Why You Can't Have A Non-Compete Clause In A Contractor Agreement

So, your small business has gotten to the point where you're ready to hire an independent contractor. 

Congratulations!

I know from experience how much time and effort it takes to get your business from solopreneur to hiring other people.

Independent contractors are a great way to get help on a project without taking on the responsibility of hiring an actual employee. Essentially, you agree via contract to work with someone for a certain time (usually until your project is completed). 

For example, a photographer hiring an assistant for a photo gig, or a marketing agency hiring a web designer for a website. After the time is up or the project is complete, the work relationship ends.

There are some benefits of independent contractor relationships for employers. 

Pros: You don’t need W-2s, guaranteed hours, or standard employer guidelines. 

Cons: The flip side is that you can’t hold a contractor to certain standards and agreements like an employee. This includes non-compete agreements, which prevent them from working with competitors or building a direct competitor business later.

Ultimately, here is what you need to remember: Independent Contractors work with you, not for you.

I’m Paige Griffith, CEO and lead attorney behind The Legal Paige. I empower creative small business owners with legal education and easy-to-use contract templates. I’ve practiced law for over eight years and provided over 10,000 contract templates/tools to business owners. As both a lawyer and entrepreneur, I understand your challenges and dreams and I’m here to help!

I put together this article on three reasons why you can’t hold a contractor to a non-compete clause to help you understand the legal stuff before you hire an independent contractor:

Reason 1 - Independent Contractors Need To Be INDEPENDENT

Even if an independent contractor signs a non-compete clause, a judge would rarely uphold it in court.

Why so? 

Because independent contractors need to actually be INDEPENDENT…meaning free from supervision and control.

The main reason non-competes are not enforceable is that they are NOT your employee under IRS standards. The IRS sees strict guidelines, like a non-compete, as holding a contractor to an employee standard. The thing is, contractors don’t get the benefits employees do, such as: 

• Health Benefits 
• Dental 
• Vision
• Retirement 

Employees also have different tax requirements, such as withholding income tax and Social Security and Medicare taxes from employees. So, if you hand a contractor a non-compete clause, it can make it look like you’re categorizing a contractor improperly for your benefit. This is a very sticky legal line to cross, so be very careful. 

Again, contractors work with you, not under you. So really, you can’t control who they work with during or after your contract period.

Not sure if someone you work with should be a contractor or an employee? It’s an important question for business owners, which is why we created this quick video explanation to help you think through this decision!

Reason 2 - You Can't Restrict a Contractor's Ability to Make Income

Non-competes would severely limit a contractor’s opportunities for income from other employers. (This is something the Federal Trade Commission is trying to prevent.)

Contractors should be free to work with whomever they want — even competitors. 

Limiting this freedom shrinks their pool of potential clients, especially problematic in small geographic areas where opportunities are already limited. Flexibility is crucial for their financial stability and allows them to gain diverse work experience.

That’s part of the inherent risk of hiring a contractor. 

Employers don’t have the same level of control as they do over regular employees. A non-compete agreement would essentially block a contractor from landing another side job, even if you don’t intend to hire them as an employee. This would reduce their ability to earn a living. (An exception to this is an exclusivity clause. More on that below!)

Overall, a non-compete doesn’t apply to contractors because they need flexible work options for financial stability and career growth.

Reason 3 - Lawmakers Are Cracking Down on Non-Compete Agreements

Laws vary from state to state, but non-competes are generally very limited in where and for how long they can legally apply. Courts in most states have made it incredibly difficult to set up a valid non-compete agreement.

And as of April 23, 2024, the Federal Trade Commission (FTC) banned non-compete agreements for virtually all workers at for-profit businesses. (This applies to employees, not just independent contractors.) (1)

The FTC is a government agency created by Congress that regulates national trade and business issues. Its new rule prohibits non-compete agreements and non-compete clauses in employment contracts. The ban also applies to other contracts and company policies that limit a worker’s later job or business opportunities. 

If an employer violates this rule, they could face fines or penalties.

This is the first-ever nationwide ban on non-competes! It’s scheduled to take effect in September 2024. But it could be delayed by lawsuits. Here at The Legal Paige, we like to keep our small business owners up on the latest legal news. Watch our YouTube video for the scoop on the non-compete ban. (2)

But remember, regardless of the FTC rule, independent contractors are independent by nature. So if you tried to agree to a non-compete with a contractor…it probably wasn’t valid to begin with. 

When it’s getting this difficult even to hold an employee to a non-compete agreement, there’s no way to do so with an independent contractor.

4 Ways to Protect Your Business in a Contractor Agreement Without a Non-Compete Clause

Many entrepreneurs are concerned about contractors taking inside strategies, data, or clients to a new or competing company. Or they’re concerned about contractors building competing businesses with the knowledge they gained working with them. “Non-compete” may come to mind, but now you know that isn’t the way to go. 

Thankfully, there are more legally reliable ways to protect your business when working with contractors.

Here are three concerns you might have as a business owner and how to address them in an independent contractor agreement:

Protection #1: Use a Non-Solicitation Clause 

First, you might be concerned about a contractor taking your clients. 

For this, consider including a non-solicitation clause in your contract. This restricts a worker from soliciting business from your current clients. It can also prevent them from soliciting business at in-person events they’re contracted to work at. This is a legally valid way to ensure they’re not competing with you during the time of your contract or for some time after.

Protection #2: Use a Confidentiality Clause 

Second, you may be concerned about protecting trade secrets, client data, or other information. 

This is where you want a good confidentiality clause. This is essential to protecting the "secret sauce” of your business! For more on this topic, please check out our blog WHAT THE HECK IS AN NDA, AND WHY YOU NEED ONE!

Protection #3: Use a “Work Made for Hire” Clause 

Third, you probably want to make sure that any work the contractor does for your company remains YOUR company's property. 

That’s what a “work made for hire” clause is for. For instance, if an independent contractor creates graphics for your Instagram page. Under the “work made for hire” clause, these graphics will remain your company’s property after their work ends.

Protection #4: Use an Exclusivity Clause

Finally, you may want to prevent a contractor from working with direct competitors while you’re working with them. In rare situations, you might do this with an exclusivity clause. An exclusivity clause restricts a contractor from working with very specific direct competitors. 

For example, let’s say you contract with a social media manager for your financial education business. The social media manager might sign an exclusivity clause, agreeing not to work with other financial education businesses during your contract period. But, of course, they are still free to work with other types of businesses!

Exclusivity clauses are generally less restrictive than non-compete agreements and often apply only during your contract term. An exclusivity clause needs to be drafted very carefully so it doesn’t look like a non-compete agreement.

So now: 

1. You're ready to hire an independent contractor for your online small business. 
2. You’re steering clear of any contractor non-compete clauses!
3. And you know 4 protections for your business you can still add to your contract. 

Do you want a done-for-you Independent Contractor Agreement?

Check out THE LEGAL PAIGE’S INDEPENDENT CONTRACTOR TEMPLATE. 

This template is: 

1. Attorney-written and reviewed. 
2. You can use over and over again in your business journey for hiring contractors. 
3. And includes free updates from an attorney so you can make sure your contract stays compliant. (Which is especially important when hiring these days.) 

If you want to build your business on a solid legal foundation, watch my FREE MASTERCLASS: How To Build a Legally Legit Business. 

In this QUICK, 45-minute masterclass you’ll get a boiled-down recap of what your business needs RIGHT NOW to be legally protected. 

Inside you’ll learn: 

• The surprising ways a well-crafted client contract can transform your business. 
• Real legal stories (ahem, soap operas) from my clients + how to avoid the same pitfalls.  
• How to leverage your legal tools to book higher-end clients.
• Actionable steps to ensure your contract is an actual shield protecting your business. 
• And so much more!

This masterclass has the potential to save you loads of money, prevent stressful client confrontations, and pave the way to a legally protected business.

Key Points on Contractor Non-Compete… 

• Non-compete agreements usually aren’t valid when working with independent contractors. You’re more likely to have a valid non-compete agreement with an employee than an independent contractor. It’s important to remember that contract work and regular employment are very different and are seen that way in the legal context as well.
• However, a new rule by the FTC will potentially ban almost all non-compete agreements anyway. (This rule is scheduled to go into effect in September 2024, subject to current and pending lawsuits.)
• You can take other approaches to protect your business in an independent contractor agreement. These include:

1. Non-solicitation clauses
2. Confidentiality clauses
3. “Work-for-hire” clauses, and
4. Exclusivity clauses

• An easy way to set up a legit independent contractor agreement is with THE LEGAL PAIGE’S INDEPENDENT CONTRACTOR AGREEMENT TEMPLATE. 

THIS BLOG POST IS NOT A SUBSTITUTE FOR LEGAL ADVICE. EVERY SITUATION IS DIFFERENT & IS FACT-SPECIFIC. A proper legal analysis considers your contract and location. 

**If you’re concerned about non-compete agreements, talk to an experienced employment lawyer in your state. They can help you ensure that you handle non-competes properly. This is especially important if you already have situations underway with employees or contractors you aren’t sure what to do with.

SEE OUR FULL DISCLAIMER HERE.

^{(1) “FTC Announces Rule Banning Noncompetes.” Federal Trade Commission, April 23, 2024. https://www.ftc.gov/news-events/news/press-releases/2024/04/ftc-announces-rule-banning-noncompetes}

^{(2) Lawsuits related to the FTC non-compete ban:}