Legal Issues In Drafting and Enforcing Individual Employment Contracts

LEGAL ISSUES IN DRAFTING AND ENFORCING INDIVIDUAL EMPLOYMENT CONTRACTS

presented at:

PENNSYLVANIA BAR INSTITUTE
NORTHEAST EMPLOYMENT LAW INSTITUTE
APRIL 28, 2003

Thomas D. Rees, Esquire
High Swartz LLP
40 East Airy Street
Norristown, PA 19404
trees@highswartz.com

I. INTRODUCTION

This chapter covers the key elements of express employment contracts for individual employees. The chapter discusses the typical terms of employment contracts, in the approximate sequence that these terms would appear in a written employment agreement. Only a small percentage of nonunion employees have written employment contracts. But employees with written contracts include many of an organization's most important employees: high-ranking executives, highly compensated professionals such as physicians, sales personnel, and others with confidential business or technical information who are subject to post-employment contractual restrictions.

Since Pennsylvania law does not require a contract of employment to be in writing to be enforceable, this chapter will be relevant to oral employment contracts as well. The Pennsylvania Statute of Frauds, 33 P.S. § 1, contains no restriction on oral employment contracts. On the central issue of the duration of an employment agreement, courts in Pennsylvania have not hesitated to enforce oral contracts of employment for a fixed period. See, e.g., Scully v. U.S. Wats, Inc., 1999 WL 391495 (E.D. Pa.), amended by 1999 WL 592695 (E.D. Pa.), affirmed, 238 F.3d 497 (3d Cir. 2001); DuSesoi v. United Oil Refining Co., 540 F. Supp. 1260 (E.D. Pa. 1982); Browne v. Maxfield, 663 F.Supp. 1193 (E.D. Pa. 1987). An oral contract for employment for a particular duration is enforceable if its existence can be established by "clear and precise" evidence. See Greene v. Oliver Realty, Inc., 363 Pa. Super. 534, 526 A.2d 1192 (1987), appeal denied, 517 Pa. 607, 536 A.2d 1331 (1987); Gorwara v. AEL Industries, Inc., 784 F.Supp. 239 (E.D. Pa. 1992). Some cases hold that only a preponderance of the evidence is necessary to overcome the employment at will presumption. Robertson v. Atlantic Richfield Petroleum, 371 Pa. Super. 49, 60, 537 A.2d 814, 820 (1987), appeal denied, 520 Pa. 590, 557 A.2d 216 (1987); Pinnizzotto v. Parsons Brinkerhoff Quade and Douglas, Inc., 697 F.Supp. 886 (E.D. Pa. 1988), affirmed, 872 F.2d 413 (3d Cir. 1989). Since oral employment contracts are enforceable, it is essential for employers to reaffirm the at-will nature of any employment relationship, in as many ways and on as frequent a basis as is practicable.

Although the term "employment contract" suggests an agreement for a definite duration, even an at-will employment relationship is contractual. The at-will employment relationship differs from the contract for a specific duration in that a contract of definite duration cannot be terminated before the contract expiration date except upon just cause or under the terms of the contract (Schecter v. Watkins, 395 Pa. Super. 363, 577 A.2d 585 (1990), appeal denied, 526 Pa. 538, 584 A.2d 320 (1990)); under an at-will contract, either party may terminate the employment relationship at any time, for any reason, or no reason. See, e.g., Lubrecht v. Laurel Stripping Company, 387 Pa. 386, 127 A.2d 687 (1956); Gruenwald v. Advanced Computer Applications, Inc., 730 A.2d 1004 (Pa. Super. 1999);Luteran v. Loral Fairchild Corp., 688 A.2d 211 (Pa. Super. 1997), appeal denied, 549 Pa. 717, 701 A.2d 578 (1997).

The existence of a valid, enforceable written employment contract that sets a fixed term of employment or limits the employer's grounds for discharge deprives employers of important leverage in dealing with employees. This loss of flexibility is an important concession, particularly in difficult economic times. In exchange, the use of a written contract gives the employer greater certainty in dealing with the employee. This certainty is not limited to post-employment restrictions. By entering into a written contract, the employer acquires greater certainty that the employee will not be able to use non-contractual legal theories to challenge an employment termination. For example, the existence of a written employment contract for a fixed term will limit an ex-employee's ability to bring the following claims upon discharge:

(a) Claims for wrongful discharge for violation of public policy. See, e.g., Smith v. Greyhound Bus Lines, 614 F.Supp. 558, W.D. Pa. 1984), affirmed, 800 F.2d 1139 (3d Cir. 1986).

(b) Implied or quasi contractual claims. See Galdieri v. The Monsanto Company, ____ F. Supp.2d ____, 2002 WL 31991106 (E.D. Pa.); Carlson v. Arnot-Ogden Medical Hospital, 918 F.2d 411 (3d Cir. 1990); Rho v. Vanguard Ob/Gyn Associates, P.C., 1999 WL 228993 (E.D. Pa.).

II. INTRODUCTORY LANGUAGE AND RECITALS

Identification of the Parties

A complete legal description of both parties is essential. The employee should be sure that a duly organized legal entity is named as the employer, rather than an individual, a trade name, or an unincorporated division of a business entity. See Surovcik v. D&K Optical, Inc., 702 F.Supp. 1171 (M.D.Pa. 1988) (employment contract with individual may not be enforced against corporation).

Practical Tip: The parties to the contract should NOT be defined as "Employer" and "Employee"; use of such similar definitions only invites confusion and mischaracterization. It is far better to use a term such as "Company" to describe the employer and the employee's last name to describe the employee.
Recitals
1. Authority to contract
  
  A proper recital should describe the nature of the employer's business and should state that the employer has the authority to enter into the contract. The issue of authority to contract is particularly important for public employers, which may have statutory or constitutional limitations on the power to enter into employment contracts, particularly if the term extends beyond the term of the existing elected officials. See, e.g., Bolduc v. Lower Paxton Township, 618 A.2d 1188 (Pa. Cmwlth. 1992), appeal denied, 533 Pa. 662, 625 A.2d 1195 (1993). An ultra vires contract will not be enforced against a public entity. Bolduc, supra; Falls Tp. v. McManamon, 537 A.2d 946 (Pa. Cmwlth. 1988); Wilson v. Southeastern Pennsylvania Transportation Authority, 709 F.Supp. 623 (E.D. Pa. 1989).
  
  It is also essential that the individual who signs the contract on behalf of the employer has the authority to bind the employer. See, e.g., Fetterolf v. Harcourt General, Inc., 2001 WL 1622196 (E.D. Pa.); Welch v. Maritrans, Inc., 2001 WL 73112 (E.D. Pa.) A private employer will be held to ratify an employment agreement by accepting the benefit of the employee's performance. Lokay v. Lehigh Valley Cooperative Farmers, Inc., 342 Pa. Super. 89, 492 A.2d 405 (1983).
2. Approval
  
  The recitals should state that the contract has been approved in the manner that is legally required in order to bind the employer. A contract with a public employer should recite compliance with statutes and ordinances and open meeting laws (See Perry v. Tioga County, 694 A.2d 1176 (Pa. Cmwlth. 1997)). A contract with a private employer should recite proper corporate action (See Zitelli v. Dermatology Education & Research Foundation, 534 Pa. 360, 633 A.2d 134 (1993)).
3. Consideration
  
  The Uniform Written Obligations Act, 33 P.S. § 6, provides that a contract in Pennsylvania need not be supported by consideration if the contract specifically states that the parties enter into the contract "intending to be legally bound". In McGuire v. Schneider, Inc., 368 Pa. Super. 344, 534 A.2d 115 (1987), affirmed, 519 Pa. 439, 548 A.2d 1223 (1988), the Pennsylvania Superior Court held that consideration was not necessary to uphold an employment contract if this required "boilerplate" under the UWRA was included. See also Connell v. Meritor Savings Bank, 1991 WL 25715 (E.D. Pa.) NOTE: The UWRA "boilerplate" will not excuse the lack of consideration in a post-employment restrictive covenant. See Surgical Sales Corporation v. Paugh, 1992 WL 70415 (E.D. Pa.); Young Bros., Inc. v. Hatch, 1990 WL 18903 (E.D. Pa.).

III. EMPLOYMENT TENURE

Employment on Terms and Conditions in Agreement

In order to provide for employment tenure beyond the traditional employment at will relationship, a contract of employment must contain the employer's explicit agreement (a) to employ the individual for a definite period of time, or (b) to limit the employer's ability to discharge the employee at will. An agreement that provides for a particular effective period (e.g., one year) but does not contain a promise of employment for this period will not necessarily override the presumption of at-will employment. See Case v. Lower Saucon Township, 654 A.2d 57 (Pa. Cmwlth. 1995).
Period of Employment
1. Fixed term
  1. The duration of the employee's employment must be fixed and definite (e.g., one year, two years). Case v. Lower Saucon Township, supra. A "permanent" employment contract will be presumed to be an at-will contract unless the employee can show the parties' intent to contract for a reasonable period of time. See Mayerson v. Washington Manufacturing Co., 58 F.R.D. 377 (E.D. Pa. 1972).
  2. Employment of an individual for the duration of a particular event or project does not constitute a fixed and definite term. Therefore, employments for the "run of the tour" for a traveling show (Rapagnani v. Judas Co., 736 A.2d 666 (Pa. Super. 1999)); for the length of a marketing program (Chadwick v. Capital Advisors, 1992 WL 121616 (E.D. Pa.));for a specified construction project (Schleig v. Communication Satellite Co., 698 F.Supp. 1241 (M.D. Pa. 1988));or during another person's ownership of a business (Walsh v. Alarm Security Group, Inc., 230 F.Supp.2d 623 (E.D. Pa. 2002)) do not override the at-will presumption.
  3. Even under an employment contract for a fixed term, both parties may treat the contract as an at-will relationship at the expiration of the contract's term, unless the contract limits the parties' ability to end the relationship at expiration. See, e.g., Synthes, Inc. v. Shimer, 1994 WL 361382 (E.D. Pa. 1994), affirmed, 54 F.3d 770 (3d Cir. 1995); Velez v. QVC Corporation, 227 F.Supp.2d 384, 423 (E.D. Pa. 2002). There is no inherent right to an extension of a contract for a fixed term.
2. Automatic Rollovers
  
  If an employee continues to work for the employer after the expiration date of a contract for a fixed term, the contract will be enforceable for a new term equal to the original term. See Burge v. Western Pennsylvania Higher Education Council, Inc., 391 Pa. Super. 108, 570 A.2d 536 (1990); Smith v. Shallcross, 105 Pa. Super. 472, 69 A.2d 156 (1949); Janis v. AMP, Inc., 58 Pa. D. & C.4th 144 (Dauphin Co. 2002). This rollover may occur even earlier than the contract's expiration date if the contract contains an "evergreen" clause, providing that the contract will automatically renew in the absence of advance notice of renewal.

IV. POSITION / TITLES / DUTIES / PERFORMANCE

Employee's Position and Title

The description of the employee's position and title calls for flexibility. The employer may find it necessary to change the position and title that cover a particular employee's duties over the term of a contract. Such changes should not lead to an argument for invalidation of the contract. Granting the employee a title does not, by itself, establish the right to employment tenure. See Halpin v. LaSalle University, 432 Pa. Super. 476, 639 A.2d 37 (1994), appeal denied, 542 Pa. 670, 668 A.2d 1133 (1995). But the grant of a title in an employment contract may give rise to a breach of the contract if the title is changed or removed. Anchel v. Shea, 762 A.2d 346 (Pa. Super. 2000), appeal denied, 566 Pa. 656, 782 A.2d 541 (2001) (removal of a director is invalid when the director's employment agreement provides that the employee will be a director as long as he is employed).
Employee's Duties

The employer will prefer to describe the employee's duties in the contract in general fashion, so as to have the flexibility to establish new duties without violating the contract. The employer's use of a catchall term- e.g., "to perform such other duties as the Board of Directors shall direct"- will allow the employer to assign additional duties to the employee, so long as the additional duties are reasonably related to the employee's position. Giuffrida v. American Family Brands, Inc., 1998 WL 196402, *9 (E.D. Pa.).

There are practical and legal reasons that favor a specific description of an employee's duties, however. If an employee fails to perform specific duties set forth in a contract, the employer may discharge the employee without the need to show that the employee's shortcomings caused actual harm to the employer. Ott v. Buehler Lumber Company, 373 Pa. Super. 515, 541 A. 2d 1143 (1988). By contrast, if the employer merely requires the employee to perform "to the satisfaction" of the employer, the courts may examine the employer's good faith in claiming dissatisfaction with the employee. See Kramer v. Philadelphia Leather Goods Corp., 364 Pa. 531, 73 A.2d 385 (1950). The specific enumeration of an employee's duties may also help the employer to enforce post-employment restrictions against work for a competitor or disclosure of trade secrets.
Full-Time Performance of Duties

An employment contract should provide that the employee will perform services for the employer on a full time basis, and will devote the employee's entire work effort to the employer. See Decision Services Consultants, Inc. v. Blumberg, 1987 WL 5731 (E.D.Pa.), affirmed, 831 F.2d 285 (3d Cir. 1987). Without such a provision, the employer may have difficulty in treating an employee's "moonlighting" as a breach of contract. See Jay Goldstein & Company, P.C. v. Goldstein, 52 Pa. D. & C.4th 211 (Phila. Co. 2001). Even if the performance of duties for another organization does not constitute a breach of contract, such outside work may constitute a breach of fiduciary duty that the employee owes to the employer. Decision Services Consultants v. Blumberg, supra..
Location of Performance of Duties

Again, the employer will prefer to keep the location of the employee's duties general, in order to relocate the employee without breaching the contract. The employee will want the location of duties to be more specific. Regardless of the contractual language, the actual location at which an employee performs duties may be determinative of the reach of an employer's restrictive covenant. See, e.g., Albee Homes, Inc. v. Caddie Homes, Inc., 417 Pa. 177, 207 A.2d 768 (1965), in which the Pennsylvania Supreme Court invalidated a restrictive covenant that extended 50 miles from any location in which the ex-employer had offices, but enforced the restrictive covenant within 50 miles of the employee's work location.
Standards of Performance / Effort

The standards of performance should not be too vague or too easy for the employee to satisfy. A provision requiring an employee to devote "best efforts" to the job is a problematic standard. In Madreperla v. Williard Co., 606 F. Supp. 874 (E.D. Pa. 1985), the Court denied a motion for summary judgment dismissing an ex-employee's action because of a genuine issue of material fact as to whether the employee had used "best efforts" in an executive position. See also Kramer v. Philadelphia Leather Goods Corp., 364 Pa. 531, 73 A.2d 385 (1950) (court will inquire as to employer's good faith in finding that employee did not perform to employer's 'satisfaction).
Disciplinary Procedures

The contract may either establish specific procedures for discipline for poor performance, or incorporate procedures from other sources such as an employee handbook. The existence of a written contract with specific discipline procedures requires the employer to adhere to these procedures, particularly for a tenured employee. See Ferrer v. Trustees of the University of Pennsylvania, ___ Pa. ____, ____ A.2d ___, 2002 WL 31886791 (2002), in which a professor recovered substantial damages because of the University's efforts to sanction a professor after the professor was found not guilty of specified misconduct. Compare Murphy v. Duquesne University of the Holy Ghost, 565 Pa. 571, 777 A.2d 418 (2001) (university professor could not challenge termination where university had properly followed all procedures for termination). The employer's obligation to comply with contractual disciplinary procedures contrasts with the employer's ability to bypass the disciplinary procedures specified in the employee handbook in the employment at will relationship. See DiBonaventura v. Consolidated Rail Corporation, 372 Pa. Super. 420, 539 A.2d 865 (1988).

V. COMPENSATION AND BENEFITS

Introduction

The employer's obligation to provide compensation and benefits is separate from the employer's obligation to provide employment for a particular duration. In general, courts have been more willing to enforce employers' promises to provide compensation and benefits than promises of employment tenure. Therefore, specific provisions in a contract or handbook for compensation or benefits, e.g., vacation leave, sick leave, severance pay, or paid holidays, bind the employer to provide such items. Bauer v. Pottsville Area Emergency Medical Services, Inc., 758 A.2d 1265 (Pa. Super. 2000). These provisions for salary and benefits do not alter the employment at will presumption, however. Bauer, supra. The employer can reserve the right to change salary and benefits by including a statement in the handbook or benefit plan that the benefits may be changed at any time, for any reason, and with or without notice. Hamilton v. Air Jamaica, Inc., 945 F.2d 74 (3d Cir. 1991), cert. denied, 503 U.S. 938, 112 S.Ct. 1479 (1992).

There is no legal requirement that the specific provisions for benefits be in writing, although written provisions for benefits will control over unwritten provisions and will be easier to prove. Hamilton v. Air Jamaica, Inc., supra. At a minimum, the employer must have communicated the benefits provisions to the employee in order to be bound by these provisions. Morosetti v. Louisiana Land and Exploration Co., 522 Pa. 492, 564 A.2d 151 (1989). Where employment is at will, the employer may reduce the employee's compensation or benefits at will. Green v. Bettinger, Inc., 608 F. Supp. 35 (E.D. Pa. 1984), affirmed, 791 F.2d 917 (3d Cir. 1986), cert. denied, 479 U.S. 1069, 107 S. Ct. 960 (1987).

Specific contractual provisions for wages and other benefits may give rise to liability on the employer's part under the Wage Payment and Collection Law, 43 P.S. § 260.1 et seq.("WPCL"). See Bowers v. NETI Technologies, Inc., 690 F. Supp. 349 (E.D. Pa. 1988); Hartman v. Baker, 766 A.2d 347 (Pa. Super. 2000), appeal denied, 564 Pa. 712, 764 A.2d 1070 (2000). The WPCL is an enforcement tool for employees' right to collect wages and wage supplements; the WPCL does not create any rights beyond those contained in an employment contract.

Group benefits may acquire the status of pension or welfare plans that are subject to the Employee Retirement and Income Security Act, 29 U.S.C. § 1001 et seq. ("ERISA"). A detailed discussion of ERISA is beyond the scope of this chapter.
Salary

Courts will enforce salary terms that are clear and precise. Gorwara v. AEL Industries, Inc., 784 F. Supp. 239 (E.D. Pa. 1992). Typical salary terms in an employment contract include the following:
1. The annual rate of compensation (Doe v. Kohn, Nast & Graf, P.C., 862 F. Supp. 1310, 1324 (E.D. Pa. 1994));
2. The frequency of periodic salary payments (Id.);
3. The frequency of adjustments to salary; and
4. The amount, formula and basis of such adjustments (Smith v. Neyer, Tiseo & Hindo, Ltd., 1993 WL 428992 (E.D. Pa.)).
Commissions

An employer's contractual obligation to pay an employee commissions is enforceable even where the employment is at will. Kofsky v. Chemical Residential Mortgage Corporation, 1999 WL 1016976 (E.D. Pa.). A right to commissions may exist separately from any contract for employment tenure; for example, an employee may establish a right to commissions under an oral contract that is independent from the employee's written contract containing an integration clause. Pilallis v. Electronic Data Systems Corporation, 1998 WL 211740 (E.D. Pa.).

A contract to pay commissions may have as many as seven key elements, as follows:
1. The draw payment to the employee;
2. The percentage of the commission;
3. The base upon which commissions are computed (e.g., total sales produced by a salesperson);
4. The time of vesting of the right to receive a commission;
5. The timing of payment of the commissions;
6. The right to receive commissions at or after the end of the employment relationship;and
7. The employee's obligation to refund any draw payments that exceed commissions; this obligation may arise periodically or when employment ends.
There have been many divergent decisions on the vesting and payment of commissions, particularly in litigation by ex-employees. The vesting date for an employee's right to receive commissions may range from the date on which orders are accepted (See, e.g., In Re: Industrial Car Manufacturing Co., 1 B.R. 339 (Bankr. E.D. Pa. 1979)) to the date on which the employer receives payment on the sale. The employer will typically want to delay the date for payment of commissions until sales are invoiced or payment is received on the sale. See, e.g., Levan v. Royal Paper Products Co., 199 Pa. Super. 502, 185 A.2d 801 (1962).

Courts will look to the terms of the contract in weighing the right of a departing or former employee to receive commissions. In general, the courts will not favor a forfeiture of commissions in the absence of specific forfeiture provisions. See Hazell v. Servomation Corp., 294 Pa. Super. 465, 440 A.2d 559 (1982) (pro-rating annual draw payments before subtracting draw from commissions due to employee who leaves in mid-year, and rejecting employer's proposed deduction of entire annual draw). A forfeiture of commissions after termination will be upheld if supported by consideration. (e.g., an increase in weekly pay). Stebok v. American General Life and Accident Insurance Co., 715 F.Supp. 711 (W.D. Pa. 1989), affirmed, 888 F.2d 1382 (3d Cir. 1989).

Until 2000, Pennsylvania was the only state other than Alabama that allowed an employer to recover excess draw over commissions without a specific provision in the contract permitting this recovery. In 2000, the Pennsylvania Supreme Court changed this rule in Banks Engineering Co. v. Polons, 561 Pa. 638, 752 A.2d 883 (2000), holding that an employer could not recover excess draws from an employee without a specific contractual provision.
Bonuses

Contractual provisions for bonus payments somewhat resemble those that govern payment of commissions, and typically include:
1. Amount or percentage of the bonus;
2. The base on which the bonus is computed;
3. Events that give rise to the right to receive a bonus;
4. The time of vesting of the right to receive a bonus;
5. The rules and procedure for deciding who will receive a bonus;
6. The timing of payment of the bonus;
7. The right of former employees to receive a bonus; and
8. Provisions for forfeiture of a bonus.
An at-will employee has no claim for a bonus unless the employee has worked until the end of the vesting period for the bonus. Kafando v. Erie Ceramic Arts Co., 764 A.2d 59 (Pa. Super. 2000); McIntyre v. Frionor U.S.A., 1990 WL 92670 (E.D. Pa.) An employment agreement may provide for forfeiture of a bonus if an employee is discharged for cause. Middleton v. Realen Homes, Inc., 24 F.Supp.2d 430 (E.D. Pa. 1998).
Stock Options

An exhaustive examination of stock option provisions is beyond the scope of this outline. As is the case with other incentive compensation, employment at will status does not defeat the right to receive stock options. See Denny v. Primedica Argus Research Laboratories, Inc., 2001 WL 1807885 (Phila. Co.) The right to stock options must be based on a written document, however. Hartman v. Baker, 766 A.2d 347 (Pa. Super. 2000), appeal denied, 564 pa. 712, 764 A.2d 1070 (2000); Bowers v. NETI Technologies, Inc., 690 F. Supp. 349 (E.D. Pa. 1988); Keck v. Tri-Foods International, Inc., 1996 WL 665536 (E.D. Pa.). The specific terms of any stock option agreement will govern the employee's right to receive stock. Kirk v. The Jerrold Corporation, 332 F.Supp. 247 (E.D. Pa. 1971), affirmed, 465 F.2d 1398 (3d Cir. 1972). The right to exercise stock options after termination will depend upon the language in the stock option plan. See Scully v. U.S. Wats, Inc., 238 F.3d 497 (3d Cir. 2001). Compare McIntyre v. Philadelphia Suburban Corporation, 90 F. Supp.2d 596 (E.D. Pa. 2000), in which the language of the stock option plan prohibited post retirement exercise of vested stock options. The employer who interferes with an employee's ability to exercise vested stock options may face possible liability under both contract law and the Wage Payment and Collection Law. Regier v. Rhone Poulenc Rorer, Inc., 1995 WL 395948 (E. D. Pa.), affirmed, 92 F.3d 1172 (3d Cir. 1996).
Retirement/Deferred Compensation

It is not unusual for an executive employment contract to provide for deferred or retirement compensation at a level determined by the executive's annual income. In Dieter v. Fidelcor, Inc., 441 Pa. Super. 215, 657 A.2d 27 (1995) and Gallagher v. Fidelcor, Inc., 441 Pa. Super. 223, 657 A.2d 31 (1995), appeal denied, 544 Pa. 675, 678 A.2d 365 (1996), the courts held that the "annual compensation" base for computing retirement income did not include income from the exercise of stock options.
Vacation, Holidays, and Other Leave

Contractual provisions on paid vacation leave typically cover the following topics:
1. Length of vacation per 12-month period;
2. Length of service before acquiring the right to take either initial or subsequent vacations;
3. Period over which the right to take vacation accrues (e.g., 1 day per month of employment);
4. Right to carry over vacation days from year to year;
5. Payment to the departing employee for unused accrued vacation (or repayment by the departing employee for excess vacation);
6. Paid holiday leave;
7. Personal leave.
An employee has the right to receive payment for accrued but unused vacation at the end of the employee's tenure. See Anderson v. Pittsburgh Press Company, 880 F. Supp. 407 (W.D. Pa. 1995); Matson v. Housing Authority of the City of Pittsburgh, 353 Pa. Super. 588, 510 A.2d 819 (1986).
Sick and Disability Leave and Pay

Typical contractual provisions include the following:
1. Number of sick days per 12-month period;
2. Length of service before acquiring right to receive paid sick leave;
3. Right to carry over unused sick days;
4. Payment to the departing employee for unused sick leave (See Matson v. Housing Authority of the City of Pittsburgh, 353 Pa. Super. 588, 510 A.2d 819 (1986));
5. Rights to unpaid sick leave;
6. Short-term disability coverage;
7. Long-term disability coverage.
All contractual provisions for sick and disability leave must be analyzed under the Americans With Disabilities Act, 42 U.S.C. § 12101 et seq. and the Family and Medical Leave Act, 29 U.S.C. § 2601 et seq. Any detailed discussion of the ADA and FMLA is beyond the scope of this chapter. Individual disability coverage is a critical element of an employment contract for a highly compensated employee. For an illustration of the problems that develop when a key employee becomes disabled and coverage is uncertain, see Langer v. Monarch Insurance Co., 879 F.2d 75 (3d Cir. 1989) and 966 F.2d 786 (3d Cir. 1992).
Expense Reimbursement

The reimbursement of employee expenses is rarely a central factor in employment contract litigation; however, many reported employment cases include reimbursement claims in addition to discharge-related claims. "Reimbursement of expenses" is a "wage supplement" under the WPCL, allowing an employee to bring a WPCL claim along with a contract claim for expenses. 43 P.S. § 260.2a. Typical reimbursable expenses include:
1. Transportation expenses. The establishment of a new policy for reimbursement of automobile expenses was one of the elements of additional consideration that supported a new restrictive covenant in Davis & Warde, Inc. v. Tripodi, 420 Pa. Super. 450, 616 A.2d 1384 (1992), appeal denied, 536 Pa. 624, 637 A.2d 284 (1993).
2. Moving expenses, which may be capped at a fixed dollar amount over the cost of moving household goods and temporary living quarters. See Pociask v. KDI Sylvan Pools, Inc., 1990 WL 161256 (E.D. Pa.).
Group Benefits

These benefits are typically provided to most fulltime employees and (if part of a benefit plan) may be subject to federal laws such as ERISA. Typical group benefits include such items as:
1. Health insurance;
2. Life insurance;
3. Pension benefits;
4. Profit sharing;
5. 401(k) participation.
Other Benefits
1. Automobile use;
2. Housing;
3. Loans;
4. Professional liability insurance;
5. Sabbaticals; and
6. Club memberships.
Permissible Outside Work and Compensation

The parties should reach a clear understanding at the outset of employment as to the employee's ability to perform services outside the workplace and to keep compensation for such services. Otherwise, it may appear that the employee is breaching a fiduciary duty to the employer, both by obtaining individual economic benefit and by failing to devote full time to services for the employer. See Jay Goldstein & Company, P.C. v. Goldstein, 52 Pa. D. & C.4th 211 (Phila. Co. 2001).

Outside services and compensation may arise in the following areas:
1. Fiduciary services, e.g., services as an executor;
2. Services as an arbitrator;
3. Teaching;
4. Lecturing;
5. Writing;
6. Consulting;
7. Expert testimony.

VI. REPRESENTATIONS

Employer Representations to Employee
1. Financial condition of the employer
  
  An at-will employee may maintain a fraud claim against an employer that fails to disclose its financial condition, or affirmatively misrepresents the possibility of a takeover of the employer. See Martin v. Hale Products, Inc., 699 A.2d 1283 (Pa. Super. 1997). Note: The Pennsylvania Superior Court recently called the Martin holding into question because the Martin parties did not raise the "gist of the action" doctrine, which precludes a claim for fraud when the "gist of the action" lies in contract. Etoll, Inc. v. Ellis/Savion Advertising, Inc., 811 A.2d 10 (Pa. Super. 2002).
  
  In the case of an employee with a contract for a fixed term, the existence of an integration clause makes it more difficult for the employee to challenge a contract on the basis of fraud. The misrepresentations must be independent of the contract so that the "gist of the action" lies totally outside the contract. See, e.g., Lokay v. Lehigh Valley Cooperative Farmers, Inc., 343 Pa. Super. 89, 492 A.2d 405 (1983).
2. Corporate changes (takeovers), etc.
  
  In Martin v. Hale Products, supra, an employee was able to maintain an action for fraud upon being discharged after a corporate takeover, when the interviewer failed to disclose to the employee that the Company was about to be bought. But see Etoll, Inc. v. Ellis/Savion Advertising, Inc., supra.
Employee Representations to Employer
1. Professional licensure
  
  The failure to disclose any professional disciplinary problems provides an employer with grounds to terminate an employee. Rho v. Vanguard Ob/Gyn Associates, 1999 WL 22893 (E.D. Pa.). Note: An employer's permission to a new employee to begin work without proper licensure may give the employee the right to challenge a termination for non-licensure on the basis of promissory estoppel. See Arasi v. Neema Medical Services, Inc., 407 Pa. Super. 393, 595 A.2d 1205 (1991), appeal denied, 529 Pa. 655, 604 A.2d 247 (1992); Travers v. Cameron County School District, 544 A.2d 547 (Pa. Cmwlth. 1988).
2. No criminal history
  
  The Criminal History Record Information Act, 18 Pa.C.S. § 9125, limits the types of criminal activity that prospective employers may consider in hiring an employee. The employer may only consider felony and misdemeanor convictions that relate to the employee's duties.
3. No previous discharges for misconduct
  
  An employee's erroneous statements to an employer about the reason for the employee's departure from a previous job may enable the employer to both terminate the employee's contract and sue the employee for fraud or misrepresentation. See Edwards v. Storage Technology Corp., 1999 WL 33505545 (E.D. Pa.).
4. Restrictive covenants
  1. Disclosure of restrictive covenants
    
    The contractual provision that the employee must disclose (and has disclosed) any existing restrictive covenants helps to protect both the employer and the employee. This provision allows the employer to assess the possible exposure to litigation over any restrictions. The employee may be reluctant to make such a disclosure before being offered a position, because of the possibility that the employee's current employer will find out about the search for new employment, and fire the employee. One possible solution is to disclose this restriction under a confidentiality agreement, as the employee did in National Business Services, Inc. v. Wright, 2 F.Supp.2d 701 (E.D. Pa. 1998). The employee who makes such a disclosure should do so in writing to avoid any question about the disclosure. The disclosure of such restrictions will make it more likely that the new employer will support the employee in defending against any action on the restrictive covenant.
  2. Indemnity for fees if undisclosed restrictions exist

VII. RESTRICTIONS ON ACTIVITIES

The topic of contractual restrictions on an employee's activities during and after employment is too long to allow detailed coverage in this chapter. Such restrictions go beyond the oft-mentioned "non-competes" that prevent an ex-employee from working for a competing employer for a period of time after employment. Possible restrictions include the following:

Restrictions on Outside Duties During Employment

Any business transactions by the employee in the employer's line of business may violate the employee's common-law fiduciary duty to bring all business opportunities to the employer. The enforcement of this fiduciary duty does not depend upon any contract, but the existence of a contractual prohibition on outside duties reinforces the fiduciary duty. See SHV Coal, Inc., v. Continental Grain, Co., 376 Pa. Super. 241, 545 A.2d 917 (1988), reversed in part on other grounds, 526 Pa. 489, 587 A.2d 702 (1991).
Non-competition Clauses (Restricting the Former Employee From Competing)

These clauses typically contain the following elements:
1. Definition of competing activities;
2. Duration of restrictions;
3. Geographic scope of restrictions;
4. Remedies for violations (see VII(F), infra);
5. Assignability
This provision is very important since a restrictive covenant without an assignment clause will not be enforceable by a new employer. See Hess v. Gebhard & Co., 570 Pa. 148, 808 A.2d 912 (2002); All-Pak, Inc. v. Johnston, 694 A.2d 347 (Pa. Super. 1997).
Confidential Business Information / Trade Secrets
Non-solicitation of Employees
Non-solicitation of Customers
Remedies for Violations of Restrictions
1. Injunctive relief
2. Restarting the covenant with each violation;
3. Liquidated damages
4. Override of arbitration clauses
5. Venue/Jurisdiction
6. Attorney's Fees- See, e.g.,Profit Wize Marketing v. Wiest, 812 A.2d 1270 (Pa. Super. 2002)
7. Forfeiture of deferred compensation- Fraser v. Nationwide Mutual Insurance Co., 135 F. Supp.2d 623 (E.D. Pa. 2001)
Assignment of Intellectual Property Rights
1. Copyrights
  
  An employer has the right to copyright all copyrightable work generated by an employee, without the need for any assignment.
2. Patents
  
  An employer may require an employee to assign all rights to patent any invention developed by the employee during employment, and may discharge the employee for refusing to make the assignment. See e.g., Brosso v. Devices for Vascular Intervention, 879 F.Supp. 473 (E.D. Pa. 1995), affirmed, 74 F.3d 1225 (3d Cir. 1995); Zlotnicki v. Harsco Corp., 672 F.Supp. 161 (M.D. Pa. 1987).

VIII. TERMINATION

During Term of Employment
1. Involuntary
  1. Termination by employer at will after a specified notice period
    
    In Schecter v. Watkins, 395 pa. Super. 363, 577 A.2d 585 (1990), appeal denied, 526 Pa. 538, 584 A.2d 320 (1990), an employer retained the right to terminate an employment agreement at will upon 90-days notice before the end of the contract period. The employer's right to terminate the contract in this fashion obviated the need to decide whether the employer had good cause to terminate the contract because of the employee's alcoholism.
  2. Termination for poor performance, misconduct, criminal conduct, etc.
    1. Poor performance
      
      If an employee fails to perform specific duties set forth in a contract, the employer may discharge the employee without the need to show that the employee's shortcomings caused actual harm to the employer. Ott v. Buehler Lumber Company, 373 Pa. Super. 515, 541 A. 2d 1143 (1988). By contrast, if the employer merely requires the employee to perform "to the satisfaction" of the employer, the courts may examine the employer's good faith in claiming dissatisfaction with the employee. See Kramer v. Philadelphia Leather Goods Corp., 364 Pa. 531, 73 A.2d 385 (1950). The employer may not terminate a contract for poor performance during an earlier term of the contract if the employer has renewed the contract. In re Allegheny International, Inc., 954 F.2d 167 (3d Cir. 1992).
    2. Misconduct
      
      The employee's failure to disclose any professional disciplinary problems provides an employer with grounds to terminate an employee. Rho v. Vanguard Ob/Gyn Associates, 1999 WL 22893 (E.D. Pa.).
    3. Negligence/Failure to Perform Professional Duty
      
      See Fort Washington Resources, Inc. v. Tannen, 901 F.Supp. 932 (E.D. Pa. 1995).
Termination by employee for employer breach
Voluntary resignation by the employee.

An employee's "resignation" constitutes a termination of employment that triggers a non-compete when the ex-employee goes to work for a competitor. Geissinger Clinic, Inc. v. DiCuccio, 414 Pa. Super. 85, 606 A.2d 509 (1992), appeal denied, 536 Pa. 625, 637 A.2d 285 (1993) cert. denied, 513 U.S. 1112, 115 S.Ct. 904 (1995). Comment: It is important to define "termination" to include "resignation" in the restrictive covenant!
Cancellation of contract by mutual consent
Disability
Death
Change in ownership or control

See Boone v. Platinum Technology, Inc., 2000 WL 33119415 (E.D. Pa.) (Illinois Law).
Termination at End of Term

At the expiration of the term of an employment contract, each party may treat the contract as an at-will relationship, and may decline to renew the contract for any reason, unless the contract limits the parties' freedom to end the relationship at expiration. See, e.g., Synthes, Inc. v. Shimer, 1994 WL 361382 (E.D. Pa. 1994) affirmed, 54 F.3d 770 (3d Cir. 1995); Velez v. QVC Corporation, 227 F.Supp.2d 384, 423 (E.D. Pa. 2002).
Procedure for Ending Contract (e.g., Notice)

An employee has no inherent right to time the departure from employment in order to receive special compensation such as a bonus or commissions. Thus, an employer may discharge an at-will employee immediately upon the employee's giving two weeks' notice of departure to work for a competitor, even if the employee is deprived of bonus payments that would vest during the two-week period. Redick v. Kraft, Inc., 745 F.Supp. 296 (E.D. Pa. 1990). An employee at will has no right to defer the effective date of resignation beyond the normal notice period in order to receive a commission that is only payable to a current employee. See Sendi v. NCR Comten, Inc., 619 F. Supp. 1577 (E.D. Pa. 1985), affirmed, 800 F.2d 1138 (3d Cir. 1986).

Where an employer terminates an employment contract shortly after its commencement, the contractual notice period may be treated as the minimum period for which the employee has a right to compensation. See Carlson v. Arnot-Ogden Memorial Hospital, 918 F.2d 411 (3d Cir. 1990).
Payments at Termination
1. Salary/Wages
  
  An employee has the right to receive wages earned up to the effective date of termination. See Allende v. Fruit Distributors, Inc., 709 F.Supp. 597 (E.D. Pa. 1989). In the absence of any provision for post-termination pay, an ex-employee has no right to receive post-termination compensation, even if the ex-employee renders services after termination. Brown v. Peoples Security Insurance Co., 890 F.Supp. 411 (E.D. Pa. 1995).
2. Severance or termination pay
  
  The employer's policies on severance or termination pay will bind the employer if those policies are either communicated to the employee (Morrisetti v. Louisiana Land & Exploration Co., 522 Pa. 492, 564 A.2d 151 (1989)) or are the subject of an agreement between the parties. The employer's failure to pay agreed-upon severance pay will expose the employer to liability for breach of contract and will enable the employee to pursue remedies under the WPCL, including individual liability of officers and agents and attorney fees. Severance pay constitutes a fringe benefit or wage supplement under the WPCL. See Bowers v. NETI Technologies, Inc., 690 F.Supp. 349, 352 (E.D. Pa. 1988).
  
  An agreement may contain provisions for forfeiture of severance payments or deferred compensation if the ex-employee engages in competition with the employer. See Fraser v. Nationwide Mutual Insurance Co., 135 F. Supp.2d 623 (E.D. Pa. 2001). Even without a forfeiture provision, the employer may try to withhold severance pay for employee misconduct that constitutes a breach of the employment contract. See Slagan v. John Whitman & Associates, 1997 WL 587354 (E.D. Pa.).
3. Vacation/Other Benefits
  
  An employer may offset claims for violations of the employee's contract against the employee's claim for vacation pay. See, e.g., Boyce v. Smith-Edwards-Dunlap Company, 398 Pa. Super. 345, 580 A.2d 1382 (1990).
4. Commissions
  
  Courts have upheld the right of a commissioned salesman to receive commissions after cessation of employment where the salesman's contract does not set limits on commission payments after an at-will termination. See Marcin v. Darling Valve Manufacturing Co., 259 F.Supp. 720 (W.D. Pa. 1966). See also Hazell v. Servomation Corp., 294 Pa. Super. 465, 440 A.2d 559 (1982) (pro-rating annual draw payments before subtracting draw from commissions, and rejecting employer's proposed deduction of entire annual draw). But see Stebok v. American General Life and Accident Insurance Co., 715 F.Supp. 711 (W.D. Pa. 1989), affirmed, 888 F.2d 1382 (3d Cir. 1989) (upholding contractual forfeiture of post-employment commissions).
5. Bonuses
  
  An employment agreement may provide for forfeiture of a bonus if an employee is discharged for cause. Middleton v. Realen Homes, Inc., 24 F.Supp.2d 430 (E.D. Pa. 1998). Although a former employee may have the right to receive a bonus, an employer may withhold or refuse to pay a bonus to an employee who has acted in a manner that is disloyal to the ex-employer. See Kassab v. Ragnar Benson, Inc., 254 F. Supp. 830 (W.D. Pa. 1966); Redick v. Kraft, Inc., 745 F.Supp. 296 (E.D. Pa. 1990).
6. Repayments/Return of Property
  
  In News Printing Co. v. Roundy, 409 Pa. Super. 60, 597 A.2d 662 (1991), a jury awarded an employer the amount of a loan that the employer had advanced to a terminated employee to finance the purchase of a residence. The employee had failed to repay the loan before termination. Where an employer advances funds to an employee who breaches a duty to the employer, the employer's ability to recover the advances may depend on whether the employee had breached a duty when the advance was made. Thus, in SHV Coal, Inc., v. Continental Grain, Co., 376 Pa. Super. 241, 545 A.2d 917 (1988), reversed in part on other grounds, 526 Pa. 489, 587 A.2d 702 (1991), an employer was unable to recover real estate closing costs advanced to an employee because the employee had not yet committed a disloyal act at the time of the closing.
7. Damages
  
  See Fort Washington Resources, Inc. v. Tannen, 901 F.Supp. 932 (E.D. Pa. 1995) (upholding the right to recover damages for negligence by an ex-employee).
Cooperation After Termination/Retirement
1. Employee cooperation (e.g., assistance on project)/p>
2. Employer cooperation (e.g., use of space)
CONSENTS / SAVINGS CLAUSES
1. Consent to Investigation / Testing / Search of Personal Property
  
  See, e.g., Kerns v. Chalfont-New Britain Township Joint Sewage Authority, 263 F.3d 61 (3d Cir. 2001).
2. Consent to Reference Upon Departure (With Covenant Not to Sue per Disclosure)
  
  An employee's consent to an evaluation or reference will provide the employer with a defense against a claim for defamation. See Baker v. Lafayette College, 350 Pa. Super. 68, 504 A.2d 247 (1986), affirmed, 516 Pa. 291, 532 A.2d 399 (1987).
3. Non-waiver Clause
DISPUTE RESOLUTION
1. Arbitration
  
  The subject of arbitration clauses in employment contracts is too broad to cover in this chapter. The courts will uphold an employee's agreement to be bound by a mandatory arbitration clause. Blair v. Scott Specialty Gases, 283 F.3d 595 (3d Cir. 2002). The courts will excise the portions of an arbitration agreement that impose fees for the arbitration on the employee notwithstanding the employee's ability to recover statutory attorney's fees in discrimination claims, but the courts will not invalidate the entire arbitration agreement. Spinetti v. Service Corporation International, 240 F.Supp.2d 350 (W.D. Pa. 2001), affirmed, ___F.3d____, PICS No. 03-0432 (3d Cir. March 31, 2003).
2. Forum Selection
  
  Courts will typically uphold a clause establishing a forum unless it is clearly unjust, or the product of fraud or coercion. This issue most often arises in restrictive covenant cases. See BABN Technologies Corp. v. Bruno, 25 F. Supp.2d 593 (E.D. Pa. 1998); Behavioral Health Industry News, Inc. v. Lutz, 24 F. Supp.2d 401 (M.D. Pa. 1998) (both upholding forum selection clauses); Compare Dentsply International, Inc. v. Benton, 965 F. Supp. 574 (M.D. Pa. 1997) and Fabian v. Steve Brady, Inc., 49 Pa. D. & C.4th 242 (Lehigh Co. 2000) (both invalidating selection of remote jurisdictions for enforcement of restrictive covenant).
MISCELLANEOUS
1. Choice of Law
  
  The court will generally honor the parties' choice of law clause. See, e.g., Tucci v. Kelso, 2002 WL 31261054 (E.D. Pa.)
2. Notice Clauses
  1. Means of notice
  2. Address of notice
  3. Effective date and time of service
  4. Rules of Interpretation
  5. Incorporation of Other Documents
    See, e.g., Girard Medical Center, 128 B.R. 938 (Bankr. E.D. Pa. 1991) (incorporating bylaws).
3. Integration Clause
  
  An integration clause, providing that the contract is the parties' entire understanding and supersedes all prior understandings, will insulate the parties against exposure for liability under earlier contracts (McGuire v. Schneider, Inc., 368 Pa. Super. 344, 534 A.2d 115 (1987), affirmed, 519 Pa. 439, 548 A.2d 1223 (1988)); outstanding oral agreements on the same subject matter (Harrison v. Fred S. James, Inc., 558 F. Supp. 438, (E.D. Pa. 1983), but see Pilallis v. ElectronicData Systems Corporation, 1998 WL 211740 (E.D. Pa.) (written contract does not supersede oral understanding on commissions)); and claims for promissory estoppel (Rho v. Vanguard Ob/Gyn Associates, P.C., 1999 WL 228993 (E.D. Pa.).
4. Amendments
  
  Most agreements provide that all amendments must be in writing and signed by the parties. Any provision for unilateral amendment should be set forth explicitly, particularly if the unilateral amendment is to take place after one party acquires vested rights in the subject matter of the contract. See, e.g., Abbott v. Schnader, Harrison, Segal & Lewis, 805 A.2d 547 (Pa. Super. 2002) (prohibiting unilateral amendment of pension plans).
5. No Oral Representations
6. Assignment Clause
  It is essential that the contract bind and benefit successors and assigns, particularly for any enforcement of employees' compensation claims or employers' claims for breach of restrictive covenants. See Hess v. Gebhard & Co., 570 Pa. 148, 808 A.2d 912 (2002); All-Pak, Inc. v. Johnston, 694 A.2d 347 (Pa. Super. 1997).
7. Severability
8. Execution

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