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Legal Insider: Be Wary of Non-Compete Agreements for Independent Contractors in Virginia

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This is a sponsored column by attorneys John Berry and Kimberly Berry of Berry & Berry, PLLC, an employment and labor law firm located in Northern Virginia that specializes in federal employee, security clearance, retirement and private sector employee matters.

By Kimberly H. Berry

An interesting question that has arisen recently is whether Virginia employers can use non-compete agreements with independent contractors. The answer is not entirely clear. There are many potential pitfalls for both the independent contractors that sign such agreements and the employers that attempt to enforce them.

The Problems with Non-Compete Agreements for Independent Contractors        

One of the main problems with requiring independent contractors to sign non-compete agreements is that independent contractors are different types of workers. An independent contractor is essentially its own business. Generally, an employer cannot compel an independent contractor, which is a separate business, to forfeit his or her business simply because it gave the independent contractor business.

Independent contractors may appear similar to employees (and many employers cross the line in terms of who they think they can classify as an independent contractor), but there are different loyalties and duties. For the most part, the more that an individual becomes a part of an employer’s business or organization, such as through signing non-compete agreements and assuming duties of loyalty, the more likely that the individual can be classified an employee.

Suppose that an independent contractor is paid and taxed as an independent contractor, and then the employer has the independent contractor sign a non-compete agreement. The very existence of such an agreement arguably initiates a shift of the contractor’s status from that of an independent contractor to a misclassified employee who owes a duty of loyalty to the employer. If the independent contractor has been misclassified by the employer, then the employer may risk having an unenforceable non-compete agreement, and potentially subjects itself to serious tax, overtime and government fine issues as a result of not paying the worker properly.

The legal issues and determinations associated with non-compete agreements for independent contractors in Virginia are in the very early stages and cannot be fully predicted. Given the large amount of government contractors in Northern Virginia alone, it appears that this issue will be further litigated.

Despite the relative uncertainty, an employer can easily run afoul of Department of Labor (DOL) and Internal Revenue Service (IRS) guidelines regarding misclassification, and end up owing significant sums to the government as well as the misclassified employee following enforcement efforts related to a non-compete agreement.

To date, there are a few interesting Virginia cases on the topic, including the case of Reading & Language Learning Ctr. v. Sturgill, 94 Va. Cir. 94, Case No. CL-2015-10699 (Fairfax County Aug. 4, 2016). The Reading case involved an individual (Sturgill) who was training to be a speech therapist, but needed a clinical fellowship to obtain certification.

Sturgill signed an agreement with Reading to work as an independent contractor for one year to obtain her license. In the agreement, Sturgill agreed “not to employ any contracted employee or contract with any current client of the other for a period of two years.” The language of the agreement was found to be confusing by the court.

Sturgill obtained her certification and left for full-time employment with a local charter school as a speech therapist. The local charter school had used Reading for some subcontracting work in the past. Reading then sued Sturgill in Fairfax County, claiming that she had breached her non-compete agreement by accepting employment at the charter school. Sturgill prevailed in her case on several grounds.

Interestingly, because Sturgill was still pending licensing, she was directly supervised by Reading personnel (since it had approved her schedule), and her supervisors had provided final approval on many issues associated with her work. As a result, the Reading court found that Sturgill was not an independent contractor and had been misclassified.

The court determined that Sturgill was really an employee and, as a result, the non-compete agreement violated public policy. Specifically, the court found that because Sturgill was misclassified, Reading had not complied with Virginia and federal laws regarding employment taxation. In other words, the employer should have refrained from filing suit as doing so subjected it to other legal and tax issues. The case does not appear to have been appealed, so it is likely that the employer realized the mounting issues and walked away.

The Misclassified Employee Can Seek Damages

If an individual makes a claim that he or she was a misclassified employee, the individual can seek losses related to taxes and overtime. The DOL and other organizations can then seek fines and other penalties regarding the misclassification. The DOL has issued guidance on misclassification. Again, if the individual was a misclassified employee, then the employer might very well be liable for multiple tax issues and payments, in addition to other potential overtime payments and damages.

If you need assistance with non-compete or other employment law issues, please contact our office at 703-668-0070 or at www.berrylegal.com to schedule a consultation. Please also like and visit us on Facebook at www.facebook.com/BerryBerryPllc.

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