Independent Contractors - Three Major Reasons to Avoid Non-Compete Agreements

Updated: Jun 7

Aside from the biggest question of, "Why would you want to?" we've outlined three major reasons why you should not ask an independent contractor (IC) to sign a non-compete agreement.

First, let's clarify the difference between a non-compete agreement and a non-disclosure/confidentiality agreement.

Nondisclosure Agreement: "an agreement in which a person (such as an employee) agrees to keep information (such as a trade secret) confidential" (Merriam-Webster). Nondisclosure agreements are expected and should be required whenever working with an independent contractor.

Non-Compete: "Non-compete agreements are contracts between workers and firms that delay employees’ ability to work for competing firms." (Office of Economic Policy).

Nondisclosure—good for independent contractors. Non-compete—not good.

Three major reasons why you should not ask an independent contractor (IC) to sign a non-compete agreement.

  • It can call into question their classification as an independent contractor. While the numerous rules and regulations regarding employees do not apply to independent contractors, there are still guidelines.

  • According to the IRS: "The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done."

  • One of the biggest perks of hiring an independent contractor is not having to deal with overtime pay, benefits, employer taxes, workers compensation premiums, and unemployment taxes. Misclassify the independent contractor, and you risk penalties in addition to back paying all those aforementioned costs.

  • You risk limiting their right to work. Independent contractors have the right to work for multiple companies at any given time, even competitors. We've seen non-competes that require the independent contractor to not only stay clear of working for competitors, but require them to do so for many years after service to that client/company ends.

  • You risk scaring away great talent. There are numerous opportunities for skilled, educated, and hard-working individuals. Why risk losing them before they even start?

  • For example, a client (not one of ours) hit it off with an independent contractor. The IC possessed the experience, skills, and personality the client sought to help grow their business. Excited to begin, the IC accepted the offer . . . then the client sent over paperwork. Some was expected, but then there was a surprise in the form of a highly restrictive non-compete agreement. The client required it and the IC refused to sign, which meant they parted ways. The client lost out on what could have been a wonderful working relationship with a skilled and experienced IC, and it didn't take long for the IC to find another relationship with a new client.

Would it surprise you to learn that non-compete agreements with an independent contractor are unlikely to be enforced. Confidentiality, nondisclosure and non-solicitation agreements are sufficient to protect legitimate businesses interests and operations.

Avoid non-compete pitfalls by having the right tools in place to work with independent contractors.



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