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Seasonal Employees and Non-Compete Agreements

Non-compete litigation usually involves long term, nonseasonal employees as defendants in an enforcement action. A case recently decided in Illinois involved a company that sought to enforce the terms of the non-compete agreement against a seasonal employee. Although this case is not binding on the New Jersey courts, the opinion is instructive and serves as guidance for future cases involving seasonal employees.

Let’s briefly Zabaneh Franchises, LLC v. Walker, 972 N.E. 2d 344 (Ill. App. 2012).

Zabaneh Franchises is a firm that provides income-tax-form preparation services. In July 2010, Zabeneh Franchises purchased a franchise of H&R Block, Inc., including all interests in the employment and non-competition agreements with H&R Block’s employees.

Walker was a seasonal employee at H&R Block, Inc. since 2003. Additionally, Walker had signed an employment contract which included a non-compete clause. The clause prohibited Walker from preparing tax returns for two years for any client who had their tax returns prepared by Walker while she was employed at either H&R Block or Zabeneh Franchises.

The language of the non-compete clause were as follows:

10. Post-Termination Covenants.

a) Associate covenants that for two (2) years following the cessation of Associate’s employment hereunder for any reason (the `Restricted Period’), Associate shall not directly or indirectly:

(1) Provide any of the following services to any Company Client: (i) preparation of tax returns; (ii) electronic filing of file [sic] tax returns; or (iii) any Alternative Products or Services;

* * *

11. Nonsolicitation of Employees.

Associate covenants that during Associate’s employment hereunder and for one (1) year following the cessation of such employment for any reason, Associate shall not, directly or indirectly, solicit or hire Company Employees to work in any business that provides any product or services in competition with the Company.

In addition to the terms described above, the contract also included an “assignability” clause, which meant that even if H&R Block sold its interests to another company, the employment contract would continue to remain in full force and effect.

Sometimes towards the end of 2010, Walker started his own tax preparation company and solicited clients from H&R Block.

Zabaneh Franchises filed a lawsuit against Walker, seeking an injunction to prevent Walker from violating the terms of the non-compete clauses.

At the trial level, the trial court held that the employment contract was a “contract of adhesion,” denied Zabaneh’s request for an injunction, and dismissed the case with prejudice.

Zabaneh appealed.

On appeal, the appellate court examined the terms of the non-compete to determine whether it was reasonable. For the court, reasonableness required an examination of “competing interests between the unfair restraint of the employee’s trade and the employe’s interest in protecting proprietary information.”

Ultimately, the appellate court held that the terms of the non-compete clause was reasonable because the terms were reasonably restricted to serve the company’s legitimate business interests: Walker was not prohibited from preparing taxes or related service to the general public. Rather, Walker was only prohibited from serving those specific clients that she had served while working for either H&R Block and Zabaneh.

In the court’s own words:

This limited restriction reasonably balances defendant’s right to earn a living with plaintiff’s right to protect its customer relationships and its investment in developing defendant’s skills. . . . We find the limited restrictions, in terms of the prohibited activity and duration, in context of the totality of the circumstances, are reasonable and enforceable and sufficient to protect plaintiff’s business interest.

The fact that Walker was a seasonal employee was thus not relevant or essential to the question as to whether the non-compete terms were reasonable.

In the end, the appellate court reversed the trial court’s dismissal of the case with prejudice and reversed the trial court’s determination that that non-compete clause was not enforceable.

 

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