cases, commentary and news related to restrictive covenants
Friday, May 6, 2011
Flat-Fee Liquidated Damages Award Upheld in Staffing Dispute (ProTherapy Assocs. v. AFS of Bastian)
Staffing agreements almost always have some sort of non-compete or (more commonly) non-solicitation covenant. Courts recognize that without such protections staffing companies could become an involuntary employment agency for their clients.
In recognition of this, many agreements don't prohibit solicitation but rather tie a monetary price to it. These arrangements are called "liquidated damages" clauses, and they basically set a pre-determined formula for solicitation or hiring of an employee. Liquidated damages clauses can be enforceable, but several procedural requirements must be met. Most commonly, the damages must not be readily ascertainable at the time of contracting. Additionally, the formula or pre-determined sum must not be grossly disproportionate to damages that might be expected to result from a breach.
A recent dispute in the skilled nursing staffing industry upheld a clause that provided for $10,000 per wrongfully solicited or hired employee. The case followed a familiar storyline. The staffing company was terminated in favor of a replacement. The nursing homes used the replacement company to hire the workers the homes could not themselves hire without paying the liquidated damages.
The court found the $10,000 sum to be reasonable and enforceable. The plaintiff introduced evidence showing that the replacement cost of skilled nurses was relatively close to the $10,000 figure and that nurses frequently received signing bonuses of $10,000. Employers who choose to utilize liquidated damages clauses should be prepared to justify them with actual figures showing why the preset number was reasonable and proportionate to likely harm. The number need not be perfect, but also it can't just be random and certainly can't be punitive.
Court: United States District Court for the Western District of Virginia
Opinion Date: 5/3/11
Cite: ProTherapy Associates, LLC v. AFS of Bastian, Inc., 2011 U.S. Dist. LEXIS 47161 (W.D. Va. May 3, 2011)
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