Can a non-compete be enforced against a 1099 independent contractor? If you are a 1099, that means you are an independent contractor. Taxes will not be taken out of whatever your payment is. And then at the end of the year, you’ll get a 1099 and you’re responsible for all the taxes associated with any of your compensation throughout the year. Let’s just start at that basic level. If you are an employee, you’ll get a W-2, and you are not an independent contractor. In any employment agreement and most independent contractor agreements for professionals who are in sales or maybe at the executive level, and certainly in healthcare, there will be non-compete.
Now, what does a non-compete do? It essentially prohibits the professional from doing what they do for a certain amount of time within a specific geographic region. Are non-competes enforceable in every single state? No, there are a few states where they’re completely unenforceable. However, in most states, they are enforceable if they kind of meet that state’s requirements. Most states do not have specific laws about non-competes, it’s kind of through case law from people suing and then the court’s making decisions. But the courts will look at the following factors to determine if the non-compete is reasonable and enforceable. First, does the non-compete protect the employer’s legitimate business interests? Does it cause undue hardship for the employee/contractor? It doesn’t harm the public and then it has a reasonable time or geographic scope associated with it.
Let’s talk about what to expect in the actual independent contractor agreement. First, can a non-compete be enforced in a 1099 independent contractor agreement? Yes, they can, unless it’s in a state where, as I said before, it’s completely unenforceable. In most non-compete, it’s going to state that the professional can’t do their specific profession for usually somewhere between a one-to-two-year time. And then the geographic scope really can be dramatically different based upon the industry that the professional is in. For healthcare, somewhere between 5 to 15 miles is normal. For some sales positions, it can be the entire state or several Counties from where they are called upon with the sales targets. It really is industry specific. Some things you must keep in mind: one, you want to make sure that the specific profession listed is very narrowly tailored. Other blogs of interest include:
Let’s just say, you’re a software salesperson. You don’t want it to say you can’t do sales for two years within this County. You wanted to say, you can’t do the very specific software banking sales. That way, you’re not completely kept from doing sales. You just can’t do sales for a competitor. That’s kind of an important part of this. If an employer is stating you can’t do sales at all and they’re a bank, well, it doesn’t make sense if you’re doing cleaning supply sales that they would prohibit you from doing that. That’s the first thing you need to think about, narrowly tailored the scope of what you can’t do. And then as far as time goes, anywhere between one to two years would normally be enforceable. If you have a five-year, 10-year non-compete, that’s ridiculous!
Very unlikely that that would be enforced. And then as far as geographic scope, as I said, you want that narrowly tailored as well. Some things to think about: you always want it to be from your primary location. If you’re in healthcare, certainly your primary practice location. If you’re in sales, you want to keep that as tight as possible and maybe just one County or if you’re throughout the state, it’s tougher, but still, you want to open as much area as possible. Multi-State non-competes generally are not enforced. However, if you’re in sales and you’re in Cincinnati and you’re on the border of Ohio, Kentucky, and Indiana, well, they may say somewhere around there. And so, like that, it’s likely that would be enforced as well.
So, are non-competes enforceable in 1099? Yes, if they are reasonable in scope. It’s tough, I mean, non-competes can be a huge part of any contract negotiation. Now, for some people, it doesn’t matter at all. Like if I have a physician moving into a city just for that job, they have no ties to the area, and they say, you know what, if this job doesn’t work out, I’m moving anyway. I don’t care about the non-compete at all. Whereas someone who is established in the city, maybe they have kids that are in school, or they have family close by, being able to stay in the area and continue to do the profession might be the absolute, most important thing. So, if an employer/independent contractor customer is just completely unwilling to make any changes to the non-compete, that can be a deal-breaker for some people. Unfortunately, yes, the non-compete can be enforced in an independent contractor agreement but must be narrowly tailored.
I would have someone look it over, an attorney looks it over to kind of give you their opinion on whether it’s enforceable and never go into a contract signing something, just saying, well, it’s too broad. It won’t be enforced if need be. Well, yes, that might be true, but you might have to litigate it or go to arbitration. I would never suggest that someone sign a contract just thinking, ah, well, it won’t be enforced. I don’t have to worry about it. That’s a bad idea in my opinion.
Employment Contract Questions?
Contract Review, Termination Issues, and more!