“Are non-compete agreements binding on independent contractors?”

Question: I worked as a 1099 independent contractor, and not as an employee. I was paid no salary, but only commissions. While I did that, I also signed a non-compete agreement. I left there and I am now working for a different company, also as an independent contractor (not an employee.)

The former company is now threatening me and this new company with a lawsuit, because they say I am violating the non-competition agreement, which says I can’t work for a competing company (a) within 240 miles, and (b) for two years.

Is this legal?  

(City, State not noted)

Answer: Mary, you may, indeed, have a non-compete problem: But, then again, there are many ways “out” of a non-compete problem:

1. A non-compete agreement (sometimes called a “non-competition” agreement) between a company and an independent contractor is presumptively binding and enforceable. A non-compete agreement is just what its name implies: an agreement between two parties in which one (or both) agrees not to compete for a certain period of time. It can be between an employer and an employee, or an employer and an independent contractor, or even between two companies.  

2. You may, though, have an “out” depending on the exact wording of the non-compete agreement. First and foremost, you need to read each word, phrase, sentence and even punctuation mark of the non-compete agreement very carefully. If, for example, it says “I promise not to be employed for two years by a competitor,” then your independent contractor status with the new company may give you an “out.” Likewise, if it says, “In consideration of your employment with this (the former) company, you agree not to compete for two years,” then your independent contractor status with the old company may give you an “out.” Also, if it says you won’t provide services to a competitor for “two years after your employment with this company ends,” then your independent contractor relation with the old company may give you an “out.” These are only a few examples of how the wording of the non-compete agreement must be carefully reread.  

3. The circumstances of your departure may also give you an “out” of your non-compete. In many states, if your departure from the company was not voluntary, but was a termination by the company without your having engaged in misconduct, then your non-compete may well be unenforceable. Here, too, the wording of the non-compete agreement may also say “after a voluntary departure,” and your departure may have been “involuntary.”

4. If the former company engaged in any wrongful conduct, that may also make your non-compete unenforceable. The law in almost every state provides that, in order to enforce a non-compete agreement in court, the party seeking enforcement must, itself, be free from “unclean hands,” which means free from “improper conduct.” So, if for example the former company was urging you to engage in illegal price-fixing, and that is one of the reasons you left, that would make the non-compete unenforceable.  

Since you seem to have received a letter from your former employer or its attorney demanding you “Cease and Desist, you might be interested in our Model Letter entitled “Response to Attorney’s ‘Cease and Desist’ Letter Alleging Non-Compete Violation.” It shows you “What to Say, and How to Say It.™” To obtain a copy for your adaptation and use, just [click here.] Delivered by Email – Instantly! 

5. As a general rule, UNLESS YOU HAVE STOLEN TRADE SECRETS, such as customer lists, very few courts will make anyone stay out of work for more than a few months, IF THAT. In my experience, most people are more afraid of non-compete agreements than they should be. Few judges see any reason to make a person unemployed – and perhaps put his or her family on welfare – unless they engaged in theft of business secrets. My experience is such that a few months is the maximum enforcement, and even then the few months enforcement is often conditioned on the former company paying the person during that time. There is no guarantee regarding non-compete agreements, but they are not popular among judges.

Our 185-Point Master Guide & Checklist to Non-Competition Agreements is a perennial favorite. It takes you step-by-step through everything you need to know about non-compete’s, including how to fight one. To obtain your copy, just [click here.] Delivered by Email – Instantly! 

6. In your situation, you may be well-advised to obtain a brief consultation with an experienced employment attorney in your city or town. Mary, I am not one to urge people to consult with attorneys without a good reason for doing so. In your circumstances, I think good reason to do so is present.

Best of luck to you!!

Al Sklover

P.S.: For those wanting personal attention and counsel, Al Sklover is available for Private Telephone Consultations on the subject of Non-Competition and Related  Restrictions on your working freedom. Choose 30-, 60- or 120-minutes. If interested, just [click here.] 

© 2011 Alan L. Sklover, All Rights Reserved.

Print Article