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Non-Compete Agreements for Temporary Employees

Using non-compete agreements for temporary employees has a controversial history with more issues being raised. The business of staffing agencies is to recruit talented employees to perform duties for business clients. As a result, they have a vested interest in maintaining a database of workers to fill needed positions. Conflicts with competitors may threaten those interests and some staffing agencies answer the problems with a non-compete agreement.

In some circumstances, a non-compete agreement has clauses pertaining to other staffing agencies. The agreement might prevent an employee from completing an assignment at a company for one agency and returning through a different agency.

Additionally, the challenge for staffing companies is also striking a delicate balance between the interests of business clients and employees who fill assignments. Concerning business clients, employers have a vested interest in protecting confidential information. They are concerned with preserving customer relationships and institutional knowledge.

On the other hand, staffing companies also want to maintain key talent for client demand. Temporary employees want work mobility and the freedom to be compensated for their in-demand skills.

Since business clients and employees have differing interests to protect, non-compete agreements may come in a variety of formats. In its basic form, a non-compete agreement might restrict employees from working with a direct competitor for a specified period. Other restrictive covenants included in some agreements might: • Protect intellectual property rights • Prevent solicitation of customers and/or colleagues • Guard the confidentiality of trade secrets State Laws Differ on Enforcement

Another layer to non-compete agreements for temporary employees is the differences among state law enforcement. All states require reasonable terms and restrict provisions to protect legitimate business interests. Furthermore, state laws vary on what courts can do regarding an unenforceable, overly restrictive provision.

There are courts that simply strike unenforceable language while leaving the agreement intact. Other courts may decide to rewrite invalid language or substitute provisions. The worst case scenario for employers is when the court rules that the entire non-compete agreement is invalid.

Generally, most states protect employee interests since an overreaching agreement can become burdensome. In states such as Oklahoma, North Dakota, Colorado and California, non-competes are either prohibited or have limited restrictions. For example, a sale or dissolution of a business voids the agreement.

States such as Alabama allow non-competes that have appropriate limitations on time and scope. However, certain classes of employees are protected: attorneys and doctors.

Protectable Business Interests

It is common for courts to enforce non-compete agreements that protect an employer's reasonable competitive business interests. How this is interpreted for staffing agencies may differ on some levels. When an employer can demonstrate that enforcing the covenant is necessary, under reasonable circumstances, temporary employees must honor the agreement.

The burden is usually on the employer to show that an employee is restrained because they have access to confidential information. Additionally, an employee who has influence that affects an employer's goodwill with customers may compromise competitive business interests.

Traditionally, a temporary staffing company could not enforce a non-compete after losing a contract with an employer. While temps may have access to confidential customer information, they usually do not know company secrets. The same employees may have access to decision-makers and still not have influence over how business is conducted.

Staffing agencies must also beware of using non-competes simply to corral employees. Keeping employee talents from competitors is a universally rejected practice for sufficient interest. In these cases, employers are obligated to persuade the court that their motivation is not to hold employees.

Competition is open to every employer for attracting and retaining employees. Non-compete agreements limit competition and restrain trade. Therefore, employer interests must extend beyond competition.

Disintermediation Interests

Using the courts to adjudicate conflicts with non-competes is helpful in some situations. In other situations, a ruling could introduce more problems than it solves. In Consultants & Designers, Inc. v. Butler Serv. Group, Inc., the court deviated and ruled that the staffing industry could claim new protectable interests. Essentially, the court gave staffing agencies the right to claim “property interests” in employees stating that some type of contractual constraint is necessary.

Viewing staffing companies as the middleman, the court referred to a term commonly used in supply chain issues to justify the ruling. The only justification was to prevent cutting out the middleman since the primary function of staffing agencies is to find suitable workers for clients.

This decision has been rejected by industry trade groups. The American Staffing Association updated its Code of Ethics roundly rejecting the notion that staffing agencies have a right to restrain employees. When one agency loses a contract with an employer, the incoming agency should have a right to retain those temps without restrictions.

A non-compete in this circumstance serves no other purpose than to keep temps from working for competitors. As a result, competition becomes lopsided since one staffing agency's position is strengthened by keeping talented employees from competing agencies.

The question becomes how to craft non-competes that are equitable for temps and “reasonably necessary” to protect the interests of staffing agencies. With dominant trade groups disagreeing with the court's decision, what is the recourse for agencies? In fact, the ASA recommends that its members allow temporary employees to apply to an incoming staffing agency. According to their Code of Ethics, entities with equal negotiating power should negotiate the terms and conditions concerning transferring accounts.

Can Employees Become Commodities?

Another case followed Consultants v. Butler that classified temporary employees as the “commodity” of staffing agencies. The foundational premise for both cases is that staffing agencies have a “property interest” in temporary employees.

However, such language raises issues that conflict with constitutional rights of freedom. The Thirteenth Amendment not only abolished slavery, but it also established a free and voluntary labor system in the United States. A ruling by a court that fails to separate business interests from human ownership does not change this precedent.

In fact, employees have a right to change employers when working conditions are oppressive. Other non-compete agreement cases that do not involve staffing agencies acknowledge that employers hold no property interest in employees. On the contrary, the law uniformly declares that employees own their skills.

Employees' Property Rights

Rarely does one law or court ruling solve all problems and answer all questions. Since employees essentially own property rights to the information about their skills, a non-compete may conflict in additional ways. Some employers – including staffing agencies – might use the law to declare property rights for knowledge and skills employees acquire during employment.

This does not justify non-compete agreements. However, Consultants changes long-standing principles and gives staffing agencies the right to keep temporary employees because of the knowledge and skills they gained in previous employment. Typically, this information is attained when an employee completes an application.

When a recruiter leaves a staffing agency, he or she is not allowed to take employee data to market those employees to other clients. However, it is in the employee's interest to retain power over their skills to market themselves to potential employers. This is especially true when the employee honed specific skills before working for the staffing agency.

Furthermore, confidentiality does not trump a temporary employee's rights to their skills. While certain information was confidential at some point, this does not justify restraining temps after the agency loses a contract. Basically, the information stops being confidential once temps began working for the client. Their skills and knowledge was revealed to the client. Courts consistently refuse to enforce non-compete agreements for such confidentiality claims.

Transition Provisions: A Better Solution

Granted, the court's ruling was focused on protecting the business interests of staffing agencies, there are other avenues besides restraining employees. Perhaps a better solution to resolving the issue of non-compete agreements for temporary employees is to include transition provisions.

Enforcement of an agreement must be reasonably necessary to protect the staffing agency's interests. To avoid the danger of disintermediation, staffing agencies can develop a transition provision with its business clients. This approach follows recommendations in the ASA Code of Ethics.

Essentially, staffing agencies can include conversion fees in contracts for protection. Whenever temporary employees are hired from the agency – either by the client or another agency – the incoming party must pay a fee. A problem for staffing agencies that use this approach is the risk of losing a client. Some will roundly reject negotiating a transition fee and hire a competitor that does not require a fee.

Conclusion

Finally, consideration is warranted for laws that protect the interests of both employers and employees. Staffing agencies will continue to face challenges as more businesses rely on temporary employees for long-term contracts. Some agreements are restrictive or use overly broad language. State laws governing the non-compete could complicate matters further. Hiring employees already under a non-compete agreement could prove more problematic than it is worth.

Should staffing agencies consider other alternatives to protecting their business interests? When a temporary employee proves to be a significant asset, consulting with state law and legal professionals can help agencies develop the best solution.