|
The Wisconsin Supreme Court recently held that a no-hire provision between a supplier of health care employees and its customer that restricted the employment opportunities of employees without their knowledge and consent was not enforceable. Heyde Companies, Inc. v. Dove Health Care, LLC, 2002 WI 131 (December 27, 2002) The decision will probably invalidate most, if not all, no-hire provisions in the contracts that staffing agencies enter into with their customers. The decision also raises questions about the enforceability of no-raid provisions in agreements between employers and employees.
Background
Dove Health Care operated nursing homes. Heyde operated Greenbriar Rehabilitation, which furnished physical therapists to Dove Health Care and other nursing home facilities. Dove and Greenbriar entered into an agreement under which Greenbriar would supply therapists to Dove's Eau Claire facility. The agreement contained a no-hire provision stating that for the term of the agreement and one year thereafter, Dove would not hire Greenbriar's therapists. Shortly after the agreement between Dove and Greenbriar terminated, Dove hired former Greenbriar employees in violation of the no-hire provision. Greenbriar sued Dove for breach of contract. Dove argued the no-hire provision was unenforceable. Over a strong dissent, a majority of the Supreme Court agreed and held that the no-hire provision was unenforceable because it violated Section 103.465 of the Wisconsin Statutes and because it violated public policy.
The Court's Reasoning
Greenbriar argued that Section 103.465 did not apply because by its plain language it only applies to contracts "by and assistant, servant or agent not to compete with his or her employer or principal." Greenbriar pointed out the agreement had been entered into by two sophisticated businesses. The Court rejected this argument, saying that the purpose of 103.465 is to invalidate covenants that impose unreasonable restraints on employees. According to the Court, the effect of the no-hire provision is to restrict employment of employees, and an employer should not be permitted to do indirectly what it could not do directly. Accordingly, the Court analyzed the no-hire provision using the five factors that traditionally apply when analyzing non-compete agreements entered into between employer and employee under Section 103.465: the covenant must (1) be reasonably necessary to protect the employer; (2) provide a reasonable time limit; (3) provide a reasonable geographic limit; (4) not be harsh or oppressive to the employee; and (5) not be contrary to public policy.
Greenbriar argued that the no-hire provision was reasonably necessary to protect its interest in maintaining its employees and to avoid involuntarily recruiting employees for its customers. Although the Court apparently agreed this was a legitimate interest, it concluded that Greenbriar had gone further than necessary to protect this interest which it could protect by entering into enforceable covenants not to compete directly with its employees.
The Court concluded the one year time limit was reasonable, but thought the geographic limit was "potentially problematic" because an employee was restricted from working at locations other than the location at which the employee had actually worked.
Most importantly, the Court concluded the no-hire provision was harsh and oppressive to the employee and contrary to public policy because the employees who the no-hire provision covered did not know about it and therefore of course also did not agree to it. According to the Court, "[a]t the very least, Section 103.465 requires that employees know that they are subject to a restrictive covenant and that they consent to such a restriction." Accordingly, the no-hire provision violated Section 103.465.
The Court went on to make a second, alternative holding -- the no-hire provision was unenforceable because it violates the public policy of Wisconsin as expressed in Section 103.465 and the common law.
Heyde's Effect
The decision will make similar no-hire provisions between staffing companies and their customers unenforceable. Staffing companies that want to ensure an enforceable no-hire provision with a customer will need to obtain the covered employees' consent to such a provision, which may be impractical. One alternative is to enter into an enforceable covenant not to compete directly with the covered employees.
To the extent that employers benefit from mobility in the labor market, the decision may be good news. One theory holds that a mobile labor force produces a favorable economic climate. For example, with limited exceptions, non-compete agreements are not enforceable in California. Such agreements are enforced relatively more easily in Massachusetts. Some look to the comparatively stronger technology industries in California as proof that mobility of labor benefits the economy.
Finally, the decision casts doubt on the enforceability of "no raid" provisions that are often part of covenants not to compete. Such no raid provisions commonly say the employee agrees not to solicit or induce other employees to leave their current employer. Heyde supports an argument that such provisions are unenforceable because the employees they cover did not agree to them.
In response to Heyde and other recent decisions on the enforceability of covenants not to compete, employers may wish to review the enforceability of any covenants not to compete that they have entered into with their employees, customers and suppliers.
For more information regarding Krukowski & Costello's training programs and publications, please call (414) 423-1330 or e-mail Krukowski & Costello's educational services department.
|
