Texas is no exception to companies hiring employees as “independent contractors” to skilled positions. Sometimes companies legitimately hire independent contractors to perform specific tasks that they cannot or prefer not to perform in-house. This combination of uses for independent contractors has led to an ever-growing subset of workers outside the traditional employer-employee relationship.
The employer-independent contractor relationship opens different types of legal liabilities than the employer-employee relationship. The independent contractor works under a contract that is subject to all the trappings of traditional contract law.
Additionally, the employer is also at risk of treating the independent contractor too much like an employee and the employer can end up on the receiving end of multiple employment law issues for improperly categorizing an employee as an independent contractor. One way employers get themselves into hot water with independent contractors is the use of non-compete agreements. That leads to a common question: can employers enforce a non-compete agreement against an independent contractor? The answer is yes, if the non-compete agreement is otherwise enforceable.
What is a non-compete agreement under Texas law?
A non-compete agreement, sometimes also called a covenant not to compete, is an agreement between two parties that one party will not enter into competition with the other party in the same profession or industry. Despite misinformation across the internet, non-compete agreements are enforceable in Texas. They are enforceable under the Texas Business & Commerce Code and upheld by the Supreme Court of Texas. An enforceable non-compete agreement must have reasonable limits in time, place and scope.
The agreement must also relate to the party enforcing the agreement’s interests worthy of that kind of protection. That usually entails protecting a trade secret, such as a secret formula or client list, or to prevent the party restrained by the non-compete agreement from soliciting customers using its connection to the business of the party seeking restraint through the non-compete agreement.
A non-compete agreement is a contract and any two parties to a contract can enter into a non-compete agreement, that can include an employer, employees, consultants, independent contractors, separate businesses and other parties. However, there are issues that can arise when non-compete agreements exist between employers and independent contractors.
The problem with non-compete agreements and independent contractors in Texas
Non-compete agreements restrain the ability for independent contractors to do business with other parties and that seems contrary to the identity of an independent contractor versus an employee. The independent contractor should be…independent. The independent contractor should be free to do business with multiple clients, as many independent contractors do. The non-compete agreement specifically limits the independent contractor’s ability to take on other work and that certainly feels like the kind of control that an employer might exercise over an employee.
Under basic contract law and the Texas Business & Commerce Code, no distinction is made between an employer-independent contractor relationship and any other contractual relationship with regard to non-compete agreements; however, other areas of law look at this relationship differently. Specifically, this relationship and the existence of non-compete agreements suffer close scrutiny for taxation purposes.
The IRS, federal Department of Labor and Texas Workforce Commission each make determinations of whether an employer-employee relationship exists by using a multiple factor test and the particular test used by each agency includes as a factor whether a non-compete agreement exists. All three take the position that generally a non-compete agreement indicates the employer exercises control like an employee.
That does not mean the existence of a non-compete agreement necessarily makes the alleged independent contractor an employee. It is just one of many factors that will be considered. Sometimes there are meaningful reasons why an independent contractor is legitimately restrained by a non-compete agreement.
However, what often happens is an employer wants to hire employees but cut costs by hiring them as independent contractors. It forms the relationship in a manner that triggers several other factors that indicate the relationship is truly an employer-employee relationship. If the alleged independent contractor is truly an employee then the employer may be liable for unpaid employment taxes. It may also be liable for the conduct of the employee and/or conduct against the employee, such as workplace harassment.
Regardless of whether the worker is classified as an employee or independent contractor, the non-compete agreement may still be valid.
The non-compete agreement may be unenforceable or only enforceable after a court revises the terms to limit the scope. That is a more complex question. If you are an independent contractor concerned about violating a non-compete agreement, contact an employment lawyer.