This year, the Pennsylvania Supreme Court made a ruling that will likely upend no-hire provisions in the state. Companies that currently utilize a no-hire strategy will need to find other solutions to accomplish the same end, or risk running afoul of the law.
Smart Business spoke with Michael J. Torchia at Semanoff Ormsby Greenberg & Torchia, LLC, about no-hire clauses, the ruling, and alternate strategies to achieve similar ends.
What is a no-hire clause and what are some of its benefits?
It is common for a contract between two companies to contain a “no hire” clause. This is a provision where one or both of the companies agree not to solicit and/or hire the employees of the other. There are business situations where these clauses are found, for example, when a company:
- Leases its employees to another company such as a temporary provider or PEO (Professional Employer Organization)
- Permanently assigns its employees to another company, such as a company that handles marketing or promotions and its employees are hired specifically to work on a project for their client, the other company.
- Professional services companies (such as attorneys, accountants, consultants) that provide embedded employees to their clients for a project or some length of time.
- Temporarily assigns employees to work on a project, such as an IT or Human Resources company that serves as outside consultants for their clients.
The benefit of these “no hire” (sometimes referred to as “no poaching”) provisions is obvious — the referring company can assign employees to the other without fear of losing the employees they have trained, and they can hire them out again and again. Worse yet, without these clauses, the employee who leaves to join a customer does so without the referring company getting anything in return.
What did the Pennsylvania Supreme Court recently decide?
In April, 2021, the Pennsylvania Supreme Court in Pittsburgh Logistics Sys., Inc. v. Beemac Trucking, LLC affirmed a Superior Court ruling holding that these no-hire clauses are now unenforceable under Pennsylvania law.
In a case of first impression, the Pennsylvania Supreme Court held that a “no-hire” provision between a logistics provider and a shipping company that prohibited the shipping company from hiring the provider’s employees during the contract and for two-year period following termination of contract, was unenforceable. The Court stated:
“We believe these types of no-hire contracts should be void against public policy because they essentially force a non-compete agreement on employees of companies without their consent, or even knowledge, in some cases. We believe 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.”
How might companies that utilize no-hire clauses achieve similar ends now that the laws have changed?
For a company seeking to protect its employees, the safest method would be to have a direct restrictive covenant agreement with the employee, providing the requisite consideration. Another way, although this has not been tested in the courts, is to have the agreement between the companies subject to the law of a state that will enforce the no-hire provision.
But the immediate task for employers is clear: review your current agreements and know whether or not your employees are protected from solicitation and hiring.
Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC
