Archives for August 2011

Enforcing Noncompetion Agreements against Independent Contractors may be Problematic for Employers

As if employers don’t have enough to worry about when they try to enforce noncompetition agrreements against their former employers, some are discovering that things get even trickier when they look to do so against workers who were arguably misclassified as independent contractors. In addition to the normal hurdles — including proving that a valid contract was formed and then breached by the employee, and establishing that a worker’s new job will substantially injure legitimate business interests — they may also face a formidable claim that the working relationship was itself illegal under Massachusetts law and, consequently, that their otherwise valid noncompetition agreements are void and of no effect.

This sort of situation is arising with increasing frequency in the real estate industry, for example, where agencies routinely classify their realtors as independent contractors despite the fact that, in all likelihood, they cannot pass muster under standards established by Mass. Gen. L. ch. 149, s. 148B. Many of these agencies also routinely required agents to sign non-competes. While it’s true that, to date, enforcement authorities have not focused attention on apparently illegal independent contractor deals like these, the approach by government does not impact the parties themselves. An improper independent contractor deal can still be raised as yet another substantial defense in a noncompetition enforcement action.

The problem for employers here is fundamental. Generally speaking, persons who violate provisions of law cannot later claim their benefits. Similarly, persons who violate contractual terms cannot later seek to enforce violations by other parties to them. In the employment setting, independent contractror arrangements that don’t comply with state law are void, and employees cannot be bound to honor them, even where they agreed to the terms in the first place. Employers, on the other hand, can be found liable for damages to the same employees who agreed to work as contractors. Where a noncompetition agreement is part of that sort of deal, an employee might argue persuasively that there is no valid basis to enforce it. Non-competes, after all, can withstand attack only when supported by a tangible benefit to the employee involved. Though hiring a worker and providing him/her a job is generally sufficient for this purpose, improperly classified workers might establish that, because the foundation of their work agreements are invalid, so too are the noncompetition clauses contained either within them or as part of some related document.

To be sure, this theory needs to be tested in the courts, and employers might in some cases argue for application of enforcement principles that apply to non-employment relationships. Standards there are in fact easier to meet in enforcement actions, but are unlikely to apply unless the employer can first establish the independent nature of the relationship to its former contractor. If that independent contractor was in fact an employee under law, that task may prove difficult or impossible.

Jack K. Merrill, Esq.