By Usama Kahf and David B. Monks
Many healthcare employers rely to varying degrees on temporary staffing, whether for nurses, medical billers, or other positions. Employee retention often clashes with increased demand for labor, giving rise to temporary staffing agencies that specialize in meeting the needs of this industry. Current employees of healthcare employers are also a good referral for potential candidates, particularly ones the current employee already knows well and can vouch for.
The problem: Some of the best skilled candidates may have signed contracts with their current or former employers restricting them from soliciting or recruiting employees for a year or two. As a result, even if you strategically hire talented individuals—managers or leaders who are likely to attract other candidates with whom they previously worked—those you hire may be unable to help you recruit other qualified candidates for a period of time.
The solution: Recruit the best “recruiters” and the talent will follow. That’s because under a recent California Court of Appeal decision involving healthcare staffing agencies, contracts that restrict recruiters from practicing their chosen profession of recruiting are unenforceable.
California’s prohibition against contracts that restrain a person’s ability to engage in a lawful business, profession, or trade is not news; it has been well-established law in California for over a decade and codified in the state statutes. In the 2008 case of Edwards v. Arthur Andersen LLP, the California Supreme Court confirmed that the only exceptions are specific statutory exceptions, rejecting the “rule of reasonableness” that some courts had used to validate restrictive covenants.
The enforceability of employee non-solicitation contractual provisions was not at issue in Edwards, and several courts have enforced such provisions prior to and since the case, though none of the court decisions on this issue since Edwards have been “published” decisions. Unpublished decisions are not binding precedent in California, and court rules prohibit parties from citing unpublished decisions in their briefs. Finally, in November 2018, the California Court of Appeal in San Diego weighed in on that issue in a published decision.
In AMN Healthcare, Inc. v. Aya Healthcare Services, Inc., the appellate court invalidated the former employer’s employee non-solicitation provision on the ground that it restrained the former employees from practicing their chosen profession of being recruiters in the healthcare industry. While this ruling may, at first glance, create some doubt about the continued viability of such contractual provisions, a close look at the facts of the decision reveals that the outcome depended on very specific circumstances that are not present for most employers using these provisions.
AMN and Aya compete in the business of providing temporary healthcare professionals, including “travel nurses,” to medical care facilities. They employ recruiters to recruit and place them. AMN required its recruiters to sign a Confidentiality and Non-Disclosure Agreement (CNDA) that, among other things, prohibited the recruiters from soliciting AMN employees to leave the company for at least one year. The CNDA stated: “Employee covenants and agrees that . . . for a period of eighteen months after the termination of the employment relationship with the Company, Employee shall not directly or indirectly solicit or induce, or cause others to solicit or induce, any employee of the Company or any Company Affiliate to leave the service of the Company or such Company Affiliate.” AMN’s position was that this contractual provision prohibited former AMN employees from recruiting travel nurses who were on temporary assignment with AMN.
Four AMN recruiters left AMN to join Aya. They recruited several AMN travel nurses to leave AMN assignments and accept assignments through Aya. In response, AMN sued the former employees for breach of contract and other claims (and also asserted several claims against Aya). As to the contract claim, AMN contended that the defendant employees breached the CNDA by soliciting AMN travel nurses to leave AMN and become Aya employees. In response, the former AMN employees requested dismissal of the contract claim on the basis that the employee non-solicitation provision of the CNDA was an unlawful restraint of trade or profession.
The Court of Appeal agreed; its reason is critical to understanding the scope of its decision. The court began by reviewing California’s well-established law: subject to narrow exceptions, a contract that restrains a person from engaging in a lawful profession, trade, or business is void. This law promotes the state’s public policy favoring employees’ mobility over employers’ competitive business interests. Then the court concluded that the non-solicitation provision was unlawful because it prevented the recruiters from doing the very thing that they chose to do as their profession: recruit travel nurses. In so deciding, the court relied on undisputed evidence showing that enforcing the contract would limit the number of nurses with whom the former AMN recruiters could work and, as a result, limit the amount of compensation that the recruiters could earn while employed with their new agency.
The AMN decision provides an opportunity for healthcare employers and staffing agencies to focus on hiring employees whose unique position effectively relieves them from having to comply with non-recruiting covenants. Hiring recruiters—whose chosen profession and primary responsibility is to recruit other employees—means whatever employee non-solicitation covenant they signed is likely unenforceable, though they are still restricted from using confidential or trade secret information of any former employer.
That said, employers who want to enforce employee non-solicitation covenants should not overreact to the AMN decision. In the vast majority of situations, an employee non-solicitation provision does not prevent a former employee from engaging in their chosen profession. Therefore, you should promptly review your employee non-solicitation provisions to assess whether they are now in more danger of being invalidated and make changes accordingly.
Usama Kahf is a partner with labor and employment law firm Fisher Phillips in Irvine, Calif. He may be reached at [email protected].
David B. Monks is a partner with the firm in San Diego, Calif. He may be reached at [email protected].