“Can I make my independent contractors sign non-compete agreements?”

Theoretically, you could compel someone uninformed and/or desperate enough into signing anything, but should you? No. Never. Never ever ever ever ever. Requiring independent contractors to sign non-compete agreements skirts a dangerous line drawn by the IRS and many state laws.

Let me rephrase that: it doesn’t just “cross” a line, it tramples through it, spits on it, lights it on fire, and dares it to retaliate.

Non-compete agreements typically constitute an “inappropriate degree of control.”

Federal and state agencies are intent on exposing and punishing employers who improperly classify employees as independent contractors. Don’t put yourself at risk.

On the federal level, there is a focus on misclassified workers. Congressional leaders are now demanding that the Department of Labor focus on investigating and punishing employers misclassifying workers and that the DOL coordinate these efforts with the Internal Revenue Service.

The IRS and the Department of Justice have initiated criminal investigations accusing business owners of using independent contractors to evade taxes intentionally and to launder money.

Numerous jurisdictions have initiated crackdowns against certain industries (*cough*salons*cough) and passed or proposed legislation holding businesses and owners civilly and criminally responsible for misclassifying workers.

Courts are increasingly hostile to employers’ use of the independent contractor designation.

In my opinion, there are very, very few justifiable reasons to utilize an independent contractor designation in our industry. Just don’t do it. Too few of you understand it.

The contract likely won’t be valid at all. A non-compete is something an employee signs, not a “self-employed” contractor. As a general rule, you cannot restrict an independent contractor’s right to work freely. By classifying someone as an independent contractor and having them sign a non-compete, you’re violating your own contract.

“But they signed it and agreed to it! Can’t I sue them for violating it since they signed it?”

Just because someone signs something doesn’t mean that the agreement will be held up in court. That contract you made them sign might actually make you their boss, which means they could be protected by the same laws that protect all employees. When the hammer comes down, it could be coming down on you; not them.

TO ME, SUING SOMEONE FOR VIOLATING AN ILLEGAL CONTRACT IS LIKE CALLING THE POLICE TO ARREST SOMEONE FOR STEALING YOUR ILLEGAL DRUGS.

Sure, that guy stole your meth, but your ass is going to jail for having it to begin with.

Suing an independent contractor for a non-compete violation could (and likely would) lead to a counter-complaint, where your “independent contractor” (read: misclassified employee) will come back at you for misclassifying them. You could then be held accountable for those back taxes, for violating federal employment law, and for violating any applicable state labor laws that pertain to the situation.

The lesson in all this? Don’t classify any salon employee as an independent contractor. When things go sour, you will be the one that suffers. The amount of money you’re saving on their employment taxes is not at all worth it.

Please understand that each state has different guidelines they use when determining employment status and nearly all of them (with the exception of California) are less stringent than the federal government’s. Therefore, it is entirely possible for a stylist to be determined to be an IC in your state, but an employee according to the federal guidelines. In any case, the agencies jointly prosecute, so you’ll have to answer to federal and state authorities (state tax/labor, and federal tax/labor officials).

For more information on why IC’s do not belong in our salons, read this post. If you test your so-called “independent contractors” against those IRS guidelines, you’ll see very plainly that they are rarely being used correctly except where booth renters are concerned.

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15 COMMENTS

  1. While I totally agree with you, that companies/salons should never force their independent contractors to sign a non-compete contract, actually these contracts are definitely enforced in many states. It’s a state law thing.
    So while you’re right in saying that companies should not make IC’s sign these contracts, also – Independent Contractors should never, ever sign them (unless they’re in a state where they’re totally unenforcable and a judge would throw it out in a second).

    • Actually, you’re mistaken. I think you might be confusing a non-compete with a non-solicitation or non-disclosure. The IRS and federal Department of Labor each make determinations of whether an employer-employee relationship exists by using a multiple factor test and the particular test used by each agency includes as a factor whether a non-compete agreement exists. Both take the position that a non-compete agreement indicates the employer is exercising the kind of control over the worker that an employer would exercise over an employee rather than an independent contractor. Those are federal laws which apply across all fifty states. Non-competes are definitely enforced, but never in the case of a self-employed person since a self-employed person is…self-employed. The non-compete restricts their ability to freely do business with other companies (which is kindof a key aspect of their employment status). This indicates that the owner is treating the IC as an employee because they are requiring the IC to remain exclusive to their business.

  2. I’m not sure what part of the posts you’re misinterpreting, but you’re clearly not understanding something somewhere. First of all, I never claim to be a licensed attorney and I actually go out of my way to ensure that everyone knows this. Nothing about the posts I construct can be construed as legal advice. It’s general business advice geared towards salon owners–many of whom have contacted me after an audit or civil suit has been initiated against them for making the same mistakes I warn against. After watching 15+ salon owners have their non-competes shut down and seeing countless owners have their contracts used against them in labor/tax disputes, I can say with confidence that having your IC’s sign non-competes is not just a bad idea, it’s an invitation for problems. I consult with several attorneys that agree with me on this and I’m certain that in your searches online, you’ll find plenty that advise against it.

    Second, this post you’re referring me to is relating specifically to Texas law–I am referring to FEDERAL laws. The major issue with the determination of independent contractor status is that each state has different ways of making that determination. These factors they take into account are often less stringent than the Federal guidelines. So, it is entirely possible for a worker to be classified as an IC on a state level but an employee on the Federal level. Most often, a salon owner is investigated due to a misclassified IC filing an SS-8 form with the IRS–not reporting to state labor agencies. Besides that, this attorney’s article blurs the line between what we refer to as “non-disclosures” and “non-solicitations,” and seems to include them into his analysis of whether or not a non-compete is enforceable. Both non-disclosures and non-solicitations are entirely enforceable and recommended in both IC and employee worker determinations–but limiting an IC’s ability to work is certainly not.

    Besides that, no salon owner should employ an IC except under very limited circumstances. Unfortunately, this status is abused across the board and it has taken a massive push on behalf of myself and other educators to move them away from it before they become the subject of an investigation. If the IC status were being used correctly, you wouldn’t see it in our industry at all.

    I recommend that you read the Federal statutes and IRS auditing guidelines. I’m certain that if you were to call this attorney and ask him if he advises hiring salon staff as IC’s and signing them to non-competes, he’ll advise against it. Texas may allow it, but the IRS and DOL are incredibly unlikely to.

  3. You’re correct that the IRS may use a noncompete as evidence that an “independent contractor” is actually an employee. Nevertheless, the state courts may still enforce the noncompete provisions while the IRS lays the hammer down on the employer for misclassification. Just because the IRS uses the noncompete to re-classify the employees and target the employer for tax fraud does not mean that state courts cannot choose to enforce the noncompete terms.

    Also, just because you say that it is not legal advice does not mean that it is not legal advice. I guess that your article could qualify as general information, but it’s definitely on the line–just be careful.

    All of that said, the advice to business owners to avoid requiring independent contractors to sign noncompetes is very good advice. Even if the noncompete provisions are enforceable, the costs of the IRS fines (and possible criminal charges) are MUCH greater than a little extra competition.

    You seem very bright and I enjoy your writing. I’m sorry if I come across as a mean critic, I do not mean to 🙂

  4. You’re correct, the fact that I say it is not legal advice doesn’t mean it isn’t–the definition of “legal advice” when being differentiated from “legal information” does. Legal advice requires careful analysis of the law as it applies to a specific person’s specific situation. Legal information is speculation based on generic facts…which is exactly what this post is.

    Generic Fact 1: Independent Contractors are free to operate without employer control–this means they have the ability to solicit their services to other businesses and clients.
    Generic Fact 2: A non-compete is a contract that basically states: You agree to work for me and only me. If you want to work for other businesses or people, you have to do it outside of the radius I define for you until some arbitrary amount of time has passed. A non-compete is NOT the equivalent of a non-solication or a non-disclosure, which in our industry translate to “you can’t steal my client information or solicit my clients” and “you can’t tell anyone else how I run my business or who we service,” respectively.
    Generic Fact 3: Having an IC sign a non-compete is a clear violation of those behavioral control factors that define the IC on a Federal level and make it obvious that the status is being misused (in our industry, these abuses are even plainer as IC’s that do not booth rent just DO NOT belong in the salon).
    Generic Fact 4: Contracts that are a violation of Federal or state laws are considered invalid.
    Personal Experience: Of the many beauty industry-specific instances of this I’ve witnessed, literally ZERO have ended well or even slightly favorable.
    Conclusion: Do. Not. Do. It. The potential gains don’t justify the risk. In our business, it doesn’t make sense. If you do it, bad things *will* happen to you.

    So no, there is no “line” to fear here.

    If I seem defensive, it’s because I’ve spent the last three years dedicating myself to helping owners navigate these issues and trying to put a stop to these business practices–which are often perpetuated by bad industry advice and/or poorly interpreted statutes that are then translated to our business. Often, these salon owners have read posts like the one you linked above and have mistakenly applied it to our industry. Our business can’t be compared to any other and any advice that isn’t specifically tailored to our business can’t be applied to it. We exist in a poorly-regulated, weird gray area where service and retail meet and where employment lines and compensation methods are blurred from chair to chair within the same salon. You can’t translate generic, broad advice for builders, restaurant staff, bank tellers, or shoe salesmen to us. It’s comparing apples to hand grenades.

  5. In these last three years, I have seen exactly one IC held to a NCA on the state-level (of dozens). Even though that state battle was won and the employee was ordered to cease employment at her new job and find one outside of the radius specified in the NCA, that contract was then flipped and used against the owner when the SAO initiated a Federal labor investigation and IRS audit on behalf of the employee. I have seen that happen over and over and over again. Even on a state level, judges do not seem to like the NCA/IC combo. Many don’t seem to like contracts that restrict anyone’s right to support themselves financially. I have even seen somewhat reasonable NCA’s get shut down, even when the person was an actual employee, for being “too broad” or “not narrowly-defined enough.” I have had attorneys I’ve referred my consulting clients to tell them that an NCA is often not worth the expense to pursue in court and is unlikely to be upheld–which is why I make it very clear to everyone in the Contracts 101 posts that they have no business drafting their own contracts. Ever.

    The particulars will always vary widely, but the outcome for a salon owner that misclassifies and leaves a paper trail will almost never be favorable. I have yet to see it and only one of my client’s attorneys (of dozens) advised a misclassifying owner to pursue her non-compete against my advice to the contrary–and she now regrets that decision six months later while she’s awaiting the outcome of her Hell Trifecta Lawsuit (the DOL, IRS, SAO tag team). Sure, the employee has been moved three miles away, but was it worth it? Absolutely not.

    When it comes down to it, the vast majority of salon owners could avoid these issues in the first place if they had retained legal counsel and had their contracts and compensation systems properly and legally formatted in the initial business planning stages. I have no interest in providing legal advice or acting as anyone’s attorney. I’d much rather communicate the potential dangers of travelling a particular path and have people avoid falling into the pits I see 80-100 salon owners fall into every year–and I don’t have to be an attorney to do that.

    …and yet, I *still* get emails from people that read this very post asking me, “But what if I do this…?” and “Do you think it’s okay if I word it this way?” and multiple other questions that basically equate to, “How can I somehow have my cake, eat it too, and not get bent over by the Federal government?” I also get emails like your comment, questioning or challenging the validity of the statements I’ve made. Let me make this very clear: this blog is directed towards the beauty industry only. Every so often, some state might just grant a very special NCA validity against an IC in whatever business type–but in our industry, it is extremely, extremely unlikely to ever happen.

  6. So I gave my employer a weeks notice because I’m going to a booth rent salon. Today I got fired, my employer said “you’re soliciting your business at my business so get out, were sueing you, you signed a contract”
    The “contract” we signed says we can’t give our info or take client info, but it says “employee may not take ect..” We’re not employees, were IC. Also they made us leave without our checks on payday.
    What can or should we do? Can they sue us for soliciting? Even if we’re not their employee?

    • If they try, they’ll have to explain to a judge why they classified you as an independent contractor. I’m willing to bet that’s not something they want to address, since the consequences for them will be pretty serious and the potential reward won’t come close to outweighing it. Unless they’re tremendously stupid, they likely won’t do anything to enforce it. Should they go to an attorney, my guess is that they will highly advise them against taking action.

  7. How do I know what I’m classified under? I was paid with a 1099 the first half of the year as my employer was trying to ” save me from paying taxes” and then I got nervous and begged her to put me on a w2. Long story short, she made me sign a non compete/ non disclosure and my mileage is more than everyone else’s. Actually, not every employee has one. Five months ago I told her my aunt is sick and shed like for me to take over her salon. I gave her 3 months notice and offered to train her employees to take over my clients. I have never once solicited, or reached out to any clients to get them to come see me. However, a few clients found me on social media and begged to come see me. Am I at fault for servicing them? She’s trying to sue me.

    • She can’t sue you for breach of non-solicitation if you didn’t solicit the clients. If they found you, they’re yours. If she wants to sue you, she’ll have to PROVE you solicited the clients (which you claim you didn’t). Since she can’t prove that (because it didn’t happen), you have nothing to worry about.

      The only way to know how you were classified is to go by which documents you received at the end of the tax year (1099 or W-2). You can file an SS-8 form with the IRS and have them perform an investigation. They can make a determination for you.

      • She sent me a cease to desist, should I reach out to an attorney? I was trying to look up laws on non competes. Is it discrimination that my mileage is more than others? Who do you suggest I should do? This is in the eyelash extension industry by the way. I’m so afraid as I’m just taking over my aunts business and now this..

        • I’m not sure what you mean by your “mileage,” but I have a post about discrimination here. A C&D is nothing more than a request sent on her behalf for you to stop before she sues. However, you can’t stop doing something you AREN’T doing in the first place. C&D’s are generally meaningless. They’re written to threaten and intimidate. If there’s a valid reason for sending it (for example, if you actually were soliciting her clients), then it would be valid, but since you claim you’re not, it isn’t. She can attempt to sue you, but without proof, she won’t get far (if her attorney even agrees to file against you–it’s far more likely that he’ll explain to her how the law works and what a waste of time and money it would be to pursue you for something she can’t prove you did). If I were you, I’d hire an attorney to respond to her attorney’s C&D. It’ll cost you maybe $150-300, depending on who you hire, but I’d have the letter clarify that a.) I am not soliciting anyone and I’d like to see any proof she has to substantiate that claim, and b.) if she cannot provide proof, to stop harassing you and attempting to intimidate you. She’s trying to suppress your ability to work, and my letter of response would say so.

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