencement of employment, but executed the agreement at a later date - with no new consideration provided to the employee. In early 2016, Yuri Karnei began working as a subcontractor for Rullex Company, a telecommunications construction firm. Rullex allegedly presented Karnei with a non-compete agreement for his review the day he started working, but the terms were left open for negotiation, and the parties ultimately did not execute the agreement until two months later.
After Karnei's relationship with Rullex terminated in mid-2017, he began working for a direct competitor. Rullex sued him, seeking money damages and injunctive relief prohibiting Karnei from working for the competitor. The lower court denied the injunction, and the intermediate court agreed. Notably, the intermediate court ruled that, without exception, restrictive covenants executed after the first day of employment are enforceable only if accompanied by new and valuable consideration.
On appeal, the Supreme Court recognized that "events often move faster than paper," and accordingly established a slightly more relaxed standard: When an employee executes a restrictive covenant after the first day of employment without receiving new and valuable consideration, it is enforceable only if it is "understood by the parties at the outset of the employment relationship as being part of their overall arrangement," with the parties having "agreed to its essential provisions as of the beginning of the employment relationship." It is not necessary for an employer to prove a complete "meeting of the minds." Instead, "objective manifestations of assent and/or an intent to be bound by the covenant's substance can suffice."
Such manifestations were not present in Rullex. Rullex argued that the parties agreed to the material terms of the non-compete agreement on Karnei's first day, but its own witness testified that Rullex informed Karnei that the parties could modify the terms of the non-compete before executing it. Therefore, "Rullex did not view itself and Karnei, as of the time Karnei started work, as having already converged as to the specific rights and obligations" of the agreement.
To ensure the enforceability of restrictive covenants, Pennsylvania employers should have new employees sign agreements, at the latest, on the day the employment commences. If that is not possible, however, Rullex provides some hope that all is not lost, so long as the parties agree to the restrictive covenant's substantive terms by the first day of employment. Failing that, if an employer determines some time into the relationship that it would like an enforceable restrictive covenant, it must then provide new and valuable consideration to the employee.
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