Implications of No-Hire Provisions for Business Owners
How a Pennsylvania Supreme Court Case Could Change Your Hiring Process
Questions of the enforceability and the implications of a contractual clause known as a “no-hire provision” were recently resolved by the Pennsylvania Supreme Court. In PLS Logistics Services (PLS) vs. Beemac Trucking, the Court had to decide whether two companies could restrict the rights of employees between one another through the use of a “no-hire provision.” These terms restricted one company (Beemac) from hiring former employees of another company (PLS) without prior approval or compensation.
The Background You Need to Know
The case revolved around Beemac Trucking hiring four former PLS employees, in violation of their no-hire agreement with PLS. PLS argued that no-hire provisions were essential in protecting their investment of training employees and preventing the poaching of their staff. These clauses were between the two corporations themselves, not the employees. The Pennsylvania Supreme Court ultimately took this detail into consideration when ruling that the specific no-hire provision in question was unenforceable and had the potential to cause harm to the employees involved. As a result, the Court struck down the use of no-hire provisions in contracts between companies doing business together.
Alternative Options for Employers
If a business was looking for an enforceable alternative to the recently struck down no-hire provision, a non-solicitation agreement would be one to consider. While a non-solicitation agreement is not completely identical to a no-hire clause, it can be used to achieve similar outcomes because they are written between employers and their employees. A non-solicitation provision typically has two parts. First it restricts a former employee from soliciting current employees to leave their current employment to join the ranks of another company. Second, it restricts a former employee from soliciting the customers of his or her former employer to move their business to another provider. It is the former that is more akin to a no-hire clause because it limits the people who are permitted to approach employees with the intention of attempting to get them to leave. If you seek to use a non-solicitation provision, keep in mind that it must be reasonable in three specific areas.
The Three Elements of an Enforceable Non-Solicitation Provision
A non-solicitation provision cannot be a general statement – it must be limited and precise in three specific areas: geographic scope, time, and description.
A geographic scope restriction is based on the footprint of your business. If your business only has a footprint in Southwestern Pennsylvania, you can only reasonably restrict your employees’ solicitation efforts in Southwestern Pennsylvania. Often non-solicitation agreements will be limited to specific counties, states, or a radius from a business’s headquarters to abide by the geographic restriction.
In addition to a non-solicitation clause being reasonable in geography, it must also be reasonable in time. Simply put, you cannot restrict someone from soliciting your employees forever, there has to be a limit. In Pennsylvania, the most commonly accepted reasonable restriction is 24 months, but if it is a highly competitive or specialized job, then you can extend that restriction to as long as five years.
The final element of a successful and enforceable non–solicitation provision is the description. As an employer, you must be clear and precise about who your employees are forbidden from soliciting.
The Impact on Business Owners
The PLS vs. Beemac Trucking case holds particular relevance for business owners who may want to include restrictions in their contracts between themselves and a customer or vendor to protect their investment of time and money in their staff. While the case made those specific kinds of covenants invalid, non-solicitation agreements between employers and employees can achieve similar results and are widely accepted.
There are other ways to protect business interests that do not involve the use of restrictive covenants. Building strong relationships with employees, providing competitive compensation and benefits, fostering a positive work environment, and offering opportunities for growth and advancement may be just as effective in retaining talent and preventing employee departures through a restrictive covenant.
If a restrictive covenant like a non-solicitation provision is necessary, be sure to abide by the standards of reasonableness in terms of geography, time, and description.
Finding the right balance between protecting business interests and complying with current laws dealing with employee rights is crucial for business owners. While non-solicitation provisions can be a tool for safeguarding investments, the recent court ruling emphasizes the importance of avoiding overly restrictive provisions that hinder job opportunities for employees.
If you have concerns about the enforceability and potential consequences of the provisions in your customer contracts or non-solicitation clauses in your employee agreements, talk to a lawyer who practices employment law. The Lynch Law Group has an Employment Law Practice Group to assist you with navigating these complex legal matters and ensuring your customer contracts and employment agreements align with current legal standards. Contact Dan Lynch at 724-776-8000 to discuss.