Pennsylvania Appeals Court Rules That “No-Hire” Agreements are Unenforceable.
The Pennsylvania Superior Court recently ruled in Pittsburgh Logistics, Inc. v. BeeMacTrucking, LLC that “no-hire” agreements between contracting companies are void as a matter of public policy, and therefore unenforceable. This ruling is significant, and requires that companies to adopt new strategies to prevent their top employees from jumping ship. To explain what this all means and what we recommend you do about it, we’ll start at the top.
What is a “no-hire” agreement? No-hire provisions are ubiquitous features of many commercial contracts -- including contracts a company enters into with customers, vendors, suppliers, distributors, shippers,and the like -- which provide that, during the term of the agreement and often for one or two years thereafter, Company A cannot hire the employees of Company B.
It makes sense why they exist. Through the companies’ respective performance under the contract, they usually develop working relationships with the other company’s employees. In some cases, a company is provided access to valuable, non-public information about the other company’s employees. Thus, by virtue of the business relationship,Company A can easily (and some would say unfairly) identify Company B’s best, most qualified employees, and then utilize their insights about that employee to woo them to join Company A. Companies need to contract with other companies to operate, but they don’t want to risk losing key employees in the process. A no-hire provision solves this dilemma quite neatly.
…until recently, that is.
The court ruling: The Pennsylvania Superior Court in Pittsburgh Logistics acknowledged that no-hire provisions have previously been enforced by various Pennsylvania trial courts. But it also made clear that there is no definitive Pennsylvania case law squarely addressing the enforceability of these provisions. The court issued Pennsylvania’s first binding ruling on this issue and found that no-hire provisions between contracting parties are void as a matter of public policy, and therefore unenforceable.
Citing case law from other jurisdictions, the Court reasoned that “we do not think that an employee’s individual right and freedom to contract may be traded away by a third person…[i]t is one thing for an employee voluntarily to surrender his known rights; it is vastly different when an employee is placed under servitude by a contract to which he is not a party and about which he may know nothing.”
Alternative strategies: The Court in Pittsburgh Logistics explained that if an “employer wishes to limit its employees from future competition, this matter should be addressed directly between the employer and the employee, not between competing businesses.”
Accordingly, going forward employers seeking to prevent their employees from leaving to work for another company must enter into an appropriate agreement directly with its employees, and can no longer rely on a no-hire provision included in its contracts with other parties. This is not as straightforward as it sounds. A contract which limits an employee's ability to work for other companies (called a“restrictive covenant”) will also be deemed unenforceable unless it is supported by “adequate consideration” and is “reasonably necessary to protect the employer’s legitimate business interests.” To understand what this means, and to learn more about factors courts use to determine enforceability of restrictive covenants generally, check out our primer on the topic here.