Employee Survival Guide® - When Can Non-Competition Agreements Be Enforced Against Independent Contractors?

Starting point is 00:00:00 Welcome to another edition of the Employee Survival Guide, where you can learn everything your employer does not want you to know about and more. Now, here's attorney Mark Carey. Hey, it's Mark here, and welcome to the next edition of the Employee Survival Guide podcast. Today, we're going to be talking about when can non-competition agreements be enforced against independent contractors. In response to a recent Care and Associates PC survey of topics of interest in employment law, some of our readers asked, quote, Are non-competition agreements enforceable against independent contractors? A good question. The short answer is, in Connecticut, yes, but with some exceptions and some special circumstances.

Starting point is 00:00:41 What is a non-competition agreement? special circumstances. What is a non-competition agreement? Non-competition agreements are special contracts between employers and their workers, which prohibit workers from engaging in business activities that compete with their former employers, usually for a fixed period of time following the end of an employment relationship and usually within a definite geographical area. These agreements are often called restrictive covenants, and they allow employers to prevent a former employee or contractor from earning a living in his or her business after the employment relationship ends. Courts generally enforce non-compete agreements. Courts in Connecticut will generally enforce non-competition agreements provided there is consideration for the promise not to compete, and provided that the restrictions are not unreasonable to protect the employer legitimate business interest, balanced with the employee's interest of working.

Starting point is 00:01:29 Facts which our courts consider in evaluating the reasonableness of a non-competition agreement include the following. Number one, the duration of the restriction. Number two, the scope of the geographic restriction. Number three, the protection afforded to the employer. Number four, the degree of restriction on the employee's career opportunities. And five, whether the restrictions are in the public's interest. If even one factor fails the reasonableness test, the non-competition agreements could be held to be unenforceable. In Connecticut, as in many states, there are no statutes or regulations that specifically address non-competition agreements outside of the medical profession. Whether a non-compete agreement is enforceable against an independent contractor is not specifically addressed under Connecticut law. Our courts do not formally distinguish between non-competition agreements with employees as opposed to independent contractors.

Starting point is 00:02:25 with employees as opposed to independent contractors. That being said, the five-factor analysis described above does vary when it's applied to the independent contractor relationship. When courts analyze the fourth factor, the effect of the non-competition agreement has on the workers' career opportunities, our courts must account for the fact that the independent contractors are, by definition, expected to serve more than a single customer at a time. That is what makes them independent. Notwithstanding this obvious basis to reject all non-competition agreements as applied to independent contractors, our courts will often find non-competition agreements enforceable. For example, non-competition agreements were upheld in circumstances where an independent contractor uses their position with the employer to gain the information to set up a competing business for themselves.

Starting point is 00:03:12 The rationale for non-competition agreements are faulty. The concepts underlying and justifying these restrictive covenants are faulty. One underlying notion that is misapplied to non-competition agreements is the freedom of contract. This legal fiction posits that individuals and firms are free to act in the marketplace in their own best interests and are therefore free to make any lawful agreements they see fit. Unfortunately for most workers, this freedom is an illusion. The notion that workers who do not want to be bound by a non-competition agreement can simply choose to work elsewhere is absurd. Jobs are difficult to find during the best of times.

Starting point is 00:03:51 During a global pandemic amid skyrocketing unemployment, locating a good position can be overwhelmingly difficult. If one is restricted from using one's business contacts, skills, and training to function in the market and in the industry in which one has established a record of experience, the task of finding gainful employment becomes insurmountable. In the employment context, the power and resources of the employer, as opposed to the employee, is generally so unbalanced that the freedom of contract is a bad joke. While non-competition agreements are becoming increasingly common, these restrictions on a person's ability to work often cause extreme hardship on workers who must find continuous employment within their chosen industry in order to survive and to support their families. Why should an employer who has no legal obligation to employ his workers for any period of time get to dictate to a former employee where and how he or she can work? How can such an economically crippling restriction between parties of drastically unequal bargaining

Starting point is 00:04:53 power be tolerated by the courts today? In a recent article, Mark Carey explored the profound injustices of restricting employees' right to work. The article is captioned, COVID-19 cancels all non-compete agreements due to impossibility. During a pandemic where millions of American workers are unemployed, restricting anyone's freedom of work is patently unconscionable. While our courts consistently uphold reasonable restrictions on competition, the Connecticut state legislature is at last beginning to address the problem directly. In another recent article by Attorney Liz Swiok, she explains the provisions of the piece of proposed legislation currently under consideration by the Connecticut Legislature Labor and Public Employee Committee.

Starting point is 00:05:33 The new proposed legislation, SB 906, quote, an act concerning non-competition agreements would impose some reasonable limits on employers' ability to enforce a non-compete agreement. reasonable limits on employers' ability to enforce a non-compete agreement. As it applies to independent contractors, SB 906 will prohibit non-competition agreements against contractors unless the contractor is being paid over five times the minimum wage, or roughly $60 an hour. While this proposed legislation is a step in the right direction, in that it prevents non-competition agreements from victimizing the lowest paid workers in the marketplace, it does not address the fundamental injustice of these agreements. The legislature's special treatment of independent contractors under SB 906

Starting point is 00:06:15 indicates a recognition that employees and contractors are not in the same position with respect to these contracts. Independent contractors serve more than one master. When it comes to independent contractors, the applicability of non-competition agreements becomes quite complex. While courts have recognized an employer's interest in protecting its trade secrets and goodwill through non-competition agreements, independent contractors are, by definition, not bound to a single employer, although in practice they sometimes are. The term independent refers to a contractor's ability to provide goods and services to many businesses at once. Employees, on the other hand, are generally obligated to devote all of their

Starting point is 00:06:56 productive time and energy to furthering the interests of their employer. Employers face risks when enforcing non-compete agreements against independent contractors. There are risks for employers who try to enforce non-competition agreements against independent contractors. When an employer imposes non-competition restrictions on an independent contractor, it runs the risk of changing the nature of its relationship with the worker. Where an employer exercises a high degree of control over the work of a contractor, that contractor could be considered a regular employee. Imposing a non-competition agreement could be construed as evidence of the very control

Starting point is 00:07:32 that marks a traditional employment relationship. Thus, some employers sometimes seek to enforce non-competition agreements but are then countersued for employee benefits and wages based on the assertion of control under the non-competition agreement. Employees could incur liability for wages, administrative fines, or workers' compensation benefits when an employee is misclassified as an independent contractor. This fact gives employers pause when enforcing non-competition agreements against their independent contractors. Non-competition agreements are overreaching.

Starting point is 00:08:09 In general, while courts in Connecticut will enforce non-competition agreements against independent contractors where they are held to be reasonable, it is difficult to justify the necessity of these restrictions. While employers often justify the restrictive covenants by asserting the right to protect confidential business information, this argument is irrelevant given the fact that all of an employer's proprietary information is protected under our trade secret and intellectual property protection statutes. Further, employers can and do include broad confidentiality and nondisclosure provisions in their employment agreements, which provide contractual protections for dissemination of vital company information.

Starting point is 00:08:42 It is simply overkill and overreach to also seek to prevent competition from former workers, whether they are employees or contractors. The basic answer to the reader's question about enforceability of non-competition agreements against independent contractors is that they are enforceable against independent contractors, but it is slightly more difficult and definitely riskier for employers to enforce such agreements against them. The larger answer is that all non-competes are inherently unjust, inequitable, and should be resisted by employees and contractors alike. If you'd like more information about this topic or would like to hire an employment attorney, please contact Cary and Associates PC at info at capclaw.com.

Starting point is 00:09:23 Thank you for listening and enjoy the week.

Employee Survival Guide® - When Can Non-Competition Agreements Be Enforced Against Independent Contractors?

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