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Categories: Independent Consultants

April, 20 2009

Contract Terms: Non-Compete Clause

Posted by Liz Greene

Almost every employment contract has one: the dreaded “non compete clause". A provision put into place to prevent you, the independent consultant or freelancer, from working with specified clients, consulting companies, or staffing agencies either concurrently with your contract assignment, and/or once an engagement has ended. In the case of the staffing agency or consulting company, it’s a mechanism to prevent you from cutting out the middle man and engaging directly with the client. But what’s good for them may not good for you.

Considered an industry standard in most engagement agreements, you shouldn’t be offended by the non-compete clause. Rather, be aware and be able to advocate for, and protect, yourself and your consulting practice. Signing the right non-compete may be perfectly acceptable for your client relationship, and may be reasonable and necessary. Signing the wrong non-compete may mean you’ve just put yourself out of business in your preferred market for a year, or more.

Here are some suggestions from Dave Putt, Vice President of Client Services here at MBO and resident contracts guru:

Be aware that you’re signing a non-compete. Many times, it’s tempting to jump into what the other party considers a “standard agreement,” but which may ultimately be tipped heavily in their favor. Boilerplate can be dangerous. Read it.
Don’t get trapped. There are clauses worked to lock you out of clients or client bases based on geography or market. For instance, stating you can’t work with any other defense contractor within the metro area. Or, they can limit your engagement options by specifying an entire market, saying you can’t work with any other fruit juice company at all. These clauses are far frequently too broad and you should carefully consider your willingness to sign such an agreement.
Don’t lock yourself in. Some non-compete clauses specify a period of time during which you cannot engage with specific clients or client bases. One year is standard, but that doesn’t mean a) that you have to agree to it, or b) that it’s reasonable given the scope of your contract or the nature of your consulting business. Consider what they are asking, and figure out if the time period is reasonable.

There is one circumstance under which Dave Putt recommends you absolutely do not sign a non-compete: A staffing company’s non-compete if you found the assignment yourself. A staffing company who is a third party to the engagement (for instance, you found the contract, but the staffing company was put there are as intermediary for the client’s convenience and you are required to use them) may present you with a non-compete, but you should absolutely refuse to sign it.

Just because you’re not a lawyer (or heck, maybe you are!) doesn’t mean you need to feel overwhelmed by contracts and all the jargon they contain. There are ways to negotiate even the most detailed contracts in your favor, safely and profitably. You can get more information at our upcoming contracts webinar featuring Dave Putt.

Submit your questions in the comments below and we’ll be sure Dave covers the answers in the live broadcast.

[The author is not an attorney, and this blog does not provide legal advice. It’s always a great idea to consult a legal professional before signing any contract. Good luck!]

Tags: employment contract, consultant, non compete, agreement

Comments

anonymous at 11/04/2009 15:56:54

My question is. Is there such a thing as Non-compete discrimination? I am being harassed by my previous owner with letters sent to me as well as other former employees alleging that I am breaking my non compete, which I am not. Other individuals that left after me started their own businesses in the same area and nothing is happening to them. Thanks for your time.

anonymous at 11/02/2009 11:30:43

Hi there,

I working for company A and I found project from company B which was through company C. I signed an non-compete agreement with Company B and company C and project was for 3-4months. Now client is happy with my work and wanted me as fulltime. They don't have budget for contract position for long term.

Now I want to accept the client offer and join them, but due to non-competency agreement I have one doubt.

client is going to handle company C which is direct vendor for client and I am going to handle company A my employer, but if we don't entertain company B, can they sue me for non-compete agreement as I am not his employee and client is not his direct client and I haven't received any benefits from company B or he has to spend something for me.

Request to advice.

Thanks in advance.

John M at 09/24/2009 23:40:51

I have a corp to corp contract with company X to provide services at a client. I have been with Company X for over 2 years. Due to some personal reasons he wants me to roll off the project. We are at very critical phase of project. The client is very happy and will be in trouble of not delivering the project on time if I leave. I don't want to leave either. Client wants to keep me at any cost.

When I reviewed the contract it says the contract is between my company and company X. Every where it mentions that my company or its personnel cannot do business with Client.

My client wants me to work through another vendor if it comes to the point of breaking contract with Company X.

My question is If I take my self out of the company I own and go through the contract with another Vendor that client wants me to go with, will I be in trouble.

I dont mind staying with company X, but if it comes to point of contention, I dont want client to suffer and loose all the money they have spent on me and restart the job again.

Any advice is greately appreciated.

Thanks

Liz Greene at 08/24/2009 12:46:52

Thanks for all the great comments and questions about non-competes. I am not an attorney and this blog does not offer legal advice.

I can offer a few friendly pointers, and the bottom line is, "If you have signed an agreement, honor it."

To "anonymous" with the person A person B scenario -- it depends on what the non-compete for Person B says, and how you engage that individual. If you hire them as a 1099 they might actually be a de facto employee. If they really are their own legal entity and subcontracting to you, then you may not be liable for their choice to compete. In a situation like this they are likely to be presumed to be your employee regardless of which tax reporting form you used, however. To learn more about that you can look at our Compliance Center which explains the issues of reclassification: http://www.mbopartners.com/learning/compliance.html

If you believe your business does not compete, you could simply ask the company how they would perceive your intended activities and find out. It might be worth simply waiting the 6 months if you don't want to pay for a legal consultation.

To Sharma, your situation sounds complex and we can't read your contracts from here, so consult qualified legal advice. If someone helped you find work and got you the assignment, then consider whether they are actually "exploiting" you versus taking a fairly agreed cut of your rate, something that you signed for with open eyes.

A lot of consultants have trouble finding work, so if you use a recruiter or staffing firm to find an assignment, then you know they're going to make that effort worth their while. It's fair business, and perhaps not fair for you to try to cut them out.

If you feel like you are doing something wrong, then it is possible you may be doing something wrong. If the agreements were unreasonable or you have some other justification for terminating a contract, then make your choices carefully and with the assistance of qualified advice.

If you missed our webinar on Contracts 101, you can watch the full video replay here: http://ftp.mbopartners.com/tours/contracts101/ or on Vimeo here: http://vimeo.com/mbopartners

Sharma at 08/24/2009 12:26:43

Hi ,

I work for Compugain Vendor company.My vendor made me signed Non-compete contract.

I started working with VA Vendor company as Hourly based full time employee ,But now they want me to go on fulltime and I refused and they also told me that I can go corp-to corp.

Now I am willing to go corp to corp with the other company. How can I switch from this existing vendor to New Vendor,. I am not happy with my current Vendor and I am bit scared as I have signed Non-compete contract is that mean ,I can work for this vendor only.The existing Vendor is exploiting me by decreasing my rates and keeping more margin.

What legal action can my vendor take against me if I decide to change my Vendor in Virginia.

Thanks

Sharma

anonymous at 08/23/2009 03:50:32

Person A worked for a company and had a non-compete clause in effect for 12 months after he left. Person A waited the 12 months and now the time has passed and he has opened his own business in the same general field, although not in direct competition with his former company. Person B worked for the same company and resigned 6 months ago. Can Person B now work as a self-contractor with Person A's new business, while keeping in mind that he is not an actual employee of Person A, even though he still has 6 months remaining on his non-compete. Again, it's the same general industry, but not in competition with the same clientele. Is Person A in any danger of being sued for allowing Person B to work as a self-contractor with his new business? Also, can Person A's business be shut down for this? We are in a "right to work" state, need to make a living, and aren't going after the former company's business in any way.

anonymous at 08/21/2009 13:28:59

question directed to john - i am interested in seeing if you can help me find the exact ohio law that limits the period of non-compete to 6 months.

John Quigley II at 05/01/2009 21:26:06

One of the big things most people miss is just because they have the clause in the contract doesn't make it valid. Many states have rules and regulations that limit the time frame. In Ohio, for example limits the period to 6 months or length of engagement, whichever is shorter. If the actual clause in the contract defines anything else, it can be voided. Most states that are right to work states have similar clauses. Many companies fight hard over these, and the best option is to either negotiate it out or down, or have an employment attorney review and explain the options.

Also watch the restrictions. If the clause is too restrictive it may not be legitimate. Many terms that lock you out of your field or area based upon distance or geological area may be legally too restrictive, and null and void. I have had contracts offered good money, but they wanted 2 years and 500 miles related to their business operations. They considered business operations to be anyone (person or business) that they had something dealings with. It ended up covering over 90% of the US, and according to several attorneys was completely illegal. They still used it against dozens of ex-employees to collect breach of contract fines. All it took was one call from a Dept of Labor lawyer to get them to drop claims and charges against me and my employer.

A Good lawyer can be a great friend and save you a lot of time and money in the long run.

Liz Greene at 04/24/2009 11:49:39

Janine, thanks for your question. We will be sure to address this on the live webinar. The quick answer (in case you need to make a decision before the webinar on May 5th) is to make sure you understand the scope of the non-compete clause, and revise it to make it more fair. It's not wrong for a company to ask you to sign a non-compete, but the point is to ensure it isn't overbroad.

Rather than flatly rejecting their non-compete -- which might lead to losing your offer of a contract -- request changes that will make it workable, either in the length of time required or in the scope it addresses. If you calmly explain your reasons for the change ("My business provides services to other clients currently within the scope of this document, so I cannot sign your non-compete unless we make it more narrow,") and present a reasonable argument, you should be able to make this workable for your client and yourself.

Neither Dave, our presenter, nor myself are attorneys. It's always a good idea to consult qualified legal advice before entering into a contract. Another option is to run your contract through MBO Partners using our Portable Employer of Record service. This enables you to leverage our negotiating position, and the contract would exist between MBO and the client. In fact, we might already have a Master Service Agreement in place with your client, which means you are already a qualified vendor and just need a Statement of Work to get started on your project. You can contact us directly to find out if we might already be a vendor to your client, and one of our representatives can explain your options for working via MBO.

Janine at 04/23/2009 16:34:17

I was presented with a non-compete clause but I haven't signed it yet. Can they refuse to hire me for the project if I refuse to sign? How should I handle this? I really can't afford to turn down this contract, but I also don't want to put myself out of business as a consultant! I am a freelancer and I signed up for the webinar. Thanks!