Svitlana V. Anderson
Businesses of all sizes are increasingly turning to contractors for both short-term and long-term assignments. The reasons are understandable. Contractors can be added when needed – and retained only for as long as they are needed. Contractors do not receive benefits extended to regular employees, for instance, health insurance or overtime pay.
On the other hand, contractors are also subject to less supervision or control than employees. They often work remotely and are not required to report during regular business hours. They may also work for other clients. The independence of contractors presents a potential dilemma for businesses that seek to protect valuable intellectual property.
The “solution” of including a non-compete clause as part of a contractor agreement may appear to resolve the dilemma. However, attempting to impose non-compete clauses on contractors nearly always causes potentially costly legal headaches.
Conversion to Employee Status
One of the fundamental legal differences between employees and contractors is the amount of control that can be imposed on the worker by a client or employer. A non-compete clause in a contractor agreement imposes a tremendous amount of control over a worker – essentially tying him or her to a single company.
A complaint made to the IRS by a contractor based on restrictions imposed by a non-compete clause may well result in the conversion of the contractor to employee status. In turn, the new employer will be on the hook for paying Social Security and unemployment benefits – along with fulfilling other requirements.
Restraint of Trade and Unenforceability
Non-compete clauses are often legally unenforceable. That is because, by their very nature, contractors are engaged by multiple clients or customers. Attempting to prevent a contractor from working with other companies, even direct competitors can result in a claim of unfair restraint of trade. In plain English, you cannot prevent a contractor from making a living.
Although rare, some non-compete clauses could be enforceable against contractors. Such cases frequently involve circumstances where contractors have engaged in unethical conduct, taking unfair advantage of proprietary knowledge specifically gained from a particular assignment. For example, a Pennsylvania court upheld a non-compete clause where consultants who had not previously worked in their client’s industry used training and knowledge gained from working with the client to establish a company in direct competition – while still working for that client. Synthes USA Sales, LLC v. Harrison, 38 Pa. D. & C.5th 278 (C.P. 2014).
Alternatives to Non-compete Clauses
Cases such as the one cited above are (fortunately) rare. However, this does not mean that as a business owner you should not, or cannot, protect your valuable intellectual property when working with independent contractors. Nondisclosure agreements and confidentiality agreements represent two viable alternatives to non-compete clauses for contractors.
Well-crafted nondisclosure and confidentiality agreements accomplish the legitimate goal of protecting your company’s proprietary and/or exclusive intellectual property from improper disclosure. Unlike non-compete clauses, nondisclosure and confidentiality agreements are legally enforceable against contractors. Business owners can take legal action against contractors who violate such agreements – and win damages as compensation.
If you’re considering working with a contractor and concerned about protecting your company’s proprietary intellectual property, contact Peacock Law. Our legal professionals are ready to provide all the information you need about alternatives to non-compete agreements for your independent contractors.