Independent Contractor Misclassification and Compliance News July 2025

Non-Compete Clause May Be Sign of Employer/Employee Relationship

In a recent opinion issued by the Fourth Circuit Court of Appeals, the court supported a lower court decision that a staffing firm misclassified nurses as independent contractors. The court relied, in part, on a non-compete clause in its agreement with the workers to determine that the nurses were employees.

In considering whether the nurses were employees or independent contractors, the court used the “economic realities” test—a test that says workers are independent contractors, as distinguished from employees, if they are, as a matter of economic reality, in business for themselves. Under the economic realities test, the court looked at several factors, including:

• The degree of control that the putative employer has over the manner in which the work is performed;
• The worker’s opportunities for profit or loss dependent on their managerial skill;
• The worker’s investment in equipment or materials, or their employment of other workers;
• The degree of skill required for the work;
• The permanence of the working relationship; and
• The degree to which the services rendered are an integral part of the putative employer’s business.

The court examined these factors in this case and determined that the nurses were employees and had been misclassified as independent contractors. Interestingly, the court considered a non-compete clause in the agreement between the workers and the staffing firm to be evidence of an employment relationship. The agreement stated that the workers would not directly provide services to any competitors without obtaining permission from the staffing firm. It also stated that, for 12 months after ending their work with the staffing firm, the workers would not enter into or be interested in any business that competes with the firm.

The court recognized that the non-compete clause in the nurses’ contracts hindered their opportunity for profit or loss and weighed in favor of employee status. In addition, the court observed that the clause limited their ability to work for other agencies. Not being able to work for other agencies suggested a more permanent relationship, which is commonly associated with employment status. Independent contractors are more likely to be able to freely work for multiple clients.

Companies that include non-compete clauses in agreements with their independent contractors might consider reviewing those clauses and adopting a more narrowly drafted non-solicitation clause and/or a confidentiality clause that protects client lists, names, and contacts. Both non-solicitation and confidentiality clauses may be better suited to an independent contractor relationship.

For more information, check out our resources page on misclassification and compliance. If you have any questions about engagement, classification, or management of your independent workforce, we’re always here to help.