It’s high time we clear the air once and for all on non-competes from a legal standpoint.
Yes, non-competes are favorable for companies who want to protect their proprietary information and customer base. However, requiring them can lead to lengthy, costly repercussions. (Take this famous lawsuit for instance, in which Amazon is suing a former vice president of product marketing who left to work at Google.)
While some may believe the use of non-competes is reserved for tech giants or those residing within the United States, think again.
Non-competes for independent contractors and full-time employees alike are utilized internationally by companies of all sizes. Whether they are legally enforceable, however, completely depends on the law applicable to the agreement.
For this reason, it’s key your distributed company understands their ins and outs before use.
Keep reading to find out what you need to know about non-compete agreements for independent contractors, including what they are, where they’re legal, risks associated with using them, and what you can use instead of a non-compete.
What is a non-compete for independent contractors?
A non-compete agreement is a legally binding contract that prohibits an independent contractor from competing with the company who engaged it throughout the term of the contract and, typically, for a certain amount of time afterwards.
Generally, a non-compete prohibits the independent contractor from working with competitors or working independently in the same exact industry.
For instance, if your information technology (IT) company outsources freelance work to software developers, having the developers sign non-compete agreements (where these agreements are recognized) means they are not permitted to work with competitors for the period of the non-compete.
Once again, it’s important to note that non-competes are not indefinite. They have starting and ending dates.
Are non-competes for independent contractors legal?
It depends on the law that applies.
In some jurisdictions, companies can require independent contractors to agree to a non-compete, and it will be enforceable under local law. In other places, they’re permitted and enforceable as long as the substance of the non-compete satisfies certain regulations, and still in others, they’re downright forbidden.
Every jurisdiction has its own approach to non-competition agreements. For example, in the United States, the majority of states do still recognize non-competes in certain situations–even though they’re increasingly under fire.
In Belgium, non-competes are highly regulated, and the requirements for a non-compete to be enforceable depend in part upon the type of worker who is providing services.
Whereas, in Belarus, non-compete agreements generally are legally unenforceable, with very limited exceptions.
What are the risks of having non-competes for independent contractors?
Putting the potential benefits aside, the risks of having independent contractors sign non-competes could sway your decision to use them.
It may lead to an employee misclassification determination
If an independent contractor is required to sign a non-compete agreement, a court or regulator evaluating the company’s relationship with the contractor may see it as evidence pointing toward employee misclassification.
Oftentimes, the distinction between independent contractor and employee status is made based on the employer’s “right of control,” or the company’s right to control the manner and means by which the work is performed.
If the non-compete prohibits the independent contractor from working for others while working for your company, this could be seen as the company retaining enough control to support categorizing the contractor as an employee.
Keep in mind that misclassification can lead to, among other things, hefty fees and penalties owed by your company, including having to pay workers’ compensation premiums, overtime pay, contributions to unemployment insurance, and more.
To help you decide whether you’re properly classifying your new distributed talent, try our free Contractor vs. Full-time Employee Analyzer.
If you think you’re at risk, don’t stress, we can help you with converting contractors to employees too! Check out our contractor conversion solution to see how easy it is with a team of experts in your corner.
The non-compete could be unenforceable
Even if the independent contractor is properly classified, the non-compete agreement could be unenforceable.
As a general matter, independent contractors are in business for themselves and can work for whomever they want, whenever they want. They’re the go-to experts in their fields.
As such, along the same lines as the prior section, if a company attempts to enforce a non-compete clause against an independent contractor, this could place unreasonable restraint on the contractor’s ability to find work. This essentially limits their capacity to earn an income.
Alternatives to a non-compete agreement
In order to protect your distributed company’s legitimate business interests, there are other agreements and provisions you can consider including in independent contractors’ contracts, such as:
Confidentiality agreements (a.k.a. nondisclosure agreements)
Also known as a nondisclosure agreement, confidentiality agreements ensure that the independent contractor does not share any proprietary information nor company secrets learned during their engagement.
This agreement prevents contractors from seeking work from the company’s clients or customers. Some non-solicitations also prevent the contractor from hiring company employees.
“Work for hire” provisions
A “work for hire” provision makes clear that any intellectual property (IP) resulting from projects your company is paying for the contractor to perform is the company’s IP. It does not belong to the contractor.
While companies that require independent contractors to enter into non-compete agreements may have the company’s best interests in mind, these agreements may unfairly restrain a contractor’s ability to work and earn income. As such, they’re approached with a lot of legal scrutiny by courts and regulators.
If keeping your company’s trade secrets and information protected is of concern, consider adding a confidentiality provision to the contract.
However, if your company does require non-competes for independent contractors, make sure you have a thorough understanding of the local laws in the country where the independent contractor is providing services so you can mitigate or avoid potential legal issues later.
To get started with hiring contractors around the globe, check out how Oyster can help. Oyster can also help you protect your proprietary information with confidentiality and IP agreements that meet local labor laws and give your business the legal protections you need.
Disclaimer: This blog and all information in it is provided for general informational purposes only. It does not, and is not intended to, constitute legal or tax advice. You should consult with a qualified legal or tax professional for advice regarding any legal or tax matter and prior to acting (or refraining from acting) on the basis of any information provided on this website.
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