Joseph G. Ballstaedt
801.365.1021
joe@snjlegal.com
Usually, a non-competition agreement is an agreement between an employer and an employee where the employee agrees to not compete with the employer’s business. These agreements are also known as non-competes, post-employment restrictive covenants, or covenants not to compete. They prohibit the employee from selling or offering to sell products, processes, or services that are similar to those offered by the employer. Whether a non-compete against an employer is enforceable depends on various factors and Utah laws that apply to non-competes between employers and employees, which I discuss in more depth in a separate article.
Although non-competes usually exist between employers and employees, sometimes an independent contractor—not an employee—signs a non-compete. Are these agreements enforceable under Utah law? Utah laws and Utah courts have little to say on this topic, but non-competes against former employees are difficult to enforce, and based on how other states handle non-competes against independent contractors, courts may likely be even less willing to enforce them than they are to enforce non-competes against employees.
The Standard for Non-Competes Against Independent Contractors
A non-compete is a restrictive covenant, and in Utah, courts have explained that restrictive covenants are not favored—they interfere with the free and unrestricted right to work. What this means is that courts, when confronted with restrictive covenants, will often throw them out or limit their effect. Many courts in Utah have discussed this heightened standard with respect to non-competes against former employees by explaining that such agreements must protect a legitimate business interest and must be reasonable in time, scope, and location. If non-competes violate these standards, they are not usually enforceable.
Although there is little guidance in Utah regarding non-competes against independent contractors, a Utah court would likely view them even more harshly than a non-compete against a former employer. The basic reason, which other non-Utah courts have acknowledged, is that a business will usually have a lesser legitimate interest in restraining the commercial activity of independent contractors, which is discussed in more depth below. So, although a non-compete in Utah against an independent contractor could be enforceable, proving that a non-compete against an independent contractor is enforceable will be more difficult than proving that a non-compete against a former employer is enforceable, already a difficult task.
Differences Between Non-Competes Against Independent Contractors and Employees
Below, I discuss in a bit more depth the standards used to determine whether a non-compete against a former employee is enforceable and how these standards might be adjusted when dealing with an independent contractor.
- Supported by Consideration. A non-competition agreement must be supported by consideration, which means the employer or independent contractor must receive a benefit in exchange for signing the non-compete. This factor is almost always met when dealing with employees and would likely be met with respect to independent contractors. Just as an employee might not hire and pay an employee unless he or she signs a non-compete, the business might not hire the independent contractor unless it signs a non-compete. The benefits and payments arising from the job are certainly consideration.
- Protecting Legitimate Interests. As stated above, a non-compete must be aimed at protecting legitimate business interests, not competition. Stated perhaps more accurately, the agreement must focus on protecting the business, not preventing the competition. For example, an employee may have a very good relationship with clients and inside business information that he or she could use to steal clients and the company’s business. So, a non-compete prohibiting the employee’s competitive behavior after the employment ends is more likely proper and enforceable. However, an independent contractor likely does not have this type of information and ability to “steal” from the business, so there are fewer legitimate business interests in prohibiting an independent contractor.
- Reasonableness in Time. In 2016, Utah passed the Post-Employment Restrictions Act, which expressly states that a non-compete cannot be longer than “one year from the day on which the employee is no longer employed by the employer.” This statute, however, only applies to post-employment restrictive covenants, and an independent contractor is not, by definition, an employee. Thus, the one-year cap does not apply. Yet, if a court is inclined to view restrictive covenants against independent contractors more harshly, it may impose this one-year cap, but it is uncertain what a court would do.
- Reasonableness in Location. Non-competes against employees probably cannot prohibit competition anywhere in the United States or anywhere in the world. Such a large geographic scope is almost certainly oppressive and improper. On the other hand, a quarter mile of the employer’s business is probably reasonable. Between these two extremes is where most non-competition agreements sit, and whether this geographic scope is reasonable depends on the facts and circumstances of the case. Although the permissible scope may be narrower for an independent contractor, there is no clear guidance since even the available guidance on non-competes against employees is quite mushy.
Enforcing Non-Competition Agreements Against Independent Contractors
If an employee violates a non-compete, the employer can seek damages (compensation for the harm the breach caused) as well as an in injunction. An injunction is an order from a court that orders the former employee to stop engaging in conduct that violates the non-compete. A breach of a non-compete by an independent contractor would trigger the same remedies, although the likelihood of recovering these remedies will be more difficult if the court is less inclined to enforce the non-compete.
Even if the court would not enforce a non-compete against an independent contractor, the threat of a lawsuit is an effective deterrent. The independent contractor may—out of fear—refrain from any competition with the business. This may be the case even though, if push came to shove, the independent contractor would win in court and have the ability and right to compete.
Help with Non-Competition Agreements Against Independent Contractors
The information above does not address every aspect or nuance of non-competes against independent contractors (or non-competes against employees). Certainly, it is always wise to discuss the unique facts and circumstances of the business relationship with an attorney.
If you own a business and want to discuss the benefits of a non-compete for independent contractors that you hire (or an employee), give me a call. If you are an independent contractor (or an employee) who has been offered a non-competition agreement or are considering conduct that might violate a non-compete, I can help. I offer a free consultation. My direct dial is 801-365-1021, and you can e-mail me at joe@snjlegal.com.
