Independent Contractor/Employee and Violation of Non-Compete Provision

Response #1: I am not familiar with Oklahoma law, so please consider everything in the context of needing review under Oklahoma law.

 

I do think someone will need to assess the risk of the individual claiming that he was an employee. Of course, the question is whether that makes any material difference. Were there benefits or compensation (medical, incentive bonus, severance, etc.) that he would have received as an employee that he did not get? What would that cost [be] if forced to compensate; what's the probability of an adverse finding; are there regulatory exposures?

 

In my experience, many jurisdictions look for symmetry between a non-compete period and severance -- perhaps not a perfect year-for-year symmetry, but some non-trivial consideration to support enforceability. Many jurisdictions will hesitate to enforce where the result is that means an individual cannot perform their occupation, here sales, almost anywhere. So, the proposed remedy you suggest should be tailored to conduct which is a direct threat to your company's products, markets and geography.

 

Finally, in certain jurisdictions you might get to the same outcome without using the "employee" agreement, if that approach turns out to be problematic. Of course, you may still have to face his claims to have been an employee, but it might help to not base the non-compete claim on the agreement that suggests he was an employee. In particular, there may be common law obligations concerning business confidentiality, certainly for trade secrets, and some jurisdictions recognize the doctrine of "inevitable disclosure" where for a while (one-year?) a person subject to confidentiality obligations cannot work for a direct competitor because, in the diligent pursuit of work for the competitor, he/she cannot avoid addressing the part of the brain containing confidential information and using that information to the detriment of the former employer/client.

 

Lastly, explore whether there is a lawful win-win with the company he is working for now. For instance, if there is a commercial relationship with the other company (e.g., supplier/purchaser of other non-competing products), or there could be one put in place, in exchange for an agreement that he will not be involved for X months in products/areas of direct competition, the two companies could reach a favorable commercial deal, such as your company selling to them a non-competing product (e.g., raw material) at a favorable price, or your company buying a non-competing product from them at a price they would find attractive.¹

 

Response #2: Your ex-staffer is hinting at the fact that if you go after him for violating the non-compete, he'll come back at you over the independent contractor issue. This wouldn't stop you from enforcing the non-compete, but it would certainly open another can of worms.

 

The fact that your non-compete calls him an employee is only one factor in whether or not a court would deem him to have been an employee rather than an independent contractor, but it could be a powerful tool to the ex-staffer's counsel, who's likely to pounce on it as an admission against interest. Whether your ex-staffer is willing to fight such a battle in court is another matter, but it's certainly a risk. And, if the court deems him to have been an employee, then there are all sorts of obligations the court will deem to apply to your company as his former employer that were not met.

 

You also need to factor in whether you may have others who may have been miscategorized as independent contractors. If so, you need to ask yourself: Does the enforcement of this non-compete outweigh the potential domino effect of the independent contractor concern?

 

To fix one piece of your puzzle going forward, you should change your non-compete agreement to apply to all "service providers" who sign it, which you then define as including both employees and independent contractors.

 

If you have any other independent contractors who even might fit the definition of employees, you'll also need to do a legal audit going forward, to ensure your independent contractors really fit that definition under current law (recommend you consider consulting an employment lawyer for that piece, if you have a number of these contractors, to manage this risk).²

 

Response #3: I think the suggestion in Response #1 is a good one. Trying to reach an accommodation with his new employer that's win-win for both companies (a commercial deal, etc.) is probably your best bet.³

 

Response #4: Non-competes are not enforceable under Oklahoma law unless it is tied to a sale of goodwill.⁴

 

Response #5: Oklahoma law holds that non-competes are void and unenforceable as against public policy. Oklahoma is one of the three states that generally prohibit non-competition agreements (California and North Dakota are the others). Even if the company that wants to enforce the agreement is located in another state and the agreement has a choice of law clause other than Oklahoma, you likely will be unsuccessful based on the public policy argument.⁵

 

Response #6: I agree with you that trying to enforce the provisions of an "employment agreement" may bring some unwanted liability to your company. The "employee vs. independent contractor" cases are coming fast and furious right now in many states, sometimes as class actions against larger employers. Courts are finding "employment" in areas historically classified as Independent Contractor- even in cases where a contractor is paid pursuant to a written Independent Contractor Agreement on a 1099 basis. You might open yourself up to claims for overtime, eligibility for employee benefits, etc., as well as raise red flags in the tax, unemployment and Workers' Compensation arenas. On the other hand, Oklahoma statutes may specifically carve out your type of salesperson as a statutory independent contractor for certain purposes- especially if it's a regulated/licensed industry. (For example, real estate salespeople/brokers are statutory ICs in many states under specified circumstances.)⁶

 

Response #7: Full disclosure: I know nothing about Oklahoma state law so the foregoing is in my honest opinion based on my experience.

 

I agree with what Response #6 has stated - generally. I believe you have two different issues to think through, not one.

(1) Is the non-compete argument itself worth it? In my opinion, outside of the high level executive scenario, it is rarely worth it. It seems this may open you up to potential liability for wages/benefits/fines,etc...additionally, because of the way the US Supreme Court, Department of Labor and many states determine classification, I wouldn't feel comfortable resting on the argument that the sales person is somehow an exception.

 

(2) If you have evidence of breach of confidentiality, is the answer to #1 different? Maybe. If you have evidence that trade secrets and other valuable Intellectual Property is being disclosed to or used by a competitor, then I would strongly consider sending a letter and taking the risk. You may be able to enforce the confidentiality provisions disregarding what his true legal classification was. Further, you don't need a non-disclosure agreement to assert allegations for misappropriation of trade secrets, breach of Intellectual Property - although not having one may weaken your argument about what reasonable steps you took to protect it.

I have seen others in the thread say that non-competes are not enforceable in Oklahoma. If that is true, I still don't think that would remove the confidentiality obligations contained in the agreement - in other words, the courts may rewrite the agreement.⁷