By Seth L. Laver, Esq., Jennifer M. Mannion, Esq. and Michael D. Brophy, Esq. of Goldberg Segalla 

There are many advantages to employers in hiring independent contractors in lieu of part or full time employees. For starters, employers do not have to pay payroll taxes, minimum wage or overtime, or provide meal and rest breaks to independent contractors. Nor do they have to cover the contractors under their workers’ compensation insurance, unemployment insurance, disability, or social security. However, hiring an independent contractor can also pose risks to an employer. Especially in today’s business world where technology and electronic data can be valuable and relied upon by companies, the risks posed by an independent contractor who works for similar and competing organizations can be great.

In response to the problem and in an effort to mitigate the risk, more and more companies are requiring independent contractors working for them to enter into noncompete agreements. On the surface, the reasoning is logical. Independent contractors are barred from stealing information or technology learned from the employer and utilizing it for itself, partnering with another, or selling it to a competitor.

However, noncompete agreements with independent contractors are not so simple. While they may appear at first glance to be of benefit to the employer, they can also pose several risks. One of the greatest risks posed by noncompete agreements arises when an employer attempts to enforce the agreement. An independent contractor defending a breach of a noncompete agreement may claim he or she was misclassified as an independent contractor, when in fact, he or she should have been classified as an employee. Employers who have misclassified employees can be subject to penalties and damages for failing to pay minimum wage, overtime, and provide meal and rest breaks, among others. An employer seeking to enforce a noncompete agreement against an independent contractor puts itself at risk for such a claim. Prior to attempting to enforce the agreement, employers should carefully review the facts to determine what risk is posed by the independent contractor and whether any such violations occurred, and balance this with the potential benefit of enforcing the agreement. A noncompete agreement may not be worth enforcing against an independent contractor if there is any argument for misclassification, or if the risks of such claims outweigh the benefits of the noncompete terms.

Furthermore, depending upon the scope of the noncompete agreement, it can itself be proof that the independent contractor was in fact an employee, rather than a contractor. For example, where a noncompete agreement precludes the contractor from any form of competition, and prevents the contractor from obtaining any similar employment, the contractor will be found to be an employee.

This occurred in the U.S. District Court case of Perez v. Supermaid, LLC. There, the employer improperly classified maids as independent contractors. The finding was based upon the noncompete agreement signed by the maids that prohibited them from competing “directly or indirectly” during their employment.

Despite these risks, there are times when the noncompete agreement may be an appropriate tool for the employer. To determine if the agreement is appropriate, employers should look first to the nature of their relationship with the independent contractor and the scope of the work performed. A careful and honest analysis of whether the contractor is really a contractor, or should more appropriately be classified as an employee should be conducted. Legal counsel should always be consulted if there is any question. If the contractor’s position is questionable, a noncompete agreement could work against the employer to solidify any contention of misclassification.

When utilizing the noncompete agreement, employers should also ensure it is tailored towards a legitimate business interest, such as protecting a trade secrete or information. Agreements such as these are more likely to be found enforceable. Furthermore, noncompete agreements must be reasonable to be enforceable. This means that they must be limited geographically and reasonable as to the time period to which the contractor cannot compete.

Employers concerned about the risk posed by independent contractors and seeking to utilize or enforce a noncompete agreement should seek experienced legal counsel to ensure its rights are protected. If you are an employer and would like to learn more about classifying your employees, utilizing noncompete agreements, or need any other guidance on this issue,

Please contact Marc Zimet at Jampol Zimet, LLP at (213) 689-8500 or at mzimet@jzlaw.com