Welcome to Texas Business Matters! This is our fourth blog in a ten-part series on non-competes agreements. In our last blog, we addressed the remedies that an employer may obtain from the court when an employee violates a non-compete agreement. In this blog, we will discuss whether an independent contractor can be bound by a non-compete agreement.

Many employers hire independent contractors to fill particular niches in their workforce. From an employer’s prospective, using independent contractors allows the employer to hire on a project-by-project basis without having to pay the taxes and benefits required for actual employees. From the contractor’s perspective, the arrangement allows more freedom and flexibility for those who are looking to freelance or do not need the benefits that come with regular employment.

Even though independent contractors may not have all the rights and benefits that employees have, independent contractors may still have access to the employer’s proprietary information and may still pose the risk of taking that information, sharing it with competitors, and starting competing businesses. In fact, independent contractors often work for multiple companies at the same time, and thus these risks may be greater for independent contractors than for employees.

Despite these risks, employers should not have their independent contractors sign non-compete agreements, even though Texas law generally does not prohibit an independent contractor from doing so. The problem is that a non-compete agreement restricts an independent contractor’s right to work freely, which makes the independent contractor more like an employee. Thus, if an independent contractor signs a non-compete agreement, the state or federal government could re-classify the independent contractor as an employee. As a result of this re-classification, the employer could be required to pay penalties and make retroactive payments that the employer would have made if the independent contractor had been initially classified as an employee. These payments may include overtime, benefits, workers compensation premiums, and contributions to the state unemployment insurance benefit funds.

Instead of a non-compete agreement, the employer should have the independent contractor sign a non-disclosure agreement. As we discussed in our second blog of this series, a non-disclosure agreement allows the independent contractor to work for the employer’s competitors but prohibits the independent contractor from using the employer’s confidential and proprietary information in the course of his work with any other employer. Also, the employer should take a closer look at the job that the independent contractor is to perform.  If it involves access to confidential and proprietary information, the job may be better suited for an employee.

In our next blog, we will cover special rules that apply to non-compete agreements for physicians.