Noncompetes in Independent Contractor Agreements? Tread carefully…

Businesses that hire independent contractors invariably seek to include noncompete provisions in their independent contractor agreements.  The noncompete has particular appeal in the independent contractor setting because true independent contractors are, by nature, entrepreneurial, and might choose to use  knowledge and business relationships gained while performing under a contract as a springboard to start/grow a competing business.

So is it then advisable to include noncompetes in independent contractor agreements? While it is possible to include noncompete clauses in independent contractors agreements, these clauses should be avoided, or otherwise very carefully drafted. And even where carefully drafted, a business should think long and hard before deciding to enforce the noncompete (see next paragraph), thus raising the question as to whether a noncompete is a useful/necessary provision in the first instance.

So why be careful with noncompetes?  A critical characteristic of an independent contractor is the contractor’s ability to continue in business after the termination of a contract/relationship. One Washington appellate court described this ability as “the most important factor” in determining whether an individual is engaged in an independent business. The problem with a noncompete provision is that it can significantly restrict a contractor’s ability to continue in business after its relationship with the hiring party ends, thus providing basis for an auditor or contractor to challenge whether the contractor was properly classified as an independent contractor.  Moreover, an independent contractor who is able to argue that he or she was misclassified as in independent contractor, is hardly defenseless against a business’s attempt to enforce a noncompete.  The contractor can report the employer to Washington State Department of Labor & Industries (L&I), Washington State Employment Security Department (ESD), Internal Revenue Services (IRS) and U.S. Department of Labor (DOL) for contractor misclassification, and/or sue for backpay and denial of benefits resulting from the alleged misclassification.

In short, then, a business should think long and hard about whether it needs a noncompete clause, and it should think even harder in deciding whether to enforce.

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