Funding Companies’ Special Interest in Staffing Agency Employment Law
Steve Capper, Principal/CEO, Flexible Funding - July 17, 2017
Funding companies specializing in financing staffing companies often perform due diligence on funding prospects that funding generalists (who fund any type of business) do not. The most common scenario for
above and beyond due diligence is new staffing operations that open with an instant book of business. The customer-account(s)-book-of-business comes from the new staffing company owner’s prior employer (a nearby staffing agency still in business).
When asked where the account came from, a new business owner will tell of their plan to take an account of the prior employer, and always with a quick justification. Common examples include:
- ‘I don’t have a non compete with my prior employer’
- ‘I do have a non compete but they are really unenforceable in my state anyway’
- ‘These were accounts that I brought to the former employer (that I recently left), so they are mine to take with me….they have been mine for years and will follow me anywhere’
- ‘The contract between my former staffing agency employer and the account(s) allows the account to leave, or to be taken’
- ‘My former staffing agency employer or soon-to-be former employer is so financially unstable that they are surely going to fold soon anyway, so it is justified to take the account(s)’
- ‘The new staffing agency is in the ownership name of my spouse/brother/father/cousin/grown child/etc, which will be transferred into my name when we deem the coast to be clear’
A payroll funding company is wise to get to the truth of the matter of whether an account(s) can really be taken by a former employee and determine strategies to avoid any lawsuit by the former employer. If the funding company were to fund new invoices of these same accounts, the former staffing agency employer could sue and get an injunction freezing up all accounts receivables and payments of the invoices. The payroll funding company would get caught up in the legal action. Better to avoid it all from the beginning.
New staffing agency owners may tell the funding company that they have already contacted an attorney to discuss the matters, and that their strategy to avoid or defend any future lawsuit for taking customer accounts is ‘solid’. A funding company could be told that an attorney scrutinized the signed non-compete agreement with the prior employer and has determined that it is flawed and therefore unenforceable–so one may rightly take an account of the former employer. A funding company specializing in staffing, or an attorney specializing in staffing would continue to probe; they know that certain prior employers won’t even sue (or win) on grounds of ‘non compete’. Instead they may sue on fine details related to the stealing of trade secrets, such as knowing inside information on margins and markups. Or they may sue for temp napping (stealing of temps).
An inexperienced generalist attorney might scrutinize the contract between the former employer staffing agency and its customer(s) and quickly come to the conclusion that it is acceptable to take accounts, believing that this is nothing more than law of ‘contracts’. The typical strategy of a former employer is to file a court complaint and try to get a quick injunction, however, this may all go beyond ‘basic contract law’. As Federal and State employment law are constantly moving targets, a staffing law specialist may need to be consulted. A rare few payroll funding or staffing accounts receivable factoring companies will sometimes contact attorney specialists to talk with the new prospect to assess the level of lawsuit danger… and make strategy recommendations. (When Flexible Funding does this it is at no cost to the prospect). This serves multiple functions:
- The attorney is able to report back to the funding company as to whether it is safe to proceed with due diligence, go into contract and fund based on that payroll funding company’s tolerance level for risk.
- The funding company may get an updated education on law pertaining to these matters. The knowledge is useful for the next prospect.
- If the new staffing agency does not end up getting funded by this funding company, at least the staffing agency gets some good advice on how to protect themselves. (For funding organizations such as Flexible Funding that would not charge for the attorney time, the advice may create some industry goodwill. This is done on a case-by-case basis and not just for anybody that calls in).
A related matter is that a funding company may see all of these issues from both sides of the fence. The funding company has a portfolio of already existing clients. If they are a payroll funding company that truly specializes in the staffing industry, it is possible that the staffing agency communicates with their funding company on business problems other than money (lending). We have had customers call us and cry that ‘their star sales rep just exited the company, taking with them one or more of the large accounts.’
In cases like this, the funding company may assist with protection strategy while getting an education in staffing law, and are able show their customer that they have their back. It works for the staffing company too as they learn to protect the (sales) volume they can fund
One of the experienced staffing attorneys we have worked with for many years (to navigate many of the matters discussed) is Bernard Frechtman, who has over 60 years of experience in staffing law. Many of his pertinent past articles, and his new continuing articles on staffing law have been added to the Flexible Funding web site as a resource under the ‘Staffing Articles’ section of the Articles tab on the home page. Bernard wrote THE book on Temp Napping–available on his own website www.frechtman.com, and complimentary at no charge to any of our own customers.