If you could ask me one question about independent contractors and non-compete agreements, what would it be?
- Are they enforceable?
- Are they a good idea?
- A bad idea?
Hey buddy, that’s three questions, not one.
As for enforceability, that will vary state by state. A recent federal decision involving an independent sales contractor found his non-compete agreement to be unenforceable. The court found that (1) it was not reasonably necessary to protect the company’s business, and (2) the burden on the sales contractor was out of proportion to the benefit to the business. The decision applied Iowa law, though, so unless you have contractors in the Hawkeye State, you might not really care.
Each state applies a somewhat different test for determining whether non-competes are enforceable. Some states, like California, will not enforce them at all (at least with respect to employees). Other states are much more likely to allow them.
Perhaps the better question, for those keeping score on Quality of Questions, is whether non-competes with contractors are a good idea.
In many cases, they are not. Non-competes may increase the risk of a misclassification finding. Remember, independent contractors are in business for themselves. In the Independent Contractor vs. Employee analysis, a persuasive factor in favor of contractor status is the freedom to work for others, including for competitors.
In other words, demanding a loyalty pledge from your contractor may backfire. The clause might not only be unenforceable, but it might cause the contractor to be deemed an employee.
There may be situations where a non-compete seems necessary. Perhaps the contractor is given access to confidential and proprietary information. If that’s the case, be sure your contractor signs an NDA. If an NDA is not going to provide enough protection and you need a non-compete clause, then the non-compete provision should be drafted as narrowly as possible. Consider allowing the contractor to work for competitors generally, perhaps prohibiting only certain limited types of competing behavior.
Also consider whether your relationship with the contractor — in which the contractor gains access to confidential information, cannot share it, cannot use it elsewhere, and cannot work for competitors — is properly classified as a contractor relationship at all. If protecting and controlling what the contractor does is so important to your business, the contractor may be more appropriately classified as an employee.
Non-competition agreements with contractors are not necessarily unenforceable, and they are not necessarily a nail in the coffin of misclassification. But any time you are thinking of using a non-compete agreement with an independent contractor, think carefully.
The clause might be unenforceable, which is bad enough, but the existence of the clause itself — whether enforceable or not — could also be considered evidence that the contractor is really an employee.
© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.