July 19th, 2007

Independent Contractors and The Non-Compete Clause

First I must state the obvious disclaimer … I am NOT a lawyer and therefore not qualified to give legal advice. These opinions are those of a Staffing Industry professional, an owner of a staffing company and a former President of Canada’s staffing industry association (ACSESS).

At various time through this blog I attempt to explain different aspects of the staffing industry, how it works and why it is that way. Today I thought I would talk about the non-compete clause, specific to the independent contractor world … since it was the subject of a recent situation at Eagle.

In Canada an independent contractor is a business entity. As an agency I enter into a business to business relationship with the independent contractor and similarly I enter into a business to business relationship with my client. Thus a three way relationship is formed, which is just one of the ways to ensure that the employer/employee issues surrounding independent contractors is kept clean.

It is a standard in our industry for contracts to include non-compete clauses in contracts. This provides some level of protection to the agency and to the agency’s client. The following are just some of the scenarios it is designed to prevent:

1. A competitor agency (with a distinct lack of ethical standards … editorial!) proposes to a client that they will take on all of their existing contracts for less money than the client is now paying its current agencies.
2. A contractor decides to cut their own deal, either with the end client or another supplier and ends up back in the same job through someone else (or not) and the original agency gets cut out of the equation.
3. In the case where the client is another supplier, such as system integrator or software development company, the non-compete will protect them from someone else winning their business using the same contractor, or even the contractor competing themselves.

Generally speaking this approach works well, it is the one piece of security that an agency has and most people will respect the clause and its intent.

The value that the staffing industry provides to Canadian industry is significant and growing. Staffing companies incur significant costs in establishing and maintaining the infrastructure that allows them to access “just-in-time resources” for their clients, and the only time they make money is when they actually have people on contract. If those contracts are shortened or margins significantly reduced artificially then the viability of the economic model is challenged.

At the end of the day the agency does their job and wants to be paid fairly for that work, the non-compete will provide some protection for that revenue stream.

Comments (36)

  1. I am not a lawyer either, but it has always been my understanding that non-compete clauses are legally unenforceable.

    But, I would never advise a contractor to try to break a non-compete clause because even if he ‘wins’ he would inevitably poison his relationship with the client. No client wants to be dragged into the middle of a dispute between an agency and a contractor, not even as a witness.

    Comment by Anonymous — August 7, 2007 @ 1:38 pm

  2. I am not a lawyer either, but it has always been my understanding that non-compete clauses are legally unenforceable.

    But, I would never advise a contractor to try to break a non-compete clause because even if he ‘wins’ he would inevitably poison his relationship with the client. No client wants to be dragged into the middle of a dispute between an agency and a contractor, not even as a witness.

    Comment by Anonymous — August 7, 2007 @ 1:38 pm

  3. Non-compete clauses are absolutely enforceable, otherwise they would not exist.

    What does happen is that some companies will have a non-compete clause that is unfair or overly restrictive and in those cases it is unlikely to hold water.

    A reasonable non-compete clause will protect those who need protection, for a reasonable amount of time, but will not inhibit a persons right to earn a living.

    Of course determinining what is reasonable and what is overly restrictive is where the legal profession makes its money in these cases.

    Comment by Kevin Dee — August 7, 2007 @ 9:47 pm

  4. Non-compete clauses are absolutely enforceable, otherwise they would not exist.

    What does happen is that some companies will have a non-compete clause that is unfair or overly restrictive and in those cases it is unlikely to hold water.

    A reasonable non-compete clause will protect those who need protection, for a reasonable amount of time, but will not inhibit a persons right to earn a living.

    Of course determinining what is reasonable and what is overly restrictive is where the legal profession makes its money in these cases.

    Comment by Kevin Dee — August 7, 2007 @ 9:47 pm

  5. Kevin, does Eagle remove the non-compete clause in those cases where the contractor comes to you with the lead?

    This often happens when clients have a ‘preferred vendor list’.

    Comment by Anonymous — August 8, 2007 @ 2:36 pm

  6. Kevin, does Eagle remove the non-compete clause in those cases where the contractor comes to you with the lead?

    This often happens when clients have a ‘preferred vendor list’.

    Comment by Anonymous — August 8, 2007 @ 2:36 pm

  7. Not as easy to answer that question as you may think.

    1. if it is a simole case of a contractor coming to Eagle to use our contract vehicle with an end client we will often change the non-compete clause to fit. It doesn’t make sense to try and get in the way of an existing long term relationship.
    2. Generally speaking we try to keep all of our contractor contracts as consistent as possible. This helps when dealing with the Canada Revenue Agency on the issue of who is a contractor and who is not!
    3. Non-competes are there to protect several parties. If our client is an integrator who is doing work at an end client then we need to protect the integrator aswell as ourselves.
    4. Sometimes clients suggest contractors to us and we need to “payroll” them. This creates an immediate employer/employee relationship risk and so we try veryu hard to keep all contract clauses the same as any other contractor. The client generally benenfits from a reduced price from Eagle and that is their win.

    I could go on at length about the various different scenarios, but we try to be governed by risk managment and common sense.

    Comment by Kevin Dee — August 9, 2007 @ 1:48 am

  8. Not as easy to answer that question as you may think.

    1. if it is a simole case of a contractor coming to Eagle to use our contract vehicle with an end client we will often change the non-compete clause to fit. It doesn’t make sense to try and get in the way of an existing long term relationship.
    2. Generally speaking we try to keep all of our contractor contracts as consistent as possible. This helps when dealing with the Canada Revenue Agency on the issue of who is a contractor and who is not!
    3. Non-competes are there to protect several parties. If our client is an integrator who is doing work at an end client then we need to protect the integrator aswell as ourselves.
    4. Sometimes clients suggest contractors to us and we need to “payroll” them. This creates an immediate employer/employee relationship risk and so we try veryu hard to keep all contract clauses the same as any other contractor. The client generally benenfits from a reduced price from Eagle and that is their win.

    I could go on at length about the various different scenarios, but we try to be governed by risk managment and common sense.

    Comment by Kevin Dee — August 9, 2007 @ 1:48 am

  9. What I don’t like about non-compete clauses is that the agency could decide, at contract renewal time, to increase its margin by decreasing the contractor’s rate (ie rate to the client would not change).

    What recourse does a contractor have in this situation? The non-compete prevents him from seeking out another agency, so he either takes the hit or walks.

    I know that no reputable agency would do this, but not all agencies treat their contractors fairly.

    Comment by Anonymous — August 10, 2007 @ 3:20 pm

  10. What I don’t like about non-compete clauses is that the agency could decide, at contract renewal time, to increase its margin by decreasing the contractor’s rate (ie rate to the client would not change).

    What recourse does a contractor have in this situation? The non-compete prevents him from seeking out another agency, so he either takes the hit or walks.

    I know that no reputable agency would do this, but not all agencies treat their contractors fairly.

    Comment by Anonymous — August 10, 2007 @ 3:20 pm

  11. I have never seen that happen … in fact what I have seen happen very often is that the contractor asks for a raise and the client is unwilling to pay any more. This then cuts into the agency margin.

    The reality is that the contractor works day in and day out with the end client and the agency probably meets with them once or twice a month. If an agency pulled a stunt like you describe the client would be singularly unimpressed and the agency would likely get no more business there.

    I suppose it is a very small risk, but as an independent company you are expected to take on more risk than an employee. That is why a contractor gets the kind of tax breaks that they do.

    Comment by Kevin Dee — August 10, 2007 @ 9:26 pm

  12. I have never seen that happen … in fact what I have seen happen very often is that the contractor asks for a raise and the client is unwilling to pay any more. This then cuts into the agency margin.

    The reality is that the contractor works day in and day out with the end client and the agency probably meets with them once or twice a month. If an agency pulled a stunt like you describe the client would be singularly unimpressed and the agency would likely get no more business there.

    I suppose it is a very small risk, but as an independent company you are expected to take on more risk than an employee. That is why a contractor gets the kind of tax breaks that they do.

    Comment by Kevin Dee — August 10, 2007 @ 9:26 pm

  13. Oh, I’ve seen it happen!

    Agency was part of a VOR agreement. VOR was about to expire, client advised all vendors on the list that he expected rates to decrease.

    Most vendors obliged, and lowered their fixed rates accordingly. They passed on the cut to their contractors, some of whom had worked for the client for many years.

    Contractors had no option but to accept the cut because they were bound by non-compete clauses.

    Does this sound fair to you?

    Contractor has no control over his agency’s VOR bid, yet he is still bound by the non-compete, even if the agency bids very poorly. (ie, the agency could also bid too high, which would disqualify the contractor from working with that client).

    IMO, when a VOR expires, so should all associated non-compete clauses.

    This would reward the good agencies who bid well, because they would attract contractors from agencies who bid badly. Good for the client too, because he wouldn’t lose experienced contractors because of agency’s mistake.

    Comment by pseudonym — August 13, 2007 @ 12:32 pm

  14. Oh, I’ve seen it happen!

    Agency was part of a VOR agreement. VOR was about to expire, client advised all vendors on the list that he expected rates to decrease.

    Most vendors obliged, and lowered their fixed rates accordingly. They passed on the cut to their contractors, some of whom had worked for the client for many years.

    Contractors had no option but to accept the cut because they were bound by non-compete clauses.

    Does this sound fair to you?

    Contractor has no control over his agency’s VOR bid, yet he is still bound by the non-compete, even if the agency bids very poorly. (ie, the agency could also bid too high, which would disqualify the contractor from working with that client).

    IMO, when a VOR expires, so should all associated non-compete clauses.

    This would reward the good agencies who bid well, because they would attract contractors from agencies who bid badly. Good for the client too, because he wouldn’t lose experienced contractors because of agency’s mistake.

    Comment by pseudonym — August 13, 2007 @ 12:32 pm

  15. I could probably go on a lot about this, so I’ll try to be brief.
    1. Contractors are businesses, not employees and they accept business risk along with their agency.
    2. If the agency needs to cut rates they should share that equitably with the contractor.
    3. If the situation changes for a contractor, like any business they have the opportunity to accept or reject that change.
    4. If a contractor has worked at the same client “for years” then why are they a contractor? Really they are an employee, which creates a whole bunch of otehr issues.
    5. The situation you described did not increase the agencies margin … which was the basis of the previous question.

    Comment by Kevin Dee — August 14, 2007 @ 1:56 pm

  16. I could probably go on a lot about this, so I’ll try to be brief.
    1. Contractors are businesses, not employees and they accept business risk along with their agency.
    2. If the agency needs to cut rates they should share that equitably with the contractor.
    3. If the situation changes for a contractor, like any business they have the opportunity to accept or reject that change.
    4. If a contractor has worked at the same client “for years” then why are they a contractor? Really they are an employee, which creates a whole bunch of otehr issues.
    5. The situation you described did not increase the agencies margin … which was the basis of the previous question.

    Comment by Kevin Dee — August 14, 2007 @ 1:56 pm

  17. 1. Please no lectures on risk. Contractors accept enormous risk, like any other small businessman. Serious illness could lead to bankruptcy, for example.

    2. Agreed that pain should be shared. However, agency should unbind contractor also. If the agency is a good one, chances are contractor won’t be able to find better deal anyway. Oh, that would be business risk for the *agency*, wouldn’t it?

    3. Non-compete unfairly reduces contractor’s options. Option to walk always exists, but can anger client. Client does not care who the agency is. (As long as agency is on preferred list).

    4. Different issue. Very common though. Many clients like to engage fully trained and knowledgeable contractors rather than just ‘warm body’ with right acronyms on resume.

    5. Agree. Original posting by Anonymous spoke of dishonest agency.

    Conclusion: Agency is a business, Contractor is a business. There will always be a degree of conflict along with the necessary cooperation.

    Best case is not to let conflict affect the client, of course, lest client curse both of our houses. :-)

    Whose client is it anyway? Ah, that is a question for another day.

    Comment by pseudonym — August 14, 2007 @ 2:58 pm

  18. 1. Please no lectures on risk. Contractors accept enormous risk, like any other small businessman. Serious illness could lead to bankruptcy, for example.

    2. Agreed that pain should be shared. However, agency should unbind contractor also. If the agency is a good one, chances are contractor won’t be able to find better deal anyway. Oh, that would be business risk for the *agency*, wouldn’t it?

    3. Non-compete unfairly reduces contractor’s options. Option to walk always exists, but can anger client. Client does not care who the agency is. (As long as agency is on preferred list).

    4. Different issue. Very common though. Many clients like to engage fully trained and knowledgeable contractors rather than just ‘warm body’ with right acronyms on resume.

    5. Agree. Original posting by Anonymous spoke of dishonest agency.

    Conclusion: Agency is a business, Contractor is a business. There will always be a degree of conflict along with the necessary cooperation.

    Best case is not to let conflict affect the client, of course, lest client curse both of our houses. :-)

    Whose client is it anyway? Ah, that is a question for another day.

    Comment by pseudonym — August 14, 2007 @ 2:58 pm

  19. I have been following this conversation with great interest, and I have question for Kevin.

    Does the non-compete apply to the client also?

    As in, “Client may not hire contractor X from any other agency for a period of Y days following termination of this agreement between the Client and the Agency”

    Comment by Don — August 15, 2007 @ 3:51 pm

  20. I have been following this conversation with great interest, and I have question for Kevin.

    Does the non-compete apply to the client also?

    As in, “Client may not hire contractor X from any other agency for a period of Y days following termination of this agreement between the Client and the Agency”

    Comment by Don — August 15, 2007 @ 3:51 pm

  21. Don … once again, the answer is not easy, and I am not a lawyer. These answers are based on my experiences:

    1. If a contractor has a non-compete with their agency then the contractor cannot typically accept a role with the client unless the agency releases them from the non-compete.

    So, if there is nothing in the contract between the agency and the client to address a non-compete situation, then the contract between the agency and the contractor might still stop the process.

    2. Many clients include terms in their contracts with agencies that allow them to “flip” contractors to perm, but usually for some kind of fee.

    Hope that helps.

    Comment by Kevin Dee — August 15, 2007 @ 10:32 pm

  22. Don … once again, the answer is not easy, and I am not a lawyer. These answers are based on my experiences:

    1. If a contractor has a non-compete with their agency then the contractor cannot typically accept a role with the client unless the agency releases them from the non-compete.

    So, if there is nothing in the contract between the agency and the client to address a non-compete situation, then the contract between the agency and the contractor might still stop the process.

    2. Many clients include terms in their contracts with agencies that allow them to “flip” contractors to perm, but usually for some kind of fee.

    Hope that helps.

    Comment by Kevin Dee — August 15, 2007 @ 10:32 pm

  23. I currently have a situation where the Client bills the Agency $100/hr. The Agency pays the contractor $60/hr making 40% margin. The indpendent contractor agreement with the agency for one year is about to come to an end and the Client has expressed interest in hiring the contractor directly at $80/hr. There is a non-compete clause that contractor cannot seek employment with the client for two years. Is this enforceable? Can the agency risk the relationship with the client for future business opportunities? If the Agency does not agree then the client is prepared to hire another agency and possibly hire the same contractor since legally the contract is between the client and another agency. I think it is best for the Agency to allow the contractor to work for the client and yet retain good relations with both Client and the Contractor.

    Comment by Anonymous — December 4, 2008 @ 5:58 pm

  24. I currently have a situation where the Client bills the Agency $100/hr. The Agency pays the contractor $60/hr making 40% margin. The indpendent contractor agreement with the agency for one year is about to come to an end and the Client has expressed interest in hiring the contractor directly at $80/hr. There is a non-compete clause that contractor cannot seek employment with the client for two years. Is this enforceable? Can the agency risk the relationship with the client for future business opportunities? If the Agency does not agree then the client is prepared to hire another agency and possibly hire the same contractor since legally the contract is between the client and another agency. I think it is best for the Agency to allow the contractor to work for the client and yet retain good relations with both Client and the Contractor.

    Comment by Anonymous — December 4, 2008 @ 5:58 pm

  25. I was told in one gathering that if an Indpendent Contractor works for the same client through the agency for atleast 9 months, then the Agency cannot enforce non-compete clause and will have to respect client’s interest in hiring the contractor as an employee or as an independent contractor directly with the client. Any thoughts on this?

    Comment by Anonymous — December 4, 2008 @ 6:02 pm

  26. I was told in one gathering that if an Indpendent Contractor works for the same client through the agency for atleast 9 months, then the Agency cannot enforce non-compete clause and will have to respect client’s interest in hiring the contractor as an employee or as an independent contractor directly with the client. Any thoughts on this?

    Comment by Anonymous — December 4, 2008 @ 6:02 pm

  27. Many thoughts, once again prefaced by the comment that these are my personal opinion and I am not a lawyer …

    1. There is no such limitation on a non-compete clause. If there were then agencies would have no protection at all and it would be harmful to the whole industry.
    2. 40% margins sound pretty rich. Is it an independent contractor, a sole proprietor or a temporary employee? The different scenarios create different costs. The agency might not be actually making 40% margin. Ask.
    3. The client contracted with the agency for this person therefore if they contract with another agency for the same person the situation will cause the contractor to break their non-compete. It is the contractor who has the risk. The new agency and the client could potentially be sued for “inciting” the contractor to break their contract.
    4. A two year non-compete would be VERY tough to enforce … 6 months is more of the norm, some companies try for a year.
    5. The client should negotiate with the agency. Most agencies are willing to have a reasonable discussion around this stuff. If the agency is perceived by the client to be unreasonable after putting the cards on the table then they can choose to not work with them again.
    6. I think the client needs to work with this agency if they want to retain this contractor.

    Comment by Kevin Dee — December 4, 2008 @ 6:18 pm

  28. Many thoughts, once again prefaced by the comment that these are my personal opinion and I am not a lawyer …

    1. There is no such limitation on a non-compete clause. If there were then agencies would have no protection at all and it would be harmful to the whole industry.
    2. 40% margins sound pretty rich. Is it an independent contractor, a sole proprietor or a temporary employee? The different scenarios create different costs. The agency might not be actually making 40% margin. Ask.
    3. The client contracted with the agency for this person therefore if they contract with another agency for the same person the situation will cause the contractor to break their non-compete. It is the contractor who has the risk. The new agency and the client could potentially be sued for “inciting” the contractor to break their contract.
    4. A two year non-compete would be VERY tough to enforce … 6 months is more of the norm, some companies try for a year.
    5. The client should negotiate with the agency. Most agencies are willing to have a reasonable discussion around this stuff. If the agency is perceived by the client to be unreasonable after putting the cards on the table then they can choose to not work with them again.
    6. I think the client needs to work with this agency if they want to retain this contractor.

    Comment by Kevin Dee — December 4, 2008 @ 6:18 pm

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  33. hi Kevin. what if the agency got booted out from the preferred vendor list, but in order to continue its business with the client, the agency needs work with another preferred vendor to work with the client. will the non-compete clause still stand?

    Comment by tom — June 18, 2010 @ 1:23 pm

  34. hi Kevin. what if the agency got booted out from the preferred vendor list, but in order to continue its business with the client, the agency needs work with another preferred vendor to work with the client. will the non-compete clause still stand?

    Comment by tom — June 18, 2010 @ 1:23 pm

  35. Tom … again I'm not a lawyer, but I'm pretty sure the clause stands.

    In reality what I have seen is that the exiting supplier will come to an arrangement with one of the preferred suppliers, or an MSP (usually at the client's direction).

    Typically the client does not want to be punitive to the outgoing supplier so an accomodation is made to be fair. The exiting supplier gets no new work but still retains "wonership" of the candidates supplied prior to the end of contract.

    Again that is the TYPCAL scenario but different circumstances can have different results.

    Comment by Kevin Dee — June 18, 2010 @ 3:13 pm

  36. Tom … again I'm not a lawyer, but I'm pretty sure the clause stands.

    In reality what I have seen is that the exiting supplier will come to an arrangement with one of the preferred suppliers, or an MSP (usually at the client's direction).

    Typically the client does not want to be punitive to the outgoing supplier so an accomodation is made to be fair. The exiting supplier gets no new work but still retains "wonership" of the candidates supplied prior to the end of contract.

    Again that is the TYPCAL scenario but different circumstances can have different results.

    Comment by Kevin Dee — June 18, 2010 @ 3:13 pm

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