Independent contractor non-compete forms are used in cases where you need to share potentially sensitive business information, like trade secrets, the specs of a new video game, or any other information you don’t want your competitors to get, with a contractor. Non-Compete agreements also require that the contractor doesn’t work with your competitors in the same industry and market for a set period of time. Most non-compete agreements also prevent contractors from setting up their own competitive business for a certain amount of time, in a specific market area.
These contracts are distinct from employee non-compete agreements, even though they cover similar circumstances and knowledge base. It’s critical to make sure you use the right form in the right situation.
This article will cover the differences between different kinds of non-compete agreements, when you should use one, and how to fill out a general independent contractor non-compete agreement.
Functionally an independent contractor and an employee may do the same job or have the same kinds of expertise. However, legally, the primary distinction between the two depends on what kind of benefits the employer is paying. Employers are responsible for withholding at least a portion of income taxes, as well as Social Security and Medicaid taxes on behalf of the employee. Employees also generally receive other benefits (for full-time work) like health insurance coverage, vacation time, and other paid benefits.
Independent contractors are hired for a set pay rate, but they pay their own taxes and may or may not be included in an employer benefits package depending on the nature of their work and the length of the contract.
It’s also important to note that independent contractors are typically hired for a specific project or to help with a difficult time of year or a company transition. They aren’t hired as a permanent addition to the business’s workforce.
Employers also cannot control when or how an independent contractor completes the work they have been given. They can mandate deadlines, but not how the deadline is met. If an employer starts to exert control over how an independent contractor completes their work the independent contractor is legally considered an employee.
It’s important for employers to be aware that having an independent contractor sign a non-compete agreement doesn’t necessarily mean that that agreement is enforceable.
Independent contractors are not required to obey the terms of non-compete agreements that are unreasonable in nature, for instance. This vital limitation on non-compete agreements was decided in the eighth circuit court case, Ag Spectrum Co. v. Elder, No. 16-3113 in 2017. The Ag Spectrum case clarified that when limitations are considered unreasonable they should not be considered enforceable by the courts.
In the same case, the Ag Spectrum Co. v. Elder decision also outlined that the non-compete was non-viable because Elder (the independent contractor being sued for violation of a non-compete agreement) did not have any notable advantage over Ag Spectrum since the nature of the work completed had not included any business secrets or other privileged information.
Essentially, the non-compete was invalid both because it was unreasonably restrictive on Elder, and because there was no legally admissible reason for him to have been required to fill out a non-compete agreement in the first place.
Even outside of the Ag Spectrum case, non-compete agreements exist in a relatively gray legal territory. Most States in the United States are still uncertain whether a non-compete agreement should be considered enforceable. That means that most cases are decided on their own merits and the exact details of the contract.
That said, the Ag Spectrum case does provide powerful precedent, and should be considered anytime you’re debating whether a non-compete agreement is necessary, beneficial, or lawful. It is possible to write an independent contractor agreement without including a non-compete agreement.
It’s important to think carefully about whether a non-compete is in your best business interests before requesting one. A bad non-compete agreement can sometimes be worse for business than not having one at all.
There are a few basic requirements that need to be in all non-compete agreements for them to be considered legal and enforceable. These provisions need to be in all independent contractor non-compete agreements, or they won’t be enforceable.
Here are some of the most basic requirements:
There are a few other things that are required in all independent contractor non-compete agreements.
Non-compete agreements are generally required to include an arbitration clause in case that the contractor or company dispute the terms of the agreement, or to help resolve possible breach of contract before taking the problem to the courts.
The arbitration clause is also required to list the state and location in which arbitration will take place. In most cases, the arbitration will be held in the same state as the original contract is written.
An independent contractor’s non-compete agreement is market limited. That means that the contractor could potentially work with another business or company of the same type in a different market area.
Of course, the range of the market limitation will vary quite a bit depending on the business. However, overly broad location limitations can make a non-compete unenforceable by being unreasonable. Make sure all contractor agreements are reasonable in scope and still allow your contractor to conduct business unless there is an important reason to limit their contract opportunities
There are several things that can make it difficult or impossible to enforce an independent contractor non-compete. For one thing, their employment contract cannot include direct work supervision or control.
Including too much supervision can make the contractor a legal employee instead of an independent contractor.
Exerting too much control over your contractors after their agreement is expired can make the terms of your agreement unenforceable.
Accidentally making your independent contractor an employee is one of the biggest risks of signing a non-compete with an independent contractor.
A non-compete isn’t always the best option when you’re working with an independent contractor. There are other, less broadly defined, agreements you can use to help protect your business interests. These agreements are also often more legally enforceable than a standard non-compete.
Non-solicitation agreements are generally important for businesses that have a client list, or that have highly qualified employees that a contractor might attempt to recruit into their own business. Non-solicitation requires that the contractor not attempt to work with the business’s clients outside the requirements of their contract. An independent contractor that’s signed a non-solicitation agreement is also prevented from recruiting employees from the business. In some cases, they are also prevented from working with the business’s clients that seek them out after the contract for a set period of non-solicitation.
Unlike a non-compete agreement, non-disclosure agreements prevent contractors or employees from sharing business secrets and sensitive information they learn during their contract. However, the contractor is still allowed to work in the same market and industry, including that they can work with a business’s competitors if they choose.
Both independent contractors and businesses who work with them should know how a non-compete agreement works and how it should be filled out.
Step 1: Name and Agreement Information
The first thing any non-compete agreement needs is the name of everyone involved, both the business and the independent contractors signing the agreement. You’ll also need to list the addresses of everyone involved in the same section.
Step 2: Go Over the Details of The Non-Compete Agreement
The next several sections of a non-compete agreement will be filled with text outlining the details of the agreement. It will define confidential information, agents and employees, and other terms critical for the purpose of the contract. Most of these agreements will also require that any confidential information be destroyed or returned at the end of the contract.
Step 3: Term, Termination, and Arbitration
The term of your agreement is its effective start date through to the end of the contract. Most non-compete contracts last for about 2 years, though some are longer. The terms of terminating the agreement, either a specific date or the completion of a project, are also outlined here. Arbitration is the usual method of dealing with disagreements over the contract, and arbitration details are also outlined in this section.
Step 4: Non-Compete Details
This section will outline the specific behavior and information that is protected by the contract. This section should be as detailed as possible so there isn’t much room for interpretation by any involved party, that way clear rules are in place and ready to use if necessary.
Step 5: Applicable Law
This type of contract is managed under State laws, which means that you need to define which State’s laws are being used to enforce the contract. This section tells both parties where the contract is enforceable.
This section will also cover waiver conditions, who will pay attorney fees if arbitration is necessary, and other limiting factors on the contract.
Step 6: Company and Independent Contractor Signatures
Lastly, once all of the other details have been arranged in the contract, both the business and the independent contractor will need to sign and date the agreement. It’s best if both parties keep a copy on file to reference if needed.