Are Restrictive Covenants Enforceable when an Employee Converts to “at-will” Employment?

By: Joseph L. Gordon

To attract high caliber employees, employers sometimes commit to employment for a fixed period through an employment contract.  Not surprisingly, those employees with the leverage to command an employment contract typically represent a serious competitive threat once they leave the company.  Given that dynamic, most employment contracts include restrictive covenants, such as non-solicit or non-compete agreements.  The recent case of Metalico Pittsburgh Inc. v. Douglas Newman, et al., __ A.3d __ (2017), 2017 WL 1398882 (Pa. Super. Ct., April 19, 2017) dealt with the question of what happens to the restrictive covenants in an employment contract when an employee converts to at-will status.

In Metalico, an employer entered into three-year contracts with two high-level executives.  After the three-year period ended, Metalico continued to employ the executives as at-will employees, with some corresponding changes to the conditions of their employment.  After working at-will for a year, the two executives departed to a competitor and solicited Metalico’s customers to move their business from Metalico to their new employer.  They also solicited Metalico employees to resign and join the new employer.  In response, Metalico sought a preliminary injunction to enforce the restrictive covenants.

The executives argued that they were no longer bound to the restrictive covenants because the three-year term of their employment contracts had expired.  The trial court agreed and ruled that the restrictive covenants did not carry forward because the transition from a term employee to an at-will employee constituted the commencement of a new instance of employment.  The Pennsylvania Superior Court, however, rejected that rationale citing the following provision of the employment contracts:

If the Executive’s employment hereunder expires or is terminated, this Agreement will continue in full force and effect as is necessary or appropriate to enforce the covenants and agreements of the Executive in [§] 8[, which contains the restrictive covenants].

According to the Superior Court, because the employment agreements contained express language indicating that the employees agreed to be bound to the covenants for the duration of their employment, their status as at-will employees was irrelevant.  Had the agreements not contained such express language, Metalico would likely have been left unable to protect its business from the solicitation efforts of these two former employees.  Thus, if employers are considering retaining an executive in an at-will status after their contract for a defined period has expired, the employer should closely review the contract to make sure the non-compete/non-solicitation provisions remain enforceable.

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