May 26, 2021 In Business Law, Employment Law

Pennsylvania Supreme Court Rules that Contract Between Two Businesses Prohibiting One from Hiring Away Employees from the Other is Unenforceable as Against Public Policy

On April 29, 2021, the Pennsylvania Supreme Court unanimously held, in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC, 31 WAP 2019 (Pa. Apr. 29, 2021), that a “no-hire” provision in a contract between two businesses, which prohibited either company from hiring away employees from the other during the term of the contract and for two years thereafter, was unenforceable as against public policy.

In making its determination, the Court applied the “reasonableness test that applies to ancillary restraints on trade,” whereby the Court must determine whether the restriction is greater than is needed to protect legitimate business interests and whether that need is outweighed by the hardship to be suffered by the other party and the public.

In applying that test, the Court first determined that the no-hire provision was greater than needed to protect Pittsburgh Logistics Systems’ legitimate business interests.  The Court held that the provision was overly broad in scope because it was not limited to just those employees who worked with Beemac Trucking during the term of the contract.

Next, the Court held that the no-hire provision would likely harm the Beemac’s employees because it impaired their employment opportunities and job mobility.  In other words, the no-hire provision effectively imposed a non-compete on Beemac’s employees without their consent.

Lastly, the Court held that the no-hire provision harmed the general public by undermining free competition in the labor market in the industry, which often results in lower wages.

As a result of the Pennsylvania Supreme Court’s decision, Courts are likely to view “no hire” provisions negatively.  Although such provisions sometimes have a place in business transactions, they must be narrowly tailored.  Thus, a company should retain counsel who is experienced in drafting restrictive covenants to ensure that best change of enforceability.

Donoghue & Picker regularly handles business contract and employment law matters and is available to advise businesses regarding the propriety and enforceability of such “no hire” provisions and other restrictive covenants.

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