The Supreme Court of Pennsylvania decided a no-hire provision between competing businesses void as a matter of public policy and enforceable. The court reasoned that while there was a legitimate interest for the no-hire provision, the restraint was overly broad and harmful to the public on balance in this case.
The case concerned a preliminary injunction to enforce a no-hire provision. Through the no-hire provision, the defendant company agreed that during the one-year contract and for two years following its termination, it would not directly or indirectly hire, solicit for employment, induce, or attempt to induce any employees of the plaintiff or any of its affiliates to leave their employment for any reason.
The defendant hired four former employees while the contract was in force, causing the plaintiff to ask for a preliminary injunction. The trial court denied the preliminary injunction request. It found the no-hire provision was void as a matter of public policy; therefore, the plaintiff could not meet its burden to show a likelihood of success on the merits. An
The Pennsylvania Supreme Court acknowledged that Pennsylvania common law treated restrictive covenants as restraints of trade that are void against public policy unless they are ancillary to an otherwise valid contract. If the restraint is ancillary, the court employs a balancing test to determine if the provision is reasonable, using the Restatement of Contracts test to evaluate the reasonableness of the provision.
The Restatement balancing test says that a promise to refrain from competition that imposes a restraint that is ancillary to an otherwise valid transaction or relationship is unreasonably in restraint of trade if (1) the restraint is more significant than is needed to protect the promisee’s legitimate interest, or (2) the promisee’s need is outweighed by the hardship to the promisor and the likely injury to the public.
Applying the test, the court found that the no-hire provision was an unreasonable restraint on trade because two commercial businesses used the provision to limit competition in the labor market ancillary to the principal purposes of the shipping contract between them. The court recognized the plaintiff’s legitimate interest in preventing its business partner from poaching its employees. However, the no-hire provision was more significant than needed to protect its interest and created a probability of harm to the public. The provision was overbroad because it precluded the hiring, soliciting, or inducing employees for the one-year term plus an additional two years, regardless of whether the employee had worked with the defendant during the contract.
Under the Restatement, the court’s overbroad finding should have been enough to void the provision. Nevertheless, the court went on to find that the no-hire provision created a likelihood of harm to the public in specific and general ways.
First, the provision specifically impaired the employment opportunities and job mobility of the plaintiff’s employees not party to the contract without their knowledge or consent. This represented actual rather than hypothetical harm because the plaintiff sought the preliminary injunction to prevent the defendant from employing former plaintiff employees who had already taken a position with the defendant.
Second, the court found that the provision undermined free competition in the labor market, creating a likelihood of harm to the general public. The court’s analysis did not explicitly weigh the defendant’s hardship and the public harm against the plaintiff’s legitimate need except in a conclusory statement at the end of the opinion.
The opinion is notable because it is the first Pennsylvania state case to weigh in on the enforceability of a no-hire provision between two businesses. However, the true import of the decision will come only with time. Based on this decision, one could argue that any ancillary no-hire provision that impairs employment opportunity and mobility is unenforceable under Pennsylvania law. At the same time, the analysis used by the Pennsylvania Supreme Court indicates that every restraint on trade is subject to the balancing test under the Restatement. Therefore, the outcome is based on the facts of each case. One wonders if the legal outcome would have been different had the no-hire provision been effective only for the life of the service contract and only applied to PLS employees who worked directly with the defendant.
In addition, employers need to consider this decision in the context of what is happening at the state and federal levels on non-compete provisions. There is no question there is a legislative movement to limit restrictions on employability. Employers have to seriously consider alternative means to protect the value of their workforce.