7 August 2020
No-hire clauses in commercial agreements: approach with caution
When entering into commercial agreements, parties will seek to provide safeguards against the poaching by one party of the other’s business or employees. Such safeguards such as non-solicitation and non-competition clauses are clearly delimited in their reach and enforceability by the courts. However, no hire clauses (i.e. provisions which specifically forbid the hiring by a party of the other’s employees) have yet to be subjected to similar scrutiny. It may be tempting to use no hire clauses instead of non-solicits as proving that a party has hired the other’s employee is easier than solicitation itself but given the fact that their enforceability remains an open question, parties should use great caution when including them in commercial agreements.
As a sign that such caution is warranted, a recently enacted regulation limits no-hire restrictions in agreements between staffing agencies and their clients to a maximum duration of 6 months. Additionally, a recent and often-referenced case in Pennsylvania ruled a no-hire clause a commercial agreement to be unenforceable. The court concluded that it restricts an employee’s right to seek employment, a fundamental right which an agreement cannot affect when the employee is a third party.
These examples have no bearing on standard commercial agreements concluded in Quebec. They do however provide clues as to the enforceability of no-hire clauses which, if not properly tempered as suggested below could be ruled to be against public order or unenforceable under the Charter, the Civil Code of Quebec or other legislation. Like other restrictive covenants in agreements, if a no-hire restriction were to pass scrutiny, it would likely be because it was judiciously crafted to ensure that it is reasonably protecting a legitimate business interest.
The following points should therefore be considered when drafting a no-hire clause:
- the clause should not be used as a stand-alone clause which the courts would be more reluctant to enforce
- it should primarily serve to facilitate the enforcement of a non-solicitation provision by removing the need to meet the heavy burden of proving active and insistent solicitation;
- the clause’s purpose can be directly linked to a legitimate business interest of the benefiting party by considering:
- which employees the no-hire provision would apply to;
- whether the no-hire provision would apply to employees who are no longer employed;
- if the provision survives for a reasonable duration, is contained within a non-solicitation clause and limited to the same duration or less; and
- if exclusions applicable to the non-solicitation clause (general solicitation, employees terminated without cause, etc.) also apply to the no-hire clause.
Key takeaways for the business community:
- Given a no-hire clause’s use as a deterrent, consider adding the clause to your commercial agreement so long as it has been drafted along these guidelines and that you are fully aware of the consequences of it being challenged in court.
- No-hire clauses in the context of M&A transactions or employment agreements with senior executives are more likely to be upheld if contested as it can be argued that they serve to protect legitimate business interests.
- If you plan on including a no-hire clause in your agreement, consider tying in liquidated damages with the clause in case of its breach. A court may enforce the no-hire clause and conclude in its breach but would likely be reluctant to order the employee’s employment to be terminated after being hired by the contravening party.