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Why You Can't Have A Non-Compete Clause In A Contractor Agreement
Independent contractors are a great way to have help on a project without taking on the responsibility of hiring an actual employee. Essentially, you will enter into an agreement with them, by means of a clause or separate contract, for a certain amount of time, typically until your project is completed, and then the employment is over. The benefits of this for the employee and employer are that there are no W-2s, guaranteed hours, or standard employer guidelines required. However, the flip side to this is that you cannot hold your contractor to certain standards or clauses like a non-compete clause like you would be able to if they were an employee. Ultimately here is what you need to remember, Independent Contractors, work with you, not for you.
Here are three primary reasons why you cannot hold a contractor to a non-compete clause!
Reason 1 - Independent Contractors Need To Be INDEPENDENT… Meaning They Have To Be Free From Supervision and Control.
The actual employment status of an “independent contractor” makes it almost impossible to enforce any type of non-compete agreement. Why? Well, the primary reason is that they are not your employees under IRS standards. When you start to enforce strict guidelines, like a non-compete, with a contractor the IRS will ping that as you are holding them to an employee standard without the benefits. Further, employees come with different tax requirements so now it appears that you are listing a contractor improperly for your benefit. This is a very sticky line to cross and one you should be very careful over. Again, contractors work with you, not under you, so you really have no ability to control who they work for during or after your contract with them has been completed.
Reason 2 - You Can’t Restrict A Contractor’s Ability To Make Income.
A problem with non-competes and independent contractors is that it puts a substantial burden and hardship on their potential earnings with other employers. Imagine how difficult it would be if every contractor had to follow a non-compete in a small geographic area. They would never be able to find work! The non-compete would essentially be blocking someone from landing another side job even though you do not want to bring them on as an employee.
Reason 3 - Non-Competes Are Only Valid For Certain Time Periods and Within Certain Regions
In order for a non-compete clause to be valid in an employment contract, there are very strict parameters of how long a non-compete can be for and where it will be enforced. When you have a full-time employee solely working for your business, you may be able to instill a non-compete that extends for a certain period of time after employment (such as two years) but you have to restrict that to a specific region that your business is in. Most states are actually creating nuanced case law regarding non-competes to make them incredibly difficult to enforce even for employees. Thus, if they are going to be insanely difficult to implement with employees, there is no way you’re going to be able to legally implement one with a contractor.
What Can You Do?
First, if you are concerned about the contractor competing with your business and really want a non-compete clause, you should alternatively choose to have them sign a Non-Solicitation Clause. This means they will not be able to try to solicit services from your current clients or at events they are contracted to work at. This way you can ensure they are not competing with you during the time of your contract and this type of clause is legally enforceable.
Another clause that could be helpful in this type of employment relationship is for the independent contractor to sign a Confidentiality Clause. A confidentiality clause protects your trade secrets and client information from being shared by your independent contractor. This is essential to keeping the "secret sauce” of your business a secret! If you want to read more on this topic please check out our blog What the Heck is an NDA, and Why You Need One!
Finally, a good clause to have in your independent contractor agreement is a Work Made for Hire Clause. A work made for hire clause ensures that any work that the independent contractor does for your company during the time of contracted employment remains the property of the company. For instance, if your independent contractor creates graphics for your Instagram page, as long as you have a work made for hire clause these graphics will remain the property of your company.
TLP’s take… Non-compete agreements are not usually enforceable in independent contractor employment situations. If you still really want to enforce a non-compete agreement competition with your independent contractor and want to control the way they do business during their employment with you and for, say, two years after, then you need to hire them as an employee. Oftentimes the headache of bringing them on board as an employee is far outweighed by the piece-of-mind you will feel knowing they are held to a non-compete.
Ultimately Independent Contractors have a different position in your business and do not need a non-compete for the same reasons an employee does. You have to remember that contract work and regular employment are very different and are seen that way in the legal context as well. A few clauses that will protect your business when working with independent contractors are Non-Solicitation Clauses, Confidentiality Clauses, and Work for Hire Clauses. If you need help setting up a contract, check out The Legal Paige’s Independent Contractor Template or seek legal advice!
THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis is necessary based on your location and contract. Consult an attorney in your home state for advice regarding your contract or specific legal situation.