High court decision in case of temp providers clarifies use of covenants
Published 08/22/00

The New Hampshire Supreme Court rendered a recent decision which helps clarify when an employer may: (a) enforce a covenant not to compete against a former employee; and (b) hold liable that employee's new employer for taking the employee. In the case of National Employment Svc. Corp. v. Olsten Staffing Svcs., Inc. decided on August 15, the Court found that Olsten was not liable to National for inducing employees of National to make the agency jump and become employees of Olsten. While the decision is subject to the Court considering a request for a rehearing, it does provide an important insight into the Court's analysis of employment restrictive covenants.

National and Olsten are in the business of supplying temporary employees to industry. Prior to August 1994, National, Olsten, and several other temporary employment agencies supplied light industrial laborers to Watts Fluid Air Corporation ("Watts") at it manufacturing facility in Maine. National required its employees to sign employment contracts prior to their commencing employment which contained a restrictive covenant prohibiting them from accepting employment, directly or indirectly, at Watts for a period of 90 working days following their termination with National. In August 1994, Watts named Olsten as its exclusive on-sight temporary employment provider and Olsten agreed to permit National employees to continue their assignments at Watts.

In January 1995, National and Olsten discussed a potential layoff of National's employees and a dispute arose as to the validity of that layoff. National then informed Olsten of the restrictive covenant in its employees' contracts and warned Olsten that the contracts prohibited employees from jumping from one agency to another. On March 3, 1995, Olsten posted a bulletin at Watts informing employees that Watts would no longer be affiliated with National and that National employees who desired to remain at Watts could apply for the position through Olsten. Several National employees applied to Olsten and were hired. Prior to commencing an assignment at Watts, National sued Olsten for, among other things, intentional interference with contractual relations. After a jury award in National's favor, Olsten appealed and was successful in that appeal. The Court found that National failed to prove that Olsten had intentionally interfered with the contractual relations between National and its now former employees.

The Court first noted that a covenant not to compete in an employment situation is reasonable only if it is no greater than necessary for the protection of the employer's legitimate interest, does not impose undue hardship on the employee, and is not injurious to the public interest. The Court found that the covenant not to compete signed by National's employees failed to meet the first part of the test in that the covenant was not necessary for the protection of the employer's legitimate interest. The Court noted that legitimate interests of an employer which may be protected from competition include the employer's trade secrets (which had been communicated to the employee during the course of employment), confidential information communicated by the employer to the employee but not involving trade secrets (such as information on unique business methods), an employee's special influence over the employer's customers (obtained during the course of employment), contacts developed during the employment, and the employer's business' development of good will and positive image.

In this case, National did not allege that this 90-working day covenant not to compete was necessary to prevent the appropriation of confidential information, trade secrets, customer lists, or company good will, but argued that National's employer interest was that it needed to retain the employees for a sufficient period of time to enable it to recoup costs associated with recruiting, interviewing, checking references, qualifying, insuring, and placing its employees. The Court noted that all businesses incur expenses in recruiting and hiring employees and noted that the employees for whom National sought to impose this covenant were light industrial laborers who were not in the position to appropriate the company's good will and were without access to sensitive information. The Court held that to post employment restrictions on such employees would be contrary to public policy and would impose an undue hardship particularly for at-will employees who could be discharged at any time such as in this case. Therefore, the Court ruled that National's covenant not to compete was unenforceable leaving only the issue of whether or not Olsten intentionally interfered with the contractual relationships by inducing its employees at will to leave National and work at Olsten.

The Court found that the mere fact that a competitor induces an at-will employee to leave his employer and work for that competitor does not, in and of itself, constitute an interference with contractual relations. The employer must demonstrate an improper purpose beyond lawful competition on the part of the competitor or the employee. The competitor may offer better contract terms and make use of persuasion or other suitable means, all without liability for intentional interference with the contractual relationship as to at-will employees. For those reasons, the Court reversed the judgment and found Olsten not liable to National for any of its claims of damages.

J. Daniel Marr is a director and shareholder at Hamblett & Kerrigan, PA whose legal practice includes counseling businesses and business persons on a variety of legal issues and advocating on their behalf. Attorney Marr is also an adjunct professor at Daniel Webster College where he teaches business law. You can reach Attorney Marr by e-mail at: dmarr@hamker.com

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