The Lowdown on Independent Contractor Non-Compete Contracts

What is an Independent Contractor Non-Compete?

Employers commonly use "non-compete" agreements to restrict former employees from immediately starting competing businesses, or working for competitors. Similar restrictions apply to independent contractors, although such restrictions can be more difficult to enforce. Nevertheless, companies enter into non-compete agreements with independent contractors as well. We have discussed the independent contractor relationship here and recent case law here.
A non-compete agreement (also known as a covenant not to compete) prohibits a former employee from entering into a profession, business, or trade that competes against the employer. Non-compete agreements are generally entered into after the employment contract , although they are sometimes incorporated into the employment contract itself. Non-compete agreements typically prohibit working for or starting a similar business within a certain geographical territory, for a specific period of time, and/or in a specified location.
Non-compete agreements are generally ancillary to an employment relationship, meaning that they require some legitimate business interest. Courts will not enforce non-compete agreements that are written simply to harm the employee or competitor. Rather, non-compete agreements should protect confidential information, trade secrets, or reduce the likelihood that former employees will "steal" customers or clients. Moreover, if an employer has invested significant time and resources into training an employee, then it can be a legitimate business interest to prevent the former employee from competing.

Independent Contractor Non-Compete Restrictions

Independent Contractor Non-Compete Agreements
The non-compete agreement for independent contractors is also critical to have, and done right, it is a great protection for employers as well. It is important to remember that independent contractors are not the employee. For example, as a general rule for a full-time employee to have a valid non-compete clause the employee must receive something significant at the time of signing. This can be a sign-on bonus, a raise for a promotion, or even promotion into a different job in the company. Rarely do attorneys write non-compete clauses into job offers when no bonus, raise or promotion has occurred. Independent contractors need not even have their work reviewed, or not be in a managerial role for a non-compete clause to be enforceable. However, the business should always consult with an attorney on the different types of independent contractors who may work on non-compete clauses.

Legal Issues and Enforceability

Several legal considerations are present concerning Independent Contractor non-compete agreements. For example, the length of time for which the Independent Contractor agrees not to compete with the principal must be reasonable in order to protect the legitimate business interest. While it is true that most courts recognize that the purpose of a non-compete agreement is to prevent unfair competition by a former employee in order to protect the legitimate business interest of a former employer, the non-compete must be reasonable in its restrictions to be enforceable. Stated otherwise, an Independent Contractor non-compete that lasts indefinitely into the future is not likely to be enforceable, given that the duration is not reasonably limited.
Geographic restrictions of a non-compete are also a consideration. It is well known that regardless of the reasonableness of the geographic restrictions of a non-compete agreement, a principal cannot obstruct independent competition among independent contractors. Most Independent Contractors are free to compete with the principal, unless the parties have specifically agreed otherwise and the agreement is reasonable as to the consequences imposed for violating the restrictions in the agreement. This means that discipline must be fair and proportional. For example, if a non-compete deals with restrictions against soliciting as opposed to the actual solicitation in violation of the non-compete, then the principal must limit its discipline to no more than is responsible.
Furthermore, many laws apply to the enforcement of non-compete agreements, including the federal Fair Labor Standards Act, the Employee Retirement Security Act, the National Labor Relations Act, the Titles VII, VII and IX of the Civil Rights Act and individual state laws in each jurisdiction. Federal agencies are also concerned regarding the enforcement of non-compete agreements. Finally, there is almost a full unavailability rule with respect to the enforceability of non-competes with respect to partners and persons within the bottom tiers of management, specifically those who manage other lower levels of employees.

Pros and Cons of Non-Competes for Independent Contractors

For independent contractors, the foregoing discussion should not suggest that non-compete agreements are necessarily bad things. For example, an independent contractor may be provided with a lucrative opportunity to enter into an independent contractor relationship with a business, but the business insists that the contractor sign a non-compete agreement as a condition to the engagement.
In deciding whether to enter into such an agreement, the independent contractor must weigh a host of factors, including in particular the amount of income they are being offered from the business.
Because an agreement that is too broad in its terms may be unenforceable, a business may agree to a narrower covenant than it might otherwise demand. Ultimately, the independent contractor may decide that the amount of income creates a significant enough cushion against a loss of business opportunities in the field that the employment creates, that the risk of signing the non-compete agreement is worth taking. By contrast, if the amount at issue is minimal, the independent contractor may decide that the residual impact of the non-compete – the inability to work for a period of time in the new field, or a limitation to geographic locations which the contractor ordinarily works in – is simply not worth the risk.
Another issue for independent contractors to consider is that, as independent contractors, they are not likely to have benefits to account for, like bonuses or deferred compensation, retirement accounts or the like, which would have to be similarly accounted for if the contractors must leave their former employer. The contractors may further have to account for gaps in their work history resulting from non-compete agreements, since a business may not be as easily persuaded to employ or enter into contracts with an independent contractor who has another business listed on his or her resume.

Drafting a Reasonable IC Non-Compete

Independent contractors generally have more negotiating power than employees. As a contractor, you are generally in business for yourself and are more likely to have both the option to decline work and to have multiple clients. In this environment, it’s imperative that your independent contractor non-compete agreement be fair and avoid imposing unreasonable restrictions on your ability to work in your field in the future. Moreover, depending on the nature of your work, a court may not enforce an overly restrictive non-compete simply because you’ve signed it.
Fortunately, there is considerable help available in creating an independent contractor noncompete that works equitably for both parties and is more likely to be enforceable if you haven’t. The following are some of the best practices that have been used in preparing independent contractor non-competes:
Some independent contractor non-competes include only a geographical or "territory" limitation and do not include time periods during which the contractor is barred from working with a client that has been the subject of work. This approach is good because it allows a contractor to begin new work as soon as possible. It is also good because it is often easier to enforce a geographical limitation where the market area is closely related to the clients’ location.
In this scenario, an independent contractor non-compete is drawn up granting the independent contractor a period of time to complete all existing projects. If the period expires without the contractor completing the projects, its is agreed that the contractor will no longer do future work with those clients. While there could be some awkwardness while the period runs its course , this limited approach may avoid a situation where the contractor loses a key client as a result of the non-compete.
Particularly where the independent contractor is being afforded some form of exclusivity in being hired out, it is generally better to agree on a mutually acceptable limit on the independent contractor’s post-agreement contacts with clients. This may involve a simple 6 month or 1 year limitations or a more elaborate sliding scale that limits the contractor from working with certain clients at first, but allowing the contractor to move to other clients and eventually work with the former clients.
When an independent contractor non-compete provides no express means for the contractor to negotiate a release, it can result in an imbalance where the contractor has no recourse even though it may not have violated the letter or spirit of the agreement. Some independent contractor non-competes provide for a period of time during which the contractor can negotiate a release from the agreement with the client. The negotiated release can also require that the contractor pay a release fee to the client. With both a time limit and an agreed upon release amount, the independent contractor is assured that its value has been weighed by the client and therefore that its efforts to negotiate a release have been considered.
In general, an independent contractor should take the same care that an employee would take in dealing with a Non-Compete Agreement. This means taking the time to read the document in detail before accepting an engagement and, if necessary, negotiating the provisions with the client to be sure they are agreeable and reasonable from the independent contractor’s perspective.

Alternatives to Independent Contractor Non-Compete

Instead of the traditional non-compete, which restricts the independent contractor from working for, or soliciting, any competitor for a certain period of time after their work with you is over, appropriate and valid restrictions can be put in place on an independent contractor’s access to or use of the company’s confidential information, or on that independent contractor’s solicitation of specific clients and other designated restrictions.
For example, maybe you know that the independent contractor will be in direct and personal contact with a small list of your company’s best customers. While you may not care if the contractor goes on to work with competitors across the board (there are only 10 companies in the world who do exactly what you do), you may want to make sure, contractual or not, that the contractor doesn’t solicit your company’s top 3 or 5 clients on their way out the door. Although this is harder to legally prohibit due to a lack of customer relationship, there are ways to possibly discourage this independent contractor behavior.
Or, on the other hand, maybe the independent contractor’s use or knowledge of your trade secrets and other confidential information is worth protecting, and restricting the contractor from using this information when working with a direct competitor post-contract makes sense. However, requiring the independent contractor to never work with these competitors again could be overreaching, considering the independent contractor may have other work or non-compete agreements through which the competitor can acquire the same information.

Latest Developments and Examples

When examining independent contractor non-compete agreements, it is important to understand how the courts are interpreting these provisions. Some of the recent trends involve the close scrutiny of non-competes with these types of workers. In a case that predates California’s enactment of BPC § 16600, a federal court confronted the issue of the enforceability of a non-compete provision in an independent contractor agreement in Scholle v. Kennelly, 933 F. Supp. 1053 (N.D. Ill. 1995). The district court held that enforcing this non-compete would be contrary to public policy. In this case, the independent contractor was a wholesale retailer of frozen pizza. The company’s product was marketed exclusively to Red Lobster. A few months after the independent contractor commenced his business, another entity began marketing its own frozen pizza to Red Lobster. Following his termination, the independent contractor entered into a non-compete that prohibited him from selling frozen pizza for up to three years. The court held that the restrictive covenant "would severely curtail competition in the frozen pizza market at Red Lobster and would heavily limit the available market for plaintiffs’ product." As the court noted, there are limited companies that sell frozen pizza to Red Lobster and allowing the plaintiff to market its products would benefit consumers through greater competition. In Ting v. Pacific Bell, 31 Cal. 4th 974 (2003), the California Supreme Court recognized that independent contractors generally lack bargaining power with respect to the terms of their employment. Courts have also suggested that non-compete provisions for independent contractors deserve enhanced scrutiny. A number of courts outside California have refused to enforce non-competes on independent contractors based in part on heightened scrutiny. See, e.g., Scholle v. Kennelly, 933 F. Supp. 1053, 1061 (N.D. Ill.), aff’d in part, rev’d in part, remanded, 29 F.3d 815 (7th Cir. 1994); Peters v. Weisz & Assoc., 605 S.E.2d 789 , 796 (Va. 2004). A second trend has been courts finding some independent contractor non-competes overbroad. In Hamm v. Automotive Express, Inc. 2002 WL 31654971 (E.D. Va. 2002), the United States Court of Appeals for the Fourth Circuit reversed an injunction that would have effectively foreclosed a former independent contractor from working in his field of professional. The former employer was engaged in the business of installing window tint. In order to work as an installer, an installer needed to enroll in the International Window Film Association. The non-compete provision prohibited the installer from working for a competitor of his employer that was also a member of the Association. The court found "there are dozens of window tint installers scattered across the country, many of whom belong to the [Association] and, thus, are competitors of [the former employer]." The court concluded that the scope of the prohibitions contained in the non-compete were too broad. Moreover, the employee’s membership in the Association was not confidential. The court held that it was necessary for the ex-employee to be able to take advantage of this professional association as this was "a tool that enables [the employee] to demonstrate his competence and to promote his professional recognition." Another court found a non-compete too broad even though the employee had general access to confidential information. In Sirius Computer Solutions, Inc. v. Zultimate Holding, LLC, No. 14-CV-3211, 2016 WL 11715705, *19 (W.D. Tex. June 9, 2016), the court determined that a "client list" was not confidential because a skilled salesperson would know such information, or it could easily be uncovered through regular competitive investigation. The court also held that the non-compete was overbroad in terms of duration (noting that covenants not exceeding three years are presumed reasonable whereas a five-year restriction is presumptively unreasonable) and geographic scope because "the Dallas/Fort Worth area, the San Antonio area, and the Houston area are each distinct, and a covenant restricted to all three areas seems overly broad."