Countless companies contract with other companies to provide services and include a “no hire” provision (pursuant to which the parties to the contract agree to not hire employees of the contracting company) in the service contract. The goal of these provisions is to prevent the contractual business partner from raiding the other’s talent—at least not without paying a fee.
In what the Court acknowledged was the first test of this issue in Pennsylvania, earlier this month the Superior Court invalidated a “no hire” agreement between companies—even though they were not competitors. The Court reasoned that companies may enter into agreements barring solicitation of customers, but they cannot agree to “no hire” provisions. Non-compete agreements between employer and employee are still valid, but not via company-to-company “no hire” clauses.
In Pittsburgh Logistics Sys., Inc. v. BeeMac Trucking, LLC, 2019 WL 168477 (Pa. Super. Ct. En Banc, Jan. 11, 2019), a divided Superior Court, en banc, struck down a “no hire” provision in an agreement between Pittsburgh Logistics and BeeMac Trucking.
Pittsburgh Logistics is in the business of picking up product from any number of non-exclusive sources, figuring out the best trucking company to ship the product, and then finding the shipper. Before it selected BeeMac for one of its projects, it executed a Motor Carriage Services Contract, which contained both “no hire” and non-solicitation of customers covenants. When BeeMac hired Pittsburgh Logistics’ employees, litigation and an injunction proceeding commenced.
The trial court enforced the non-solicitation of business provision but concluded that the “no hire” agreement was void on public policy grounds because the two companies imposed a non-compete on the employees without the employees’ consent and without required additional consideration to the employees.
The Superior Court, in both its panel and en banc decisions, affirmed. The Court adopted the reasoning of other jurisdictions and affirmed that company-to-company contracts cannot create “no hire” obligations on the employees. The Court further held that any legitimate goal of preventing unfair competition could be solved through enforceable non-solicitation agreements.
Judges Bowes and Murray dissented and would have allowed the Plaintiff to enforce its contract in its entirety. The dissent argued that contracts between sophisticated parties are presumably enforceable, “no hire” agreements do not violate a clear mandate of public policy, and a “no hire” clause is not the same thing as a non-compete agreement. Whether this will lead to an appeal to the Supreme Court has yet to be seen.
This decision has a number of critical and immediate implications for employers:
- Unless the decision is reversed by the Supreme Court, service contract “no hire” agreements are no longer valid.
- Employers who want to have valid post-employment covenants need to secure legally binding non-compete and non-solicitation agreements with their employees (the validity of which are not impacted by the Court’s decision) and not rely on business-to-business service contracts.
- Service contracts should include non-solicitation of business covenants so as to avoid anticompetition challenges should employees change employers.
- Because of the risk that a “business partner” can hire away its employees, employers should scrutinize operations and staffing to ensure that employees do not get too close to or comfortable with other companies under a supplier agreement.
- This case does not resolve whether a Pennsylvania company can enforce their contracts in another state, particularly where “no hire” provisions are still enforceable.
- Looking ahead, this case may carry over to joint-employer and employee leasing cases.
Bottom line: if you rely on “new hire” agreements in service contracts, now is a time to review those contracts, your employment contracts, and your employment policies.