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Norton Law Corporation Non-Compete Agreements for Independent Contractors

Independent Contractors and Non-Competes Never Mix

A shorter week equals a shorter post. That means it’s the perfect time to talk about an issue that comes up a fair amount. Can I get my independent contractors to sign a non-compete agreement? If you haven’t read the title, get ready for a surprise: NO. That’s right, you never want to have your independent contractors sign a non-compete agreement. I’ll explain why in a little bit, but first some backstory.

Employers love hiring contractors over employees for a ton of reasons. No benefits. No healthcare. No wage laws. No vacations. You don’t have to deal with those bureaucrats and their rules getting the the way of your business. In fact, most employers would love to hire only independent contractors. Too bad that’s just about impossible given the differences between employees and independent contractors. But that’s a story for another blog post.

Many employers, to avoid the extra costs of employees, misclassify employees as contractors. And that’s, for those of you who haven’t read my other post comparing employees and independent contractors, is a big no no. Misclassification just leads to a lot of fines and lawsuits and other nasty situations down the road, so don’t do it. And more and more governmental agencies are starting to take notice—much to the chagrin of the employers.

But here’s the thing. Somewhere along the way, employers felt their contractors were sharing trade secrets. After all, they were working for the competition, often at the same time. And truth be told, you should hope they are, since that may tip the scales to the independent contractor side over the employee side. Employers did not see this as a good thing, and so they asked their independent contractors to sign non-competes. As I stated in the intro, this is bad—very bad. Why?

Because non-compete agreements are documents only signed by employees—NEVER by independent contractors.

It all comes down to the question of who is a true independent contractor? One who checks all the contractor boxes in the employee versus independent contractor test. One who works for others while they’re working for you. And if you make that contractor sign a non-compete agreement, then guess what, they now only work for you—like an employee. But what’s so bad about that? Well, they’re supposed to be working for a variety of companies in the same industry in which they have expertise. After all, I assume that’s why you hired that independent contractor. You wanted someone with unique knowledge of the industry. And how did they get that knowledge? Probably by working for some of your competitors.

So what is a savvy business owner to do when she wants to hire an independent contractor? Well, as you’ve just learned, never have them sign a non-compete agreement. Instead, make sure they sign a confidentiality agreement (aka a non-disclosure agreement). An independent contractor agreement that lays out exactly what they’re to do and how much they’re paid for it is also great. Follow those up with an invention assignment agreement and you’re all set. After all, you don’t want their hard work (which you paid for) to wind up as their property. Those three documents are usually enough to keep employers out of trouble. As long as they stay out of their contractors way.

And for those who are hiring an independent contractor for mission critical activities? Double-check that you actually want an independent contractor and not an employee. If that’s the case, then slap that non-compete agreement in front of your contractor and tell them to sign it. Well, maybe don’t slap it in front of them, but you get the picture.

One final note. If you’re hiring someone and you want them to be classified as an independent contractor, take a look at our other blog post on the subject. 7 Tests to Determine if that Independent Contractor You’ve Hired is Actually an Employee. And if you need help drafting any of the necessary documents for your business (like employment or contractor agreements), feel free to contact me.

A few notes: Somehow this has become the most popular post on my website, which has led to a number of questions. Allow me to address some of the most common.

  1. Is the de facto rule that independent contractor agreements should never have a noncompete clause, no way no how, lest it automatically render the agreement invalid or something like that? No. There are some reasons to include one, but on the whole including a noncompete clause in an independent contractor agreement can lead to that independent contractor being classified as an employee. It is simply one of many factors to be looked at when trying to determine if an independent contractor is actually an employee in disguise. Furthermore, this post—like all of the posts on my website—is merely legal conjecture. It is not necessarily the black letter of the law nor should it be considered applicable to your unique situation. If you have a legal issue related to independent contractors and employees, contact an employment attorney.
  2. Does this post apply to me in my state/country in my unique situation? I can’t tell you that. Being a California lawyer, I can only talk about issues based on a California perspective (with the exception of my trademark and copyright law posts, which in certain circumstances are designed to cover the Federal laws dealing with trademarks and copyrights). So if you are in another state or country, you will need to look to that state or country’s own laws regarding the issue of whether a person is an independent contractor or an employee. As for whether I can answer you regarding your personal situation, that depends on the facts at hand and whether you are located in California.
  3. Does the presence of a noncompete agreement in an independent contractor agreement automatically render that agreement unenforceable or automatically mean that person is an employee rather than an independent contractor? No. Again, the presence or lack of a noncompete in an independent contractor agreement is just one of many factors to consider when tasked with trying to determine whether a person is an employee or an independent contractor.
  4. Is there ever a good time to put a noncompete agreement in an independent contractor agreement? Sure. If the independent contractor you’re hiring is doing something very similar to what kind of business you’re running before you hire her as an independent contractor and plans to continue doing the same after she’s finished her tasks with you, then you may want to have a noncompete in there. But just be aware that you may find that person should probably have been classified as an employee given their similar skill set to what you’re doing as well as the presence of the noncompete.
  5. Will you help me litigate my case on the issue of independent contractors and employees? No. Sorry. I have no interest in litigating. My practice is almost entirely business transactional (I draft contracts and other business documents as well as file and prosecute trademark and copyright applications) except for the rare trademark or copyright case that requires court action. Moreover, I am certainly not an employment attorney, and there are plenty of good attorneys out there who only handle employment law issues.

7 Tests to Determine if that Independent Contractor You’ve Hired is Actually an Employee

Now that’s a long title.

But you’re not here for the title. You’re here for the content.

It happens to even the most careful of employers. You think you have hired an independent contractor only to find out later on that the person you hired should have been classified as an employee. You did your research. You read the California statute for independent contractors. The language is simple, right? “Any person who renders service for a specified recompense for a specified result, under the control of his principal as to the result of his work only and not as to the means by which such result is accomplished.” California Labor Code §3353. You figured that just meant a person who performs work independently and isn’t subject to your company’s rules. Or, to make matters worse, you thought that meant anyone who is not exclusively your employee but can work for other employers at the same time. However, while you may think this misclassification between independent contractor and employee is just an honest mistake, the difference can have a huge impact on your business—and your finances. After all, one simple misclassification can mean that you may owe back workers compensation, taxes, benefits, and unemployment insurance.

So what’s the point here?

Don’t misclassify your employees as independent contractors—or you will greatly regret it later on.

But what is an employer to do? Well, the best thing you can do is hire an attorney who can help you with employer protection, or someone similar. Before you contact that lawyer, though, there are a few questions you should ask about the employment relationship to help you see if you really have hired an independent contractor or if you’ve actually just hired a new employee.

  • Is the person performing the services engaged in a distinct occupation or business?
  • In the person’s occupation or business, considering factors such as the locality, is the kind of work usually done under the direction or supervision of the principal or is the work usually done by a specialist without supervision?
  • How much skill is required for the person’s occupation?
  • Does the person supply their own tools, instrumentalities, and place of work, or are the tools, instrumentalities, and place of work supplied by you?
  • How long will the services be performed?
  • Is the type of work you’re hiring the person for of the same type of work your business regularly does?
  • Do you believe you are creating an employer-employee relationship? Does the person you’re hiring believe they are entering into an employer-employee relationship?

The foregoing questions come from S.G. Borello & Son, Inc. v. Dept. of Industrial Relations (1989) 48 Cal.3d 341, 351, and the following should not be construed as legal advice in any way. I am providing you a very generalized look at California law on the topic. Also keep in mind that the Federal tests for an independent contractor relationship are different.

Image Courtesy: Victor1558

Is it OK to Spy On Your Employees?

Ah, the digital age. So much progress. So much productivity. So many more ways for your employees to avoid doing their jobs while they’re on the clock. And that’s where employee-tracking software comes in. For those who don’t know, this is perfectly legal software you install on your office’s computers to track what your employees are doing on the computer throughout the day. But as a manager, officer, director, or whatever position of power you hold in your company, you need to make sure you are implementing your employee-monitoring policies in a proper way. And here are three key points to keep in mind that can go a long way to properly implementing your policies.

Anonymity

While you may think the best policy is to hunt down those time-wasters so you can single them out for termination, a much better policy is to analyze the employee-tracking readouts in bulk to get a better feel for what your employees are doing on the whole—not necessarily individually. This way you can keep morale high since you’re not on a warpath to eliminate jobs, and you can avoid all kinds of wrongful termination suits that may spring up from disgruntled employees where terminated after you were spying on them.

Transparency

As with any company-wide policies—and especially ones with such negative connotations as employee-tracking—you need to be as transparent as possible when it comes to monitoring your employees. The more they know, the more at ease they will feel about the whole process. And the more at ease they feel, the more accurate the data you’ll be able to collect and analyze. And again, be clear with your employees you’re using that tracking information as a learning tool instead of a tool used to eliminate your staff based on their on the job browsing habits.

Good Judgment

Finally, the best way to properly institute an employee-tracking program is to make sure you use your best judgment. If something seems wrong, it probably is and you should not do it. Keep in mind whether you would like to be in the employee’s position and whether if you, in that position, would feel like your privacy was being completely violated by your employer’s actions. As long as you use your best judgment in implementing employee tracking, you’re already on the right track to staying out of trouble.

Image Courtesy: kevin dooley

The Problem With The Employee Probationary Period

A close friend of mine recently hired a new employee. Things were going swell, and the employee was working out great, but then that person decided they’d rather seek employment elsewhere. During the time that employee worked there, my friend decided the best bet was to test the waters with the employee—try out an employee probationary period whereby everything that employee did was highly scrutinized, given feedback, and, if necessary, terminated for cause. It turned out the employee left before the probationary period ended, but what if they hadn’t?

My friend may have had a terrible situation on his hands. Something no employer wants to have to deal with.

An implied employment contract.

Yes, even though he meant for the employee to be “at-will” and terminable at any time for any reason (any legal reason, anyway, but that’s a post for another day), by simply having a probationary period, my friend might have unwittingly created a contractual employment relationship that could have superseded the desired at-will employment terms.

So how does this work exactly? Well, you start the employment relationship with an at-will employee agreement. That’s fine. That’s what everyone wants. But then you tell your employee that for the first 60 days, you’re going to give her extra feedback and fire her only if warnings have been given in advance. Uh oh. You see, the problem is that some courts have found that an oral employment contract can exist, and if you haven’t structured your employee handbook or employment agreement carefully, you may run right smack into a court saying that your probationary period created an oral employment agreement

There’s the problem. And here’s the solution. Ditch the probationary period all together. You can still keep an extra watch on new employees and give them feedback without the need for probation. After all, you probably tell your veteran workers when they make a mistake and if you’re an effective boss, you know exactly how well every one of your employees does their job—whether they’ve worked there a week or a decade.

Of course, if you really love the probationary period and can’t possibly let it go, you can always make sure it doesn’t affect your at-will employment relationship with a few quick fixes. First, make sure all employment agreements are in writing and include a provision that prevents the formation of any oral employment contracts. Second, include the facts of the probationary period in your written employment agreements and make sure that you outline in specific detail that the conclusion of the probationary period does not create any additional obligations for you or your employee. Third, make sure you have a well-drafted employee handbook and that the handbook explicitly states that no additional benefits, such as vacation time, paid time off, etc., will entitle your employee to permanent employment as opposed to at-will employment. If you keep those three factors in mind, and contact an attorney who can help you make sure your employment documents are in order and legally sound, you will significantly lower the risk that an employee can turn a successful employment period into an oral contract for permanent employment at your business.

Image courtesy: Victor1558