Employer sitting with employee

Are Non-Competes Enforceable Against Independent Contractors?

If you are an independent contractor in New York City, your employer may ask you to sign a non-compete agreement or a non-compete clause may be included in your employment contract. Because signing a non-compete agreement can affect your employment status as an independent contractor and limit your ability to find new work, it is wise to consult with an experienced employment lawyer.

Independent Contractor v. Employee

The first thing to know is that under Internal Revenue Service (IRS) rules, employees and independent contracts are defined differently. Generally, there are three categories that determine whether a worker is an employee or independent contractor:

Financial Control

How much financial control does the employer have over the worker? If the employer controls or directs the financial and business aspects of the worker’s job, then he or she may be considered an employee.  

Behavioral Control

How much behavioral control does the employer have over the worker? If the employer has control over or directs the work being performed, then the worker is considered an employee. 

The Employment Relationship

The relationship between the employer and worker factors into how a worker is classified, including whether:

  • There is a written contract
  • Benefits are provided by the company
  • The duration of the relationship (e.g. permanent or set time period)
  • The services being performed

In short, independent contractors perform protect-based work that is not central to the business and

  • Control how they do the work
  • Provide their tools/equipment
  • Manage their time
  • Pay their taxes
  • Are responsible for their training
  • Are free to offer their services to other businesses

If the employer misclassifies an employee as an independent contractor, then the employer may be liable for employment taxes.       

Non-Compete Agreements for Independent Contractors

In short, a non-compete provision basically prevents you from starting a competing business or working with a different company during or after employment for a set period of time. In particular, a non-compete must specify:

  • The reason for the non-compete provision
  • The geographical region covered
  • The date on which the non-compete agreement begins
  • The duration of the non-compete restriction
  • The compensation the worker will receive in exchange for agreeing to the terms

Businesses typically use non-compete agreements to prevent employees from revealing confidential business information (e.g. trade secrets, client lists, strategy, future products). However, signing a non-compete agreement can make it difficult for an independent contractor to find new work once the project is completed.

Is a non-compete provision enforceable?

For a non-compete agreement to be enforceable in New York, it must (1) be necessary to protect the employer’s legitimate business interests (2) be reasonable in terms of scope (duration, time period), (3) not cause undue hardship for the worker/contractor, and (4) not violate public policy.

Given that an independent contractor needs to work with various companies to earn a living, an overly broad non-compete provision preventing you from working with any competitor may pose an undue hardship. If a non-compete agreement unreasonably restrains your ability to work, it may not be enforceable.   

Depending on the circumstances, a non-compete agreement may also reclassify an independent contractor as an employee because the employer would be exercising financial control over the contractor. In this situation, the company may be subject to fines and the contractor may have a right to take legal action to obtain unpaid overtime. 

The Bottom Line

If you have been asked to sign a non-compete agreement as an independent contractor, such an agreement may not be enforceable and could also pose problems for the company. Nonetheless, businesses have an unfair advantage over contractors, and your client may demand that you sign a non-compete as a condition of getting the project. Before you sign anything, contact a New York City Employment Lawyer.