In VL Systems v. Unisen, a Californian Court of Appeals has thrown out another type of non-compete agreement. The general rule in California has been that an employer could not forbid an employee from working for other companies, including competitors, as long as no trade secrets were in jeopardy. However, savvy employers have long used a loophole to get around this rule, especially in the "consulting" business. In this arrangement, an ultimate client would hire a consulting company to provide temporary labor. The consulting company would then hire an employee and pay her a fraction of what they were getting paid by ultimate client. The employee would work at the ultimate client site, frequently along side other employees of ultimate client. While the consulting company might try to put a "non-compete" agreement in the contract with the employee, many employees know that these non-compete agreements are illegal. Instead, the consulting company would put it in the contract with the ultimate client. That is, if ultimate client hired one of consulting companies employees, they would then have to pay a significant amount of money. Thus, not a "non-compete" because it doesn't actually prevent the employee from working wherever she wants -- or so the argument went.
The facts of this case are a little different from the general scenario outlined above, so the holding may be a little more limited than most employees of consulting companies would hope for. In this case, the employee (David Rohnow) worked for the consulting company, but worked on projects other that Star Trac's (ultimate client). Star Trac used the consulting company to provider workers, but never used David directly. They did have a clause in their contract that required a significant penalty is they hired any of consulting company's employees. Star Trac posted a job listing on the internet, David applied and was hired. The consulting company then sued for the $60,000 penalty that they felt they were due.
The court threw out the clause in the contract that required a penalty to be paid in the event that ultimate client hired any of consulting company's employees. It held that such a clause was simply a non-compete clause dressed up differently. That is, it does not matter how a non-compete clause is structured. The courts will look at the end result, and if it looks like a non-compete, it will be treated as a non-compete.
Employees should be cautioned that the court did make note that it was important that (1) Employee never worked directly for ultimate client while at consulting company, (2) that Employee was only with consulting company for a short period of time, and (3) that no time or money was spent on training Employee for these particular jobs. Thus, it is likely that non-hire clauses that are designed to prevent any of the above three issues from occurring may still be enforceable.
As a side note, it appeared that consulting company was paying employee on a salary basis in violation of California overtime laws, but that was not the subject of this lawsuit.