The Non-Compete Question for Contractors
Non-compete clauses restrict a worker from competing with the hiring party during and after the working relationship. While these clauses are common in employment agreements, applying them to independent contractors raises unique legal and practical challenges.
The tension is straightforward: independent contractors, by definition, operate their own businesses and serve multiple clients. Restricting their ability to work in their field conflicts with the fundamental nature of the contractor relationship.
Can You Put a Non-Compete in a Contractor Agreement?
Yes, you can include a non-compete in a contractor agreement. Whether it will be enforced is a different question entirely. Courts evaluate non-compete clauses based on several factors, and the contractor context makes enforcement harder than the employment context.
Why Courts Scrutinize Contractor Non-Competes
Courts generally apply heightened scrutiny to non-compete clauses in contractor agreements for several reasons:
- Inconsistency with contractor status: Restricting who a contractor can work for looks like control over the contractor's business, which is an indicator of employment
- Lack of bargaining power balance: While both parties are theoretically independent businesses, hiring companies often have more leverage
- Economic hardship: A contractor's entire livelihood depends on serving clients. Restricting their market can be devastating
- Public policy concerns: Courts don't want to discourage legitimate business activity or limit market competition
Here's an important catch: an overly restrictive non-compete can actually undermine the independent contractor classification itself. If you're telling a contractor they can't work for anyone else in the same field, that level of control looks a lot like employment.
State-by-State Landscape
Non-compete enforceability varies dramatically by state:
States That Ban or Severely Restrict Non-Competes
- California: Non-compete clauses are void and unenforceable in virtually all circumstances, including for contractors
- Oklahoma: Non-competes are generally unenforceable
- North Dakota: Non-competes are not enforceable
- Minnesota: Banned non-competes effective July 2023
- Colorado: Largely unenforceable except for highly compensated employees (and specific narrow exceptions)
States With Moderate Restrictions
Many states allow non-competes but impose specific requirements:
- Oregon: Non-competes are limited to 12 months and require minimum compensation thresholds
- Washington: Requires the worker to earn above a specified threshold ($120,559.99 for employees, $301,399.98 for contractors as of 2024)
- Massachusetts: Limited to 12 months, requires garden leave or other adequate consideration
- Illinois: Requires minimum compensation thresholds
States That Generally Enforce Reasonable Non-Competes
States like Florida, Texas, Georgia, and Pennsylvania will enforce non-competes that meet the reasonableness standard, though courts in every state retain discretion to narrow or reject overly broad restrictions.
The Reasonableness Standard
In states where non-competes are enforceable, courts evaluate them against a reasonableness test. The clause must be reasonable in:
Scope of Activity
The restriction should be limited to activities that genuinely compete with the hiring company. A broad prohibition on "any work in the technology industry" will likely fail. A narrower restriction on "providing data analytics services to direct competitors in the financial services sector" has a better chance.
Geographic Scope
The geographic restriction should match the hiring company's actual market. For local businesses, a city or county-wide restriction may be appropriate. For national companies, broader restrictions may be justified, but only for the specific competitive activities at issue.
Duration
Shorter is better. Most courts look favorably on restrictions of 6 to 12 months. Restrictions beyond 24 months are difficult to enforce for contractors, and even 12 months can be challenging depending on the circumstances.
Legitimate Business Interest
The hiring company must have a legitimate business interest to protect. Common qualifying interests include:
- Trade secrets and confidential information
- Customer relationships and goodwill
- Specialized training provided at the company's expense
- Investment in the contractor's professional development
The strongest non-competes are narrowly tailored to protect specific, identifiable business interests. A non-compete that simply prevents competition without connecting to a legitimate interest is much more likely to be struck down.
Better Alternatives to Non-Competes
Given the enforceability challenges, many businesses achieve better protection through alternative restrictive covenants:
Non-Solicitation Clauses
Prevent the contractor from soliciting the company's clients, customers, or employees for a defined period after the engagement ends. These are generally more enforceable than non-competes because they're narrower in scope and don't prevent the contractor from working in their field.
Non-Disclosure Agreements
A strong confidentiality clause prevents the contractor from using or sharing proprietary information, which addresses the most common concern underlying non-compete requests. If the contractor can't use your trade secrets, their ability to compete effectively is naturally limited.
Non-Interference Clauses
Prevent the contractor from interfering with the company's business relationships, including relationships with vendors, partners, and key accounts. Broader than non-solicitation but narrower than non-compete.
Garden Leave Provisions
If you do include a non-compete, consider a garden leave provision where you continue to pay the contractor during the restricted period. This makes the restriction more enforceable because the contractor isn't being asked to forgo income without compensation.
Drafting Enforceable Restrictions
If you decide to include a non-compete or other restrictive covenant in your contractor agreement:
- Keep it narrow: Restrict only the specific competitive activities that threaten your legitimate business interests
- Limit the duration: Aim for the shortest period necessary, typically 6 to 12 months for contractors
- Define the scope geographically: Match the restriction to your actual market
- Provide consideration: The opportunity to work under the agreement may be sufficient, but additional consideration strengthens enforceability
- Include a severability clause: Allows a court to narrow the restriction rather than invalidate it entirely
- Choose governing law carefully: Some states are more favorable to enforcement than others
- Have both parties acknowledge the restriction: Ensure the contractor specifically agrees to and understands the limitation
The FTC's Proposed Ban
The Federal Trade Commission proposed a near-total ban on non-compete clauses in 2024, which would have applied to both employees and independent contractors. While the rule faced legal challenges, the trend toward restricting non-competes at both federal and state levels continues. Businesses should not rely solely on non-compete clauses for competitive protection.
Include the Right Restrictions in Your Agreement
Whether you choose a non-compete, non-solicitation, confidentiality provisions, or a combination, these restrictions need to be carefully drafted and integrated into your broader contractor agreement. PactDraft generates independent contractor agreements with customizable restrictive covenants designed to protect your business interests while remaining enforceable. Build your agreement now.