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Pennsylvania Legislature Joins the Trend to Limit Restrictive Covenants

Posted: December 21, 2017

On November 27, 2017, Pennsylvania became the next state to join the national trend to limit the use of restrictive covenants when a bill was introduced in the Pennsylvania House that would ban non-competition covenants in employment agreements. PA House Bill 1938, titled the “Freedom to Work Act,” would prohibit non-competes as “illegal, unenforceable and void as a matter of law.” Non-compete provisions exempt from the ban would include (1) non-competes that are reasonable and involve an owner of a business that sells the business or sells the goodwill in the business and that is reasonable, (2) non-competes involving a dissolution or disassociation of a partnership or a limited liability company, and (3) non-competes that are reasonable and are in effect prior to the law’s effective date.

The proposed bill cites interests in both Commonwealth businesses and workers as policy reasons for the legislation. In terms of businesses, the act notes the Commonwealth has a strong interest in protecting businesses to allow them to hire the employees they wish, promoting innovation, entrepreneurship, and business opportunities to attract the best workers for open positions, and promoting business’s abilities to pursue the best candidates. Regarding workers, the proposed bill states the Commonwealth has a strong interest in lowering the unemployment rate, providing employees with opportunities to make a living wage, and allowing highly-skilled workers to increase their income potential. Looking to the future, the bill also cites the Commonwealth’s interest in attracting “major multinational high-tech companies” to the state that would invest “billions of dollars and hire tens of thousands of employees in high-paying jobs.”

While the bill still has a way to go before being passed, in recent years there has been a national trend of limiting non-compete agreements. States such as Hawaii, New Mexico, Oregon, Massachusetts, and Utah have limited the scope of agreements, and California, Oklahoma, and North Dakota have made non-compete agreement generally void and unenforceable.

The impact of this bill, if passed, will be felt by employers. While employers would be able to freely hire employees without fear of impending litigation based on an employee’s potential non-compete agreement with a former employer, they would not be able to enforce non-compete agreements with their employees, which could lead to the potential spread of employers’ confidential information and trade secrets across industries. Under the current draft of the bill, existing “reasonable” agreements would be enforceable at the time of the law’s effective date.

Regardless of the outcome of the passage of the bill, the trend towards banning non-compete agreements should be on the radar of employers across the state of Pennsylvania. New Jersey introduced similar limiting legislation in November of 2017, as well. We wrote about that bill here.