As a business owner, you may need to hire an independent contractor (or employee). It goes without saying that you should use an independent contractor agreement every time. Two key provisions often found in these agreements are non-competition and non-solicitation clauses. But, in most states, these provisions are traps for the unknowing. They must be carefully drafted and include the right language in order to be enforceable. Otherwise, you just might find yourself holding a worthless piece of paper and clients walking out the door with your former independent contractors.
So what is important to know about these clauses, which are known as “restrictive covenants”? The laws vary from state to state, but generally speaking, there are three important considerations. First, is the restrictive covenant geographically limited? Courts generally consider these types of restrictive covenants to be restraints on trade (i.e. limitations on someone’s right to earn a living) and therefore, to be valid, they need to be narrowly tailored. So, if your business is Atlanta, Georgia, your non-competition clause should not try to prevent your independent contractor from competing with you over in Savannah, Georgia. The distance between Atlanta and Savannah is too wide for a clause like that to be enforceable. It is not likely that a contractor working for you in Atlanta, is a real threat to you way over in Rockford.
What is a proper geographical limitation? Again, you should check the laws of your particular state, but generally speaking, a 50 mile radius should be the outer limit. So, for the Chicago company, the owner should not try to prevent a contractor from competing with her beyond 50 miles in any direction. Based on this discussion, it goes without saying that an attempt to prevent an independent contractor from competing anywhere in the United States would be tossed out quickly by a judge.
Second, is the restrictive covenant limited in time? For example, you cannot stop your independent contractor from competing with you forever, or some other equally unreasonable period of time. Remember that restraint of trade is against public policy—people are entitled to earn a living in their chosen field, so make sure your non-competition clause has a reasonable time limit. What’s reasonable? Well, it depends. It depends on the industry, the nature of the business, the nature of the harm that the business owner would suffer, etc. But, think carefully if you are inclined to try to prevent someone from competing with you for more than 1 year.
Third, is the restrictive covenant limited in scope? You cannot prevent your former independent contractor from competing with you in unrelated areas. So, for example, if you a marketing consultant, and you hire an employee or independent contractor to assist you, a non-compete clause that prevents them from competing with you “in the provision of marketing consulting services” is probably too broad. “Marketing services” is a pretty large field. What if you specialize in writing new product launch marketing plans and your former employee wants to provide marketing services to nonprofits regarding sponsorship deals with companies in the health and beauty industry? Is that really competition to you? You cannot lock down an entire industry that is that broad. You have a much better chance of your contract being enforced if the scope of services you are seeking to protect is narrowly tailored to fit just what you need; not every possibility known to man.
The issues are similar when dealing with a non-solicitation clause that prevents a former employee or contractor from soliciting your clients when they leave your company. The usual exception is that there doesn’t have to be geographical limitation. However, there should be a time limitation and a limitation on which clients are off limits. In other words, every client probably can’t be protected. However, every client that the former employee met or worked with probably can be protected.
These types of restrictive covenants are important provisions to a business owner. It is well worth your time and money to retain an experienced business law attorney to draft these provisions. You don’t want to find yourself with former contractors or employees competing with you and soliciting your clients to leave…and there’s nothing you can do to prevent it.
