A recent decision from a North Carolina Court of Appeals could affect the enforceability of employment agreements between staffing companies and temporary employees.  In Phelps Staffing, LLC v. C. T. Phelps, Inc., 740 S.E.2d 923 (N.C. Ct. App. Apr. 16, 2013), the court found a staffing company’s non-compete agreement was unenforceable because (1) its customer restriction was not limited to the exact location where its temporary workers were placed, and (2) it applied to temporary employees who were terminated “for any reason whatsoever,” irrespective of whether the company decided to no longer provide staffing to a given client and terminated employment on that basis.

The Case

Phelps Staffing, LLC (Phelps) and C.T. Phelps, Inc. (CTP) were both staffing firms.  CTP began competing for Phelps’ clients and was successful in convincing several of them to use CTP to fulfill their temporary labor needs.  To make the transition to CTP more seamless for its new clients, CTP began recruiting the temporary workers that Phelps had placed with the clients and allowed them to keep the same or similar positions; or, as Phelps referred to the practice, CTP was “flipping” its temporary employees. 

To combat the “flipping,” Phelps began to require its new temporary employees to sign non-compete agreements prohibiting them from leaving its employment to work directly for one of its clients as an employee of the client and from indirectly working for its clients through another temporary staffing firm.  The noncompetition period was twelve months from the voluntary or involuntary termination of the employee’s termination from Phelps “for any reason whatsoever.”

Phelps alleged CTP not only continued to convert more of Phelps’ placements to switch employment, but for one client, Hoover Treated Wood Products (Hoover), the employment applications for CTP were altered to appear as though the temporary workers switched employers a week earlier.  Phelps alleged this was done to allow CTP to bill the client for a week of staffing service for employees actually placed by Phelps.

Phelps sued CTP for tortious interference with contract and the former employees with breach of contract.  But the trial court granted summary judgment to the defendants, finding the non-compete agreement to be legally unenforceable.  On appeal, the North Carolina Court of Appeals affirmed the trial court’s decision that the agreement was unenforceable.  The court’s reasoning should give pause to staffing service companies who have their temporary employees sign similar noncompetition agreements. 

The Decision

First, the court took aim at the scope of the protection.  Phelps argued its non-compete agreement was reasonable because it did not prevent its former employees from working for its clients, but only that client where the employee was placed by Phelps for temporary work.  Phelps further argued the non-compete agreement was, in fact, limited only to prohibiting former employees from working at the specific location where it had been placed by Phelps.  But the court disagreed with this characterization, finding its scope was not limited to the specific location where the employee had been placed. Surprisingly, the court seemed to base its decision on the agreement not being so narrowly restricted:

Thus, a former employee would not be prohibited from working for a client, such as Hoover, whether the client had a second location in the same city or different state.

This decision makes little sense in the larger context of North Carolina decisions regarding employee non-compete agreements, which have been held enforceable despite non-solicitation restrictions simply prohibiting contact with a client and not limited to the single location the employee may have serviced.  For the appellate court to apparently base its decision on the fact that the Phelps agreement was not limited to prohibiting its temporary workers from “flipping” to employment with a new staffing company at the very same location is somewhat startling, and perhaps a reason for North Carolina staffing companies to give their temporary employees’ noncompetition agreements a second look.

Notably, this was not the court’s only reasoning for affirming the trial court.  But its second reason was similarly surprising.  The court noted that the agreement provides that its terms apply after the termination of the employee “for any reason whatsoever,” and noted:

[I]f Phelps Staffing were to decide to no longer provide staffing to a client and terminated its contract with a client, plaintiff’s noncompetition agreement would prevent the former employees from accepting employment from plaintiff’s former client for a period of twelve months.

This is also a novel reason for an agreement to be found unenforceable that appears without precedent.  While North Carolina courts have held non-solicitation agreements to be unenforceable where they prevent former employees from soliciting future customers, see, e.g., Farr Assocs.Inc. v. Baskin, 530 S.E.2d 878, 883 (2000), there does not appear to be any precedent saying they are unenforceable if the client relationship was not intact on the date of termination, even if it was ended by the employer.

Takeaways from the Decision

The decision’s precedential value is arguably limited by the fact the temporary employees appeared to have been blue-collar workers.  It described the employees as “general laborers.”  Phelps admitted its employees did not have access to its trade secrets or confidential proprietary information because of their employment.  The decision described the employees as “general laborers.”  Nonetheless, staffing companies that enter into non-compete agreements with temporary workers in the state of North Carolina, or utilizing North Carolina choice-of-law provisions, may need to re-visit their agreements’ terms in light of the Phelps decision.