DISCLAIMER: This post contains general information about the FTC ban and non-competition agreements. It is not legal advice. If you are using non-compete agreements in your business, we strongly recommend you schedule a consultation with an employment attorney in each of the US jurisdictions where you operate.
The Federal Trade Commission (FTC) guidance for businesses and small entities reads:
The Rule applies to noncompetes with all workers, whether full-time or part-time, including employees, independent contractors, interns, externs, volunteers, apprentices, and others.
Notice that the rule, or ban, includes independent contractors–independent business owners that have contracts to perform services for the businesses that will soon be unable to include non-competition clauses in those agreements. You can probably already see why this is a problem, but this post intends to make it clearer.
Distinguishing Independent Contractors
Federal, state, and local government agencies have different criteria for determining who is a true independent contractor. We recommend you carefully scrutinize the structure of any relationship you have with a vendor you issue a 1099-NEC form with a social security number (SSN) rather than a tax identification number (TIN) or employer identification number (EIN). Typically, a true independent contractor is an independent business with multiple contracts to perform the services it provides you.
Here are other considerations:
- Is the work the independent contractor does different from what your business offers?
- Do you have employees who do the same work?
- If the work is done poorly, is the independent contractor responsible?
- Is the independent contractor’s business the one that’s success is contingent on satisfactory work? Or is it yours?
- Who provides the equipment and materials necessary to fulfill the contractual duties?
- Which of you controls when the work is done and how it is performed?
- When additional workers are needed for a project, who provides them?
- Does the independent contractor have liability, workers’ compensation, and disability benefits insurance under its own legal business name and EIN?
- How does the independent contractor advertise its services?
- Are you providing any training, insurance, or other benefits?
Banning Non-Competition Clauses Between Businesses
Assuming independent contractors are truly independent businesses, the FTC ban on non-compete agreements should not include the contracts between them and their clients.
Business-to-business agreements are not the same as employment contracts and should not be treated similarly. The power imbalances the FTC seeks to neutralize does not exist in the same ways when businesses choose to work together.
In this country, we have a long history of viewing business owners as savvy enough to advocate for themselves. We trust them to negotiate and enter agreements in the best interests of their businesses without our interference. Courts and government agencies generally only step in when contracts are unconscionable or a threat to the general public. That should not change.
Next Steps
The United States Chamber of Commerce plans to file a lawsuit challenging the FTC ban, arguing that states should be the ones regulating non-competition agreements as they deem necessary. We also expect there to be challenges to the application of the FTC rule to independent contractors. Regardless of the outcomes of such lawsuits, employers must evaluate their independent contractor relationships for other compliance reasons.
Not sure your contractor is truly independent?
Making the FTC Ban on Non-Competition Clauses Work for Employers