GPSolo Magazine - September 2006
Labor and Employment Law
Square Pegs: Non-Compete Agreements for Temporary Employees
Use of non-compete agreements between staffing companies and their assigned employees is controversial and on the rise. Sometimes injunctions are sought against employees of an outgoing staffing firm who seek to join the incoming staffing firm. More often, the outgoing vendor sues the incoming vendor for tortious interference with the non-competes, squandering the competitor’s profits in defense of the claims.
The protectable interest. Generally, non-competes are enforceable only if they protect an “employer’s reasonable competitive business interests.” Courts commonly require a “showing that enforcement of a covenant is reasonably necessary” to the company’s business. Historically, the employer must demonstrate that the restrained employee either has access to confidential information or has contact with and influence over customer decision makers so as to be able to affect the employer’s customer goodwill.
Under traditional analysis, a temporary help company would have no hope of enforcing a non-compete against a contracted employee after it lost the contract. Though these employees may know the person who decides which vendor gets the contract, they have no sway over her or him. Notably, while temps may work with the customer’s confidential information, they seldom know the staffing company’s secrets, which are generally limited to its margin, or its database of prospective employees.
Employers may not use non-compete agreements to merely corral their employees. Keeping an employee’s talents from competitors is universally rejected as a sufficient interest to support a non-compete. Actually, the exact opposite is true: The employer must “persuade the court that the motivating reason for the covenant is not to establish a hold upon the employee.” All employers compete to attract and retain employees. Non-compete agreements, which limit this competition, are in restraint of trade. Thus, to be sustained as reasonable, the employer’s “interest [protected by a non-compete] must be something greater than mere competition, because prohibition of competition is in restraint of trade.”
The disintermediation “interest.” After centuries of non-compete litigation, an aberration occurred in Consultants & Designers, Inc. v. Butler Serv. Group, Inc., 720 F.2d 1553 (11th Cir. 1983). Completely without citation to precedent, the court simply invented a new protectable interest for the staffing industry, based upon the astonishing premise that a corporation has a “property interest in its” employees. Volt Services Group v. Adecco Employment Serv., Inc., 35 P.3d 329 (Or. Ct. App. 2001) followed Consultants, holding that temporary employees were the “commodity” of the employer. Consultants states that “some form of contractual constraint” is necessary to protect the staffing company’s “role as . . . the much maligned but time-honored middleman,” whose function is to “gather . . . and to provide information on available and suitable people for” the customer. The alleged and admittedly “only possible” justification for a covenant restraining temps is to prevent a customer from cutting out the middleman, a process known as “disintermediation.”
Reversing a half-millennium of precedent, Consultants and Volt enforce non-competes that protect no interest except to keep employees from the plaintiff’s competitors. Which company would not improve its competitive posture if it could prevent talented employees from taking positions with competitors? The decision’s foundational premise that staffing companies need protection from the loss of employees to incoming firms has been rejected by the dominant trade group in the staffing industry. The American Staffing Association (ASA) has published a Code of Ethics that says when another company has obtained the contract to provide staff, the temporary employees should be given “the choice of . . . applying to stay on their current assignment with the new staffing firm” or serving other customers of the outgoing firm.
Contrary to the assumption inherent in Consultants that staffing firms need protection from disintermediation, the ASA has decreed that allowing temps to migrate from outgoing firms to incoming firms is “in the best interests of the staffing industry.” How can non-compete agreements for temps be “reasonably necessary” to protect staffing companies when the dominant trade group states that the temporary employees of its members must be allowed to apply to incoming firms as a matter of ethics? The ASA Code of Ethics recommends that this issue be addressed in negotiations between the corporate entities with equal bargaining power: “ASA members are encouraged, whenever feasible, to specifically address the terms and conditions relating to the transfer of accounts in written agreements with their customers” (emphasis added).
Human beings as “commodities.” Foundational to both Consultants and Volt is the premise that the employer has a “property interest” in the employee. Volt goes so far as to say that temps are the “commodity” of the staffing firm. Discussing the Thirteenth Amendment, the Supreme Court in Pollock v. Williams stated: “The undoubted aim of the Thirteenth Amendment . . . was not merely to end slavery but to maintain a system of completely free and voluntary labor throughout the United States. . . . [I]n general the defense against oppressive hours, pay, working conditions, or treatment is the right to change employers.” Other non-compete cases and commentators recognize that an employer has no property interest in a worker. On the contrary, the law is uniform that the employee “owns” his or her skills.
Employees’ “property” rights to information about themselves. Knowledge and skills gained during employment do not justify non-competes. Consultants does more violence to long-standing principles of non-compete law than is immediately apparent. Consultants actually grants staffing companies the right to restrain employees because of “knowledge, skill or facility” gained in past employment, which the employee reports to the staffing company in the application process. Even conceding that a staffing company can keep data about its bank of prospects from being used by recruiters who leave, do not employees have a superior interest to use information about their own skills to market themselves, especially when those skills were honed before the employees were hired by the staffing company? And, especially after the outgoing firm has lost the contract anyway?
Moreover, while information about the employee may have been “confidential” at some point, confidentiality is no justification to restrain employees after the contract is lost. Information is no longer confidential to the staffing company once the employee began performing in the customers’ environment, and the employee’s skills and talents became known to the customer and other staffing firms on site. Outside the staffing industry, courts scrutinize claims of confidentiality and consistently refused to enforce non-competes when the information is not confidential at all.
A better solution: Transition provisions in contracts with the customer. Apparently without recognizing the import of its words, Consultants notes that enforcement of a non-compete is not the only way or even the best way to protect staffing companies. Yet, generally, enforcement of a covenant must be “reasonably necessary” to protect the employer’s interests. The “other way” to avoid the proclaimed danger of “disintermediation” conceded by the court in Consultants is the method recommended by the ASA Code of Ethics as quoted above: “ASA members are encouraged, whenever feasible, to specifically address the terms and conditions relating to the transfer of accounts in written agreements with their customers” (emphasis added). Indeed, case law supports “conversion fees” where the temporary employee is hired away from the staffing firm. The primary problem for staffing companies is that by seeking to negotiate a transition fee, some customers will reject their proposal in favor of companies that do not require transition arrangements. Other customers will negotiate transition provisions that reasonably relate to the staffing company’s interests.
William E. Pilchak is a shareholder in the management labor and employment law firm of Pilchak Cohen & Tice, P.C., the Michigan affiliate of the WorklawNetwork. He can be reached at william. firstname.lastname@example.org.
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- This article is an abridged and edited version of one that originally appeared on page 199 of The Labor Lawyer, Fall 2005 (21:2).
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- Periodicals: The Labor Lawyer, journal, published three times per year; Labor and Employment Law, newsletter, published quarterly; substantive committee newsletters, published biannually.
- Books and other recent publications:
The Family and Medical Leave Act; Covenants Not to Compete: A State-by-State Survey, 4th ed. and 2005 Supp.; Developing Labor Law: The Board, the Courts, and the National Labor Relations Act, 4th ed. and 2005 Cum. Supp.; Employee Benefits Law, 2d ed. and 2005 Cum. Supp.; Fair Labor Standards Act, 2005 Supp.; How to Take a Case Before the NLRB, 7th ed. and 2005 Cum. Supp.; International Labor and Employment Laws, vols. 1 and 2, 2d. ed. and 2005 Supp.; Labor Union Law and Regulation, 2005 Supp.; The Railway Labor Act, 2d. ed.; Wage and Hour Laws: A State-by-State Survey, 2005 Supp.