North Carolina Decision May Adversely Affect Enforceability Of Non-Compete Agreements Between Employers And Temps

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...