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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What are “1099 Employees”?

chupacabra news independent contractor 1099 employee

The chupacabra is a heavy creature, reportedly the size of a small bear, with a row of spines reaching from the neck to the base of the tail. Its name means “goat-sucker,” which comes from its habit of attacking livestock, especially goats, and sucking their blood. [Editor’s note: Please, folks, protect your goats.]

Why am I leading this post with information about the chupacabra?

[SPOILER ALERT:] Because it’s not real. Not a thing. Doesn’t exist.

Same with “1099 employees.” Businesses using this term almost certainly are trying to classify these individuals as independent contractors. As we know, independent contractors (if properly classified) are not employees at all. Business must report the compensation of employees on a Form W-2, not Form 1099.

When businesses describe independent contractors using terms like “1099 employee,” they are raising red flags, suggesting possible independent contractor misclassification — almost begging for an audit!

As we discussed here, what you call your contractors can make a big difference in determining whether they are truly independent contractors or should instead be classified as employees under the law.

Remember, the determination of Who Is My Employee? — that is, employee vs. independent contractor — is made based on legal standards, not how the parties decide to classify their relationship. You can call your pet three-toed sloth “Usain Bolt,” but that doesn’t mean he’s fast. (I’m sure he’s cute, but he’s not fast.)

So please don’t call your independent contractors “1099 employees.” Or we’ll send the chupacabras after you and your goats.

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

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NLRB Nominees Hate Puppies & Rainbows, Dems Claim

dog nlrb independent contractor -1674115_1920

Ok, not really, but it seemed that way.

Last week, NLRB nominees William Emanuel and Marvin Kaplan were alternatively tossed softballs and stink bombs in “questions” from Senators on the Health Education Labor and Pensions Committee (known in Congressional circles as the HELP Me Rhonda, HELP HELP Me Rhonda Committee).

I use the word “questions” in quotes because, as both Americans who have ever watched C-SPAN would know, these events are typically staged to allow Senators who have already made up their minds to hear themselves talk, rather than ask questions. Here’s an example:

Question by Sen. Elizabeth Warren:  “Your entire career has been to discourage union membership and I just don’t understand how we can rely on you to defend workers after a long career of making it harder for them to join unions.  But let me push to another point… [changing the topic].”

Or this:

Question by Sen. Warren: “You have made it clear that you have pre-judged. … I think the American people deserve better.”

I don’t think she has pre-judged the nominees though. Just sayin’.

Or this:

Question by Sen. Al Franken (whose recent book I liked, by the way): “It seems likely that big business will probably push you to change the NLRB’s modernized election rule. If you’re concerned, I just wanted to point that out. … What I’m saying is that the unions should be able to vote sooner than 35 days. [then on to another subject]”

Sen. Patty Murray accused the nominees of “anti-worker, anti-union, even anti-NLRB measures” and characterized them as having “careers of fighting against workers’ rights.”  At least she did not dress up her remarks as a question, though. These were in a pre-published statement.

Sen. Maggie Hassan, a former corporate lawyer, was one of the few Senators to ask questions relating to independent contractor misclassification and joint employment. I should note too that her questions were legitimate questions, both topically and in the sense that they included actual question marks at the end.

Sen. Hassan asked Mr. Emanuel, “If you are confirmed, what steps will you take as a Board member to curb this epidemic of misclassification?”

Ok, “epidemic” is a bit loaded, but the bar is low here. Think pre-school obstacle course low.

Anyway, Mr. Emanuel did not take the bait. He responded, “I’m not sure I would agree with the characterization that it’s an epidemic. It does occur. … It’s like any other issue that comes before the NLRB. I would consider the facts of the case.” Jab, uppercut, duck, jab.

She then asked Mr. Kaplan if he thought the recent Browning-Ferris joint employment case was wrongly decided.  In keeping with the great tradition of non-answer answers (the perfect counterpart to non-question questions!), he declined to answer, instead acknowledging that it is up to the Board to determine the proper standard for joint employment under the NLRA.

And that’s about as exciting as it got, folks!

For those without C-SPAN access, StubHub may still have seats available to future hearings.  The secondary market for labor committee hearing tickets is white hot this time of year, especially with all the tourists in D.C.  The committees overcharge for popcorn, though.  Or so I’m told.

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

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Misclassification settlement strips $6 million from Club Assets

IMG_1090When I was an undergrad at Michigan, any time I would drive to the airport or to Tiger Stadium, I’d see billboards for Deja Vu, a strip club with (apparently) lots of locations. I never visited (not into that sort of thing, thanks for asking), and I never thought much of it. I certainly did not expect to be writing about Deja Vu and independent contractor misclassification 25 years later. But here goes.

When patrons of these fine establishments partake in the traditional lap dance, it’s doubtful they’re thinking about whether these often-single-mom “entertainers” who are just trying to make a living have been properly classified under wage and hour law. More likely, they’re thinking about — never mind.

But that’s an important issue, as Deja Vu recently learned, when it was sued by a class of 28,177 dancers alleging they were misclassified as independent contractors, rather than paid as employees. The class alleged that the clubs intentionally misclassified them as contractors, failed to pay them minimum wage, unlawfully required them to split gratuities, and unlawfully deducted wages through rents, fines, and penalties.

After a fairness hearing in federal court in Detroit, the parties finalized a $6.55 million dollar settlement. In addition to cash compensation, the settlement includes an unusual provision allowing dancers to choose whether to be contractors or employees.

Dancers will receive between $443 and $6,007 each. Their lawyers will enjoy a payout of $1.2 million in fees, which could buy them a lot of — never mind.

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

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The DOL Wants You to Know Its Opinions (Here’s Why That’s Good News!)

IMG_1087

Everybody has an opinion, so why not share?

This week, Labor Secretary Alex Acosta announced that the WHD will resume its prior practice of issuing opinion letters to advise on difficult wage and hour issues. This is good news for companies and employees because it increases predictability.

An opinion letter is an official, written opinion by the WHD of how a particular law applies to a specific set of circumstances presented by an employer or employee. The benefit to the general public is that opinion letters are published and may be relied upon.

The practice of issuing opinion letters had persisted for more than 70 years before being discontinued in 2010, when the WHD began issuing occassional general guidance memos instead.

The return of the opinion letter means more predictability and less “Gotcha!

If the proper public role of the DOL is to promote voluntary compliance (as it should be!) and not merely to sack wrongdoers, then this announcement is a big step in the right direction.

This announcement comes shortly after Secretary Acosta’s recent decision to withdraw the WHD’s 2015 and 2016 general guidance memos on independent contractor misclassification and joint employment. Presumably, these would be topics that are now ripe for new opinion letters.

With a new Labor Secretary, employers can expect a shift toward more business-friendly interpretations that respect the existence of independent contractor relationships and decrease the incidence of joint employment findings. As discussed here, the determination of Independent Contractor vs. Employee under the wage and hour laws (e.g., the Fair Labor Standards Act) is made using an Economic Realities Test.

Employers can click here or here to see whether prior opinion letters have been published on any particular wage and hour topic.

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

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What Role Does the EEOC Play in Independent Contractor Misclassification?

IMG_1081The EEOC’s jurisdiction is limited to claims brought under certain federal anti-discrimination laws. The reach of these laws, however, is limited to employees. It is not a violation of Title VII, for example, to discriminate against an independent contractor.

So the EEOC has nothing to do with issues of independent contracor misclassification, right? Wrong.

Because the EEOC’s jurisdiction is limited to claims brought by employees, the Commission is incentivized to reclassify independent contractors as employees — especially when the Commission thinks that a company’s conduct was untoward.

In October 2016, shortly before the election, the EEOC published its Strategic Enforcement Plan for 2017-21. Lo and behold (is it ever just “lo”?), Priority #3 is “Addressing Selected Emerging and Developing Issues,” among which the EEOC lists:

Clarifying the employment relationship and the application of workplace civil rights protections in light of the increasing complexity of employment relationships and structures, including temporary workers, staffing agencies, independent contractor relationships, and the on-demand economy.

In other words, the EEOC wants a seat at the Independent Contractor Misclassification Table. It wants a chance to decide who is a contractor and who is an employee, because every chance to find misclassification is a chance to apply the laws that the Commission is charged with enforcing. No employment? No EEOC.

Am I cynical? You bet! But the EEOC has empirically interpreted its mission to include expanding employee protections. In this case, that means expanding who is an employee.

On January 25, 2017, President Trump named Commissioner Victoria A. Lipnic Acting Chair of the EEOC. She began her service as a Commissioner of the EEOC in April 2010, having been confirmed by the Senate for an initial term ending on July 1, 2015. In November 2015, she was confirmed by the Senate for a second term ending on July 1, 2020.

To date, there is no indication of any change in the Strategic Enforcement Plan for 2017-21.

Expect the EEOC to take a more active role in trying to determine who is an independent contractor and who is 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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Five (More) Signs Your Independent Contractor May Be Properly Classified

IMG_1079Last week I posted Five Signs Your Independent Contractor May Be Properly Classified. While I feel pretty good about the post, I also feel like there’s more where that came from. So here goes.

Five More Signs Your Independent Contractor May Be Properly Classified:

  1. The contractor has its own employees. Since contractors are in business for themselves, they should be free to hire their own employees. If they actually do, chalk up a few points.
  2. The contractor pays its own expenses. One indicator of a legitimate independent contractor relationship is that the contractor, if a sound businessperson, will earn a profit but, if a poor businessperson, will incur a loss. The profit/loss determination is often a function of how well the contractor prices its services. If you reimburse a contractor for all of its expenses, the risk of loss is generally removed. Legitimate independent contractors should be bearing some risk.
  3. The contractor works from its own office space. The flexibility to work wherever and whenever suggests proper classification as an independent contractor.
  4. The contractor works using its own tools and equipment. That’s more evidence that the contractor is running its own business and has more opportunity to incur a net loss.
  5. The contractor carries its own insurance. When a contractor carries the types of insurance typically carried by a business, the contractor is likely operating as a business. Look for General Commercial Liability and Workers Comp coverage.

Remember, the tests for determining Who Is My Employee? vary by law, and most test are balancing tests, so no single factor is likely to be determinative. Relationships with these five features, however, are more likely to have the scales tilted in favor of recognizing independent contractor status.

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