Thanks to a recent ruling by the Supreme Court of Pennsylvania, workers in the Commonwealth are now more likely to be considered “fair game” to other potential employers, even in the presence of an agreement otherwise between the current employer and the suitor. Those agreements, commonly referred to as “no poaching” agreements, now face more probing scrutiny in light of the Court’s decision in Pittsburgh Logistics Systems, Inc. v. Beemac Trucking, LLC (“PLS”). The decision is seen as a victory for employees (who have no say in, nor did they agree to, the “no poaching” arrangements), and will, in theory, increase competition for talent, and increase employee mobility. This decision also puts Pennsylvania among a growing number of states that are hostile to such arrangements and is in line with the United States Department of Justice and President Biden’s Campaign Platform on this issue.
This latest decision involved a third-party logistics provider, PLS, and a shipping company, Beemac Trucking. The companies did business under the terms of a contract, part of which required them to refrain from hiring the other’s employees during the term of the contract and for the two years following its termination.
While the contract was in effect, PLS hired four of Beemac’s employees, triggering litigation. After working its way through the lower courts, the case made its way to the Supreme Court of Pennsylvania. As an issue of first impression under PA law, the Court surveyed other jurisdictions’ takes on the matter, addressed the parties’ arguments, then identified several reasons why this specific “no poaching” agreement was unenforceable. The analysis provides a useful roadmap for employers who wish to prevent businesses with which they contract from hiring their employees as much as is reasonably possible.
As a threshold matter, restrictive covenants that are not ancillary to an otherwise valid contract are typically void against public policy. Indeed, such a contract—referred to as a “naked no-poaching” agreement—is per se illegal under federal antitrust law and could lead to criminal prosecution.
If the restriction is ancillary to a valid contract, courts will apply a balancing test to determine the reasonableness of the restraint. This involves analysis of several factors, including: (1) the parties’ interests that the restraint aims to protect; (2) the harm to other contractual parties and the public; (3) the reasonableness of the restraint’s geographical scope; (4) the restraint’s duration of time; and (5) whether the restraint is greater than is needed to protect the party’s legitimate interest.
The agreement in PLS failed this test for several reasons. First, the agreement was greater than needed to protect PLS’s interest because it prohibited Beemac (and any affiliated entities) from hiring any PLS employees, even if they hadn’t worked with Beemac in the past. Employers should take care to include a provision in any such agreement that narrows the category of “off limits” employees to those that have some connection to the other party. The Court also noted that the “no poaching” agreement created a likelihood of harm to the public because it impaired employment opportunities for PLS employees, who had no say in the arrangement, without providing them with anything of value in return. Unfortunately, the Court did not identify how much value (i.e. consideration) would have been appropriate to avoid this result. Lastly, the Court noted that the no-hire provision undermined free competition in the labor market in the shipping and logistics industry, which is likely to harm the public.
The PLS decision highlights several other important issues for employers to consider when drafting such provisions. Similar to a restrictive covenant with an individual employee, a “no poaching” provision should identify the specific interests it aims to protect, such as specific trade secrets or employees with specialized training. Along those lines, the more employees subject to a “no poaching” provision, the less likely a court will be to enforce the agreement. Thus, the provision should identify specific categories of employees subject to the provision, such as those with knowledge of trade secret information, or those employees that the employer has invested significant time, resources, and knowledge into training. Generally speaking, the less sophisticated the employee, the less likely it is that the restraint will be deemed reasonable, but a good rule of thumb for these provisions is that they should be drawn as narrowly as necessary to protect a legitimate business interest.
As this is an evolving area of the law, especially in Pennsylvania, employers would be wise to consult with an attorney before entering into a “no poaching” arrangement. There are several pitfalls to be wary of, and there may be other means of accomplishing the same goal in any event. We will of course continue to provide updates as they break. Until then: Happy Hunting!