Non Compete Agreements for Independent Contractors
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The law about non compete agreements can be tricky even for regular W2 employees. Signing a non compete with an independent contractor presents additional challenges.
Why a Noncompete With an Independent ContractorAn employer might want a non compete agreement for the same reasons that apply to W2 employees. These include protecting the company's trade secrets and confidential information, or protecting the employer's goodwill.
The contractor may also have significant customer contact. You may be concerned that if they work for a competitor they will bring with them the company's goodwill. These are both considered legitimate business interests that you can protect with a non compete. Having your independent contractor sign a noncompete can help with that. Are Non Compete Agreements Enforceable Against Independent Contractors?Massachusetts now has a statute defining the circumstances under which a non compete can be enforced. That statute specifically states that it is applicable to independent contractors and employees. You can read more here about the general rules for enforcing non competes in Massachusetts.
You should be aware that there are ways that true independent contractor status inherently conflicts with a non compete. For example, to be a in independent contractor a worker must be free from supervision and control. A non compete that limits their activities for a period of time after termination could be seen as control. Also, an independent contractor has to be engaged in an independent business providing services to others. A non compete that prohibits competition during the term of employment directly contradicts this element. What Are the Risks of Signing a Noncompete With an Independent Contractor?One risk is that the agreement will not be enforced based on any of the common defenses to non compete agreements that re available to both employees and independent contractors.
The major risk, however, is that the agreement itself will undo the independent contractor status of your employee. This could be because it prohibits them from working for others while working for you. It could be because the non compete itself is evidence of enough control to make the person an employee. What does that mean in practice? You might seek to enforce the agreement only to face a counterclaim from the employee for misclassification. Massachusetts employment laws are strictly enforced. These include the Independent Contractor Law which limits who can be hired as a contractor. You can read some examples here of people who have successfully challenged their non compete agreements. These include individuals who have been able to get a release from their non compete by challenging their independent contractor status. You should take into consideration that the risk of a challenge to a contractor's status is about more than just the non compete. A worker who proves they should have been paid as an employee can recover three times their actual damages. You can also be on the hook for all of their costs and legal fees. |
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What Should You Include in an Independent Contractor Agreement?
If you decide you want to include a non compete, you should seek legal advice first. It is important to understand the risks in your situation and minimize them if possible. There are other things you can do in the agreement that carry less risk of converting it to an employment contract.
The restrictions on enforcement of non competes do not apply to nondisclosure or non-solicitation provisions. This means you can include a confidentiality provision in your independent contractor agreement to protect your trade secrets and confidential information.
Similarly, you can include a provision restricting the contractor from soliciting customers or employees after termination. This may be all you really need to protect your company's goodwill.
You can also protect your intellectual property rights to the contractor's work without putting their status into question. This can be done with a "work for hire" provision. This makes clear that any work you are paying them to create belongs to the company and not to the contractor.
The restrictions on enforcement of non competes do not apply to nondisclosure or non-solicitation provisions. This means you can include a confidentiality provision in your independent contractor agreement to protect your trade secrets and confidential information.
Similarly, you can include a provision restricting the contractor from soliciting customers or employees after termination. This may be all you really need to protect your company's goodwill.
You can also protect your intellectual property rights to the contractor's work without putting their status into question. This can be done with a "work for hire" provision. This makes clear that any work you are paying them to create belongs to the company and not to the contractor.
How We Can Help
We have helped many small business owners assess their employment practices and their risk. We can help you structure your hiring and agreements in a way that minimizes risk, and respond in the event of a problem. You can use the button below to schedule a call back from a member of our team, or give us a call at 781-784-2322.
