Non-Compete Agreement Defined
Non-Compete (or "noncompetes") may generally be described as a clause or standalone agreement within a contract that stipulates that the employee agrees not to compete against an employer within a defined territory for a period of time after leaving the employment. The rationale behind a non-compete is that it is believed to protect the goodwill of the employer by prohibiting former employees from stealing customers or making use of confidential information.
As mentioned before, non-competes are usually seen in the corporate workplace where the employee is privy to confidential information and has certain relationships with customers, clients or vendors. However, noncompetes clauses are also seen in contracts with independent contractors. For example, there may be a non-compete clause in a contract between a doc and a medical billing company which prevents the doc from doing billing for their own practice if the doc’s relationship with the billing company is terminated . The rationale for this type of noncompete is thought to be the same as above – to keep the independent contractor from poaching a competitor’s customers when the contractor has been exposed to the employer’s confidential information. The landscape of noncompetes for unlicensed professionals (i.e., doctors, lawyers, etc.) is different from the corporate workplace. As mentioned previously, non-competes for an independent contractor are stricter than a non-compete between an employer-employee. This is because a noncompete must be reasonable in order to be valid and the courts will look strictly at its reasonableness when construed in the context of an independent contractor relationship. The courts, therefore, view non-competes for independent contractors differently than for employer-employee relationships. A non-compete between an employer and employee, by its nature, creates an adversarial relationship between the parties, like a cat and dog. There is an inherent conflict of interests and so, non-competes in the employer-employee context tend to be upheld even if not 100% necessary.
The Legality of Non-Competes Against Contractors
The legal enforceability of non-competes in the context of contractor-contractor or contractor-client relationships is unsettled. Several states allow non-competes with independent contractors if the non-compete is supported by consideration other than mere retention as a contractor. Other states, however, do not recognize noncompetes with contractors at all, and still other states, contrary to their own employer-employee case law, have found non-competes upheld when applied against contractors. For example, Illinois still does not enforce non-competes against independent contractors, even though it has set forth a reasonableness standard for non-competes in the corporate context and has held that "casual service" may be sufficient consideration to support a non-compete. However, Tennessee has upheld non-competes against independent contractors, despite having a very restrictive approach when applied to employees. Similarly, South Carolina has upheld noncompetes for independent contractors despite a recent clarification in their employee-contract relation case law expressly holding that non-competes against employees are subject to the strict reasonableness standard set forth in the second-to-last paragraph of PEI Genesis v. Loth, 2011 WL 1677961 (S.C.App.) (per curiam). In contrast, Louisiana has long held that non-competes cannot be enforced against independent contractors or "mere casual laborers." Nola Ventures, LLC v. Boudreaux, 2008 WL 2899896 (La.App.) (rejecting PEI Genesis holding), writ den., 2009 WL 2823878 (La.), rev’d on other grounds, 2010 WL 55883 (La.). The Florida Supreme Court’s decision in White v. Mederi Caretenders Visiting Services (125 So.3d 188 (Fla.2013) is the most comprehensive supervisor opinion available on the enforcement of non-competes (and is also now the only state top-court case on non-competes in less than ten years), it drew the following conclusion: "In our view, our intermediate appellate courts’ decisions striking down non-compete agreements are properly viewed as effectuating and protecting the core goal of the [TLA], which is to strengthen protections for employees. The TLA seeks to prohibit employers from circumventing its mandates by converting what is clearly an employment relationship into a contractor relationship. While some intermediate appellate courts have indeed extended the scope of the TLA too far into the field of contractor-contractor and contractor-client relationships, we believe the better view is that articulated by other courts enforcing non-compete agreements against contractor-contractor and contractor-client relationships. This latter group has resisted the temptation to extend the [TLA] into areas where the Legislature manifestly did not intend it to reach." (citing McGowan v. Manney, 71 So.3d 151 (Fla.1st DCA 2011); Reg’l Emp. Servs., Inc. v. Quigley, 794 So.2d 638 (Fla.4th DCA 2001); Trujillo v. Universal Serv., LLC, 1:05cv303, 2007 WL 1064035 (W.D.Va. Apr. 5, 2007) (An employee’s covenant not to compete with a subsequent employer is enforceable pursuant to the Virginia Covenant Not to Compete Act, Va.Code Ann. ยง 59.1-9.1, despite the fact that the employee was treated as an independent contractor by his first employer.) The need for a Supreme Court decision in Connecticut is apparent. In the short time since Northeastern Fence v. DeFelice, 175 Conn. 578, 400 A.2d 712 (1978), four circuit courts have refused to follow it. These circuits (the first, third, ninth, and eleventh) have overridden a state supreme court’s rejection of non-competes without additional consideration, and have held that a contractor with no proprietary information can nonetheless be properly bound by a non-compete.
Core Parts of a Contractor Non-Compete
It is critical to not only have a non-compete agreement that restricts the independent contractor from competing, but also to ensure that it is properly drafted to protect your legitimate business interests. Therefore, you should make sure that you include the following key components:
Duration
The most common duration range for an independent contractor non-compete is 6 months to 2 years after the independent contractor’s last day of work.
Takeaway: You should definitely consider a duration within this range, but also customize it to fit the needs of your business.
Geographic Scope
An independent contractor non-compete should be limited in geographic scope to where the independent contractor performed his/her services on behalf of your company.
Takeaway: Keep in mind that some states will only allow an independent contractor non-compete that is limited to the geographic scope where the independent contractor would reasonably be expected to encounter former customers, clients, patients or accounts.
Specific Activity Restricted
The independent contractor non-compete should restrict the independent contractor from performing specific activities such as soliciting any of your customers, clients, patients or accounts that he/she contacted during the course of his/her duties. It also should restrict the independent contractor from providing services on behalf of any of your competitors where the independent contractor also performed services.
Takeaway: An independent contractor non-compete often will restrict a wide range of activity that can be performed by a competitor, and therefore, it is critical to limit the scope of activities that you seek to restrict. Remember, if you go too broad, an independent contractor non-compete will not be enforceable against the former independent contractor.
Pros and Cons for Independent Contractors
As an independent contractor, non-compete agreements have both pros and cons. The first thing to understand is they do not mean as much because you are not an employee, you are a contract worker. So, these agreements can be viewed as a blessing and a curse. The latter applies to the former.
On the pro side, these agreements can actually make you more valuable. They remove your competition, so some of your value for one employer can be in your non-compete from the point of view of that employer. From the point of view of the potential competitor it is a curse because, even if they wanted to recruit you away from your current employer, they cannot because you are restrained from working there.
The other side is what makes these agreements bad for independent contractors. The restrictions are usually drafted as applying to non-compete agreements, non-solicitation agreements, non-competition agreements, non-poaching agreements, and/or non-moonlighting agreements. The restrictions are thick and broad in some cases, limiting their ability to work in the same field pretty much anywhere.
This is a real problem because it prohibits the independent contractor from moving around in the industry, at least unless they are willing to break the restriction on working for a competitor during the non-restricted period, or risk getting sued over the violation of the terms of the existing contract. Again these have less force than they would for an employee due to the broader nature of these contracts and their enforceability issues.
Negotiating a Reasonable Non-Compete Provision
Negotiating a Fair Non-Compete Agreement for Independent Contractors
While independent contractors have a number of rights under California law, they also have a number of responsibilities – including complying with a valid and enforceable non-compete agreement. Independent contractors wishing to protect their right to work and earn a living in this state should therefore pay close attention to the language of any non-compete that they are being asked to sign prior to accepting a specific position.
Fortunately, there are several things you can do as an independent contractor to negotiate a fair non-compete agreement with a limit on the impact it may have on your ability to earn a living. For example:
- Ask the prospective employer for more time to review the agreement and suggest language that will make it more reasonable.
- If you run into resistance, consider hiring an attorney who focuses his or her practice on employment or contract law to look over and negotiate the agreement for you .
- Talk with your employer about what engagement, position or job responsibilities the non-compete may impact and get clarification on their application outside your state.
- Many employers will write into the agreement that it is in force in California (for independent contractors performing work in this state) only if it is deemed unenforceable in this jurisdiction for any reason. This is often preferable to having a California court make such a determination at a later date.
- Keep in mind that the burden of proving the non-compete was violated is on the employer, and do not let their pressure tactics make you believe otherwise; and
- In some cases, it may be best to turn down the offer of a job if it comes along with a non-compete agreement that you view as unreasonable in any way.
Making sure you fully understand your rights and protections as an independent contractor – including your contract rights under a non-compete agreement – is essential, as you face a range of consequences when a non-compete is enforced against you.
Alternatives to a Non-Compete Agreement
Employers often find that non-compete agreements pose more problems than they solve. Employers have alternative contractual options for protecting their business interests. Non-disclosure agreements (NDAs) are a common solution; in an NDA, the employee or independent contractor acknowledges that he or she has access to confidential or proprietary information and agrees to keep that information confidential. Likewise, non-solicitation clauses in employment agreements attempt to prevent a departing employee from soliciting customers or employees of the former employer for a certain period after termination of employment.
Non-competes do not generally work for many employers, particularly small employers. For example, non-competes are rarely successful in successfully protecting small businesses because the small company has a smaller market share; thus, the company has less to protect. In contrast, large companies have more information to protect and therefore an easier time showing that the high risk of harm justifies the non-compete. NDAs or non-solicitation agreements are more fitting solutions for many employers. They may be more successful at protecting a legitimate business interest, such as a customer or company list that is not readily ascertainable by the public or a competitor, while placing less of an intrusion on the former employee’s ability to work. Furthermore, for many companies, their trade secrets change over time. NDAs and non-solicitation agreements can be drafted in such a way as to allow for modification or addendums to be attached at a later date, thereby allowing the business to adapt as its competitive concerns change. Many clients prefer this flexibility because it allows them to maintain their competitive edge without increasing the costs of drafting new non-compete clauses as their business landscape changes.
On the other hand, some clients view the non-compete as a sort of insurance policy. Clients believe that if they require a non-compete, they are covered. Clients don’t want to run the risk that the former employee is going to stay in the state, start a competing company and affect their bottom line. What clients don’t understand is that in addition to potentially being unenforceable, non-competes are not "good insurance." What happens when the company needs to lay off a number of employees, but the company must still pay a group of employees who are no longer working there? What happens when the company must shut down operations in a city, but must continue to pay the former employee for a number of months? What happens when the business has been sold and the non-compete has now become worthless? Non-competes might be prohibitively expensive to administer because they require the involvement of the human resources department, the managerial staff, employment lawyers, litigation counsel, etc. It is usually more cost effective to attend to your concerns in the beginning.
When to Fight a Non-Compete Agreement
When you work as an independent contractor, the terms of your contract with any given employer should be clear…including whether a non-compete agreement is part of it. In situations in which non-compete agreements are not explained explicitly and fully to independent contractors, it may be worth challenging the agreement.
There are also times when an employee signs a non-compete agreement but then no longer works for that employer, making it a non-compete between their business and itself. It may still be possible to defend a challenge to the agreement, which is why lawyers are there to help you out.
Pre-Employment
A non-competition agreement should be given to you before you start working for a company. If you’re asked to sign it without explanation, or if it’s presented to you some time after you’ve already begun your employment, it may not be valid. You can work to have it overturned by all means, but in this case you’re much better off taking a proactive stance on the company and letting it know a non-compete agreement should have been presented up front .
When to Challenge
There are many circumstances under which it may be best for you to legally challenge your non-compete agreement. For example, it may simply be so broad and unreasonable as to render it unenforceable. In addition, it may even be written in a way that does not even appear like a non-compete.
Another situation is when you’ve been given a new contract and the company is trying to get you to sign a new non-compete agreement. Companies sometimes employ this tactic after they hire you and prefer not to have you as a competitor. However, you may very well be able to challenge the agreement and have it thrown out.
The Importance of Speaking to an Experienced Lawyer
Non-compete agreements by independent contractors shouldn’t be putting you in a position where you’re looking at legal challenges to your employment. Unfortunately, however, this is often the case. All contracts are up for discussion, so if you see a clause that you don’t like, discuss it with an experienced lawyer who can provide you with a well-informed opinion and tell you how best to proceed.