Can an Independent Contractor Sign a Non-Competition Agreement?

October 10, 2016

Topics: Independent Contractors

Companies sometimes want to hire individuals as independent contractors, instead of employees, but have the contractor sign a non-competition agreement indicating that he or she will not provide the same services to the company’s competitors.  The problem with doing this, however, is that, by definition, a true independent contractor is a vendor that offers its services to the business community generally. A refrigeration company can manage the frozen foods department at two competing supermarkets; a plumber can work for two competing accountants. Companies should not ask an independent contractor to sign a non-competition agreement because doing so calls into questions this individual’s classification as a contractor.

Independent contractors are workers who are permitted to work for multiple companies, even competitors, at the same time.  By asking an independent contractor to sign a non-competition agreement, the company is setting up a relationship that looks more like one between an employer and employee than between a company and independent contractor.

The existence of a non-competition agreement with a particular contractor could contribute to a determination by the federal or state department of labor that the independent contractor is actually an employee.  This could result in liability on the part of the company for, among other things, failing to provide the worker with the benefits of an employee such as workers’ comp coverage, unemployment insurance benefits, and overtime pay, and failing to withhold social security and taxes from the worker’s pay. In addition, in many states, a non-competition agreement between a company and independent contractor may not even enforceable and therefore would not protect the company.

A company that seeks to protect its confidential and proprietary information should require its independent contractors to sign confidentiality agreements governing the use and disclosure of the information the contractor will obtain while providing his or her services.  These agreement are more likely to be enforced against a contractor than non-competition agreements.