Independent Contractor/Employee Violation of Non-Compete

Response #1: Let me suggest that you might be focusing on the wrong issue. It seems to me that it makes no practical difference whether he was an employee or an independent contractor for purposes of seeking to enforce the non-compete provision of his contract. It sounds as if he had a valid contract with your company and received adequate consideration in return for his promises including the non-compete.¹

Response #2: Win a battle and lose the war? I would want to know two things before pursuing this further: (1) is the non-compete likely to be enforceable? Courts generally do not like them and it would need to meet the various scope restrictions (geography, duration, and activity covered) to have a chance of enforceability without guarantee; and (2) if you sue on the non-compete and he/she countersues alleging misclassification (employee v. independent contractor), what is the likely liability the company will face if you lose that claim? Lost wages / benefits, unpaid taxes? Minimum wage claims? Stock grants that should have been paid? Other? The employee/IC can also file a misclassification claim with Oklahoma authorities who could independently pursue unpaid taxes, wages, etc. Also, ask whether it is the competing that is the issue or whether he/she is misusing confidential and proprietary information? These are separate issues that often get mixed together.²

 

Response #3: Looks like you are stuck between the proverbial rock and a hard place. You will need to weigh the pros of enforcing the non-compete versus the cons of fighting a willful misclassification action. The "employment agreement" is evidence against you on the employment issue if he pushes it in response to a cease and desist action. Unlikely he would raise the issue in response to a letter unless you seek an injunction. However, you might check if there was an independent contractor agreement by which he agreed to indemnify the Company for all taxes etc. On the bright side you would be almost out of luck in California and face stiffer penalties for the misclassification. Regardless of how he is ultimately classified, you are likely to have an enforceable covenant since you are in Oklahoma.³

 

Response #4: You need to look at all agreements before you weigh the pros and cons of the approach. The non-compete will be enforceable in Oklahoma; you need to decide if it is worth it.⁴

 

Response #5: I am not aware of any exception for a "sales person" on the analysis of an independent contractor v. employee.

 

I agree with you that you may face an increased risk of having this individual found to be an employee if you attempt to enforce a non-compete against him.

 

Some states (New York) feel that a non-compete in any agreement with an independent contractor negates their status as an independent contractor.

 

You could certainly prevent him from using Confidential Information in either case (employee v. independent contractor), but I would be very careful with respect to the non-compete.⁵

 

Response #6: Talk about tangled webs . . . If the "employment agreement" to which you refer is the agreement he had as an Independent Contractor, then you are correct to conclude that trying to enforce a non-compete agreement against him is a 100% sure fire way to concede the point that he was an employee and not a true IC. Now, that may or may not matter much to the company. You may be on the hook for state unemployment contributions, Workers' Compensation contributions, and Federal Insurance Contribution Act taxes for the period of employment, but the former employee might not care much about any of that since he's not getting the money. But, if he would have a claim for severance pay, medical benefits, or other money in his pocket (including minimum wages or overtime claims), then you might not want to go there as he would be much more likely to come after you. You should also be wary of how this case might affect any other Independent Contractor arrangements you may have with other people.

 

But, a company CAN enforce a confidentiality agreement against an Independent Contractor. If he had access to proprietary information and is potentially misusing that information, you can send the cease and desist letter based SOLELY on breach of confidentiality and not mentioning any non-compete. You might have a better shot at that, although getting any actual relief on that kind of claim is not easy. But it may make your CEO happy that you "did something" without exposing the company to a claim from the former IC/employee.⁶

 

Response #7: I am not an Oklahoma lawyer, but a cursory Google search identified Oklahoma as one of three states (the others being California and North Dakota) that deem non-compete agreements void and unenforceable.⁷

 

Response #8: We've had some similar issues with our employees. As mentioned, the issue isn't the independent contractor argument, but the non-compete.⁸

 

Response #9: I would avoid getting into a contract fight altogether if the non-compete and confidentiality agreement suffer from the same flaw - he is referred to as an employee (or the confidentiality provisions are included in the non-compete). Either way, you are inviting a classification dispute and, if there are other sales people who may be misclassified you run a risk of class litigation or a US Department of Labor investigation. Have you considered treating his conduct as a misappropriation of trade secrets under state statute?⁹