When you outsource work to an independent contractor, should the contractor be required to sign a non-compete agreement as part of the deal?
According to Business Lawyer Mike Young, it depends upon the circumstances.
Should Individual Freelancers Sign a Non-Compete Agreement?
If the work is to be done by an individual working as a freelancer, there’s a real legal risk that a non-compete agreement can make the worker an employee rather an independent contractor. If the worker is an employee, then you’re probably on the hook for payroll taxes, unemployment compensation and worker’s compensation insurance contributions, and compliance with applicable federal and state wage and hour labor laws.
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Of course, there’s usually no way of know about this problem until the worker makes a successful claim against you for violating employment laws, files for unemployment compensation, etc.
Because of this risk, it rarely makes sense to have an individual working as an independent contractor to agree to a covenant not to compete with your business regardless of the scope of the agreement with regard to term, geographic area, and type of work covered as competing.
Business Entities as Independent Contractors
When you outsource work to a corporation or a limited liability company (LLC), it may make sense to require a non-compete agreement as part of the deal, particularly if there’s a real risk the contractor may take the knowledge acquired from you and misuse it to become your competitor.
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Because the contracting party is a business entity instead of an individual freelancer, the risk of finding the contractor is really an employee is almost nonexistent even if the entity is owned by a single shareholder or member.
Confidentiality Agreements and Independent Contractors
Whether or not your contractor agrees not to compete with you, confidentiality agreements are important for protecting your trade secrets, customer lists, and other intellectual property (IP).
Drafted correctly, the agreement will cover how your important information is handled during the term of the agreement, after termination, and adequate remedies for breach to minimize damages if your contractor decides to violate the terms and conditions of the confidentiality agreement.
Single Contract or Multiple Agreements?
As a general rule, it makes sense to incorporate non-compete and confidentiality provisions into a single independent contractor agreement rather than having them as separate contracts.
Your contractor may be able to argue the separate agreements are unenforceable because they were signed without consideration, i.e. you gave nothing of value to the contractor in exchange for the agreements not to compete or keep your stuff confidential.
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On the other hand, if these provisions are included in the independent contractor agreement, it’s easy to identify what you’re giving to the contractor for them (e.g. payment).
An experienced business lawyer will be able to draft an independent contractor agreement that covers these legal issues and other important provisions you’ll need to protect yourself when outsourcing projects to others rather than having employees do the work. To learn more, check out our Business Contract Legal Protection Package.