Michael Jackson Says: Be Sure Your Subcontractor Agreements Require Adequate Insurance

Insuracne subcointractor agreement independent contractor clauses agreements IMG_1096The Michael Jackson song, “Don’t Stop Til You Get Enough” has all kinds of lyrics I can’t understand. No matter how many times I listen to that song, most of it sounds unclear to me, like nonsense syllables.

The one part of the song that is clear, though, is the title. That one phrase is repeated over and over. Leaving aside (for now) the unintelligible parts of the song, the King of Pop unwittingly provided a good lesson on insurance clauses for subcontractor agreements.

(Note to readers: I looked up the real lyrics, and they have nothing to do with subcontractor agreements or insurance clauses, but they might as well since I still can’t understand them.)

Subcontractor agreements typically include an indemnification requirement and an insurance requirement. The subcontractor is required to indemnify your business against certain types of claims and must require sufficient insurance to cover those claims.

But how much insurance is enough?

That varies, of course, depending on the scope of the engagement and the responsibilities undertaken by the subcontractor. But don’t leave the amount and types of coverage to the subcontractor’s discretion.

Types of required insurance often include general commercial liability, automobile, and workers compensation coverage. Minimum amounts, though, should be specified. It does you no good to have a contractual agreement for indemnification if the subcontractor lacks the financial backing to pay up. You may end up with a bankrupt contractor and a worthless indemnification agreement.

I often see $1 million or $2 million per occurrence for general commercial liability. Workers compensation clauses often refer to “statutory limits,” but some states, like Texas, do not have statutory coverage requirements, so the term “statutory limits” in Texas might be meaningless.

Provide some specific requirements for coverage amounts and don’t stop til you get enough.

Now about the song, did you know these are actual lyrics?

  • Keep on with the force, don’t stop.
  • I was wondering, you know, if you could keep on, because the force it’s got a lot of power.
  • I’m melting (I’m melting) like hot candle wax.

Sounds like a tribute to the Star Wars exhibit at Madame Tussaud’s.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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Are Non-Compete Agreements for Independent Contractors Enforceable?

binding-contract-independent contractor non-compete agreement noncompetition - 948442_1920If 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.

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Stop the Leaks! What if White House Staffers Were Independent Contractors?

Sessions stop the leaks independent contractorsTrump and Sessions wants to prosecute the leakers. As we’ve seen before, stopping leaks can become a Presidential obsession. In Nixon’s White House, the Plumbers were tasked with stopping leaks of classified information, such as the Pentagon Papers. Through the Committee to Re-Elect the President (fittingly, CREEP), members of the Plumbers broke into the office of the psychiatrist of Daniel Ellsberg, who had released the Pentagon Papers to The New York Times. Some of you may have heard about what happened next.

Presidential aides and White House staffers routinely have access to information that is intended to remain confidential. Businesses face the same issue. A company’s employees often have access to confidential or trade secret information that would be harmful in the hands of competitors, or that could damage the business if released to the general public.

It’s commonplace to require employees in such positions to sign Nondisclosure Agreements (NDAs).  NDAs typically define the scope of confidential information and require employees to refrain from using or disclosing any of it outside of work.

But what about independent contractors? Non-employees like specialists or consultants are often retained to work on sensitive company projects. In the course of that work, they are often granted access to confidential information.

Should independent contractors sign NDAs too? You bet! If they will be granted access to confidential or trade secret information, NDAs are important.

They can be used in a stand-alone agreement or as part of a broader independent contractor agreement containing other terms.

It is arguably even more important to have a contractor sign an NDA than it is for an employee to be required to sign one. Why?

Employees, by their nature, are agents of the company and are presumed to be acting to further the employer’s interests. NDAs are a useful reminder to employees of their obligations to the employer, and NDAs can expand — by contract — the scope of protection offered by trade secret laws.

Independent contractors, in contrast, are in business for themselves. They are generally not agents of the business, and any obligation they have to preserve confidential information will stem mainly from contractual obligations, rather than from trade secret law.

In fact, trade secret laws generally require a company to prove that it takes steps to safeguard the privacy of trade secret information — that is, steps to prevent other people from accessing it. By sharing trade secrets with a non-employee contractor, the company may — through that act alone — risk losing trade secret protection for their confidential business information.  They’ve shared it outside the company.

That is where NDAs come in. If a contractor is required to sign an NDA as a condition of the retention, then the employer can much more confidently share confidential and trade secret information with the contractor.

The NDA not only creates a contractual obligation on the contractor to preserve the secrecy of the information, but it also bolsters the company’s ability to show that it takes active steps to protect its confidential information. In other words, the NDA helps the business show that it does not tell an outsider its trade secrets without first obtaining a signed NDA.

The lesson here is simple. If your independent contractor will be granted access to confidential information — even incidentally or accidentally — NDAs can provide important protections to the business.

If the contractor leaks the information anyway, you can always find some goons to break into the office of the contractor’s psychiatrist to get some dirt on him.  (That was a joke. Don’t do that!) Legal remedies are available. Don’t break into anyone’s office. Please.

© 2017 Todd Lebowitz, posted on WhoIsMyEmployee.com, Exploring Issues of Independent Contractor Misclassification and Joint Employment. All rights reserved.

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