Another Reason to Classify Your Employees / Independent Contractors Correctly
July 25, 2011
The essence of any lawsuit seeking an injunction to enforce a non-competition agreement is breach of contract: The company seeking to enforce the non-compete is claiming that the violating party breached the non-compete. A defense often raised in these matters is that the company acted with “unclean hands,” i.e., that the company breached the agreement too, so the non-compete should, likewise, be unenforceable. In one recent case, this very argument was used with success in terms of the independent contractor relationship.
In the case, Joseph Figueroa had an independent contractor agreement (ICA) with Precision Surgical, Inc., a medical equipment supplier. The agreement contained several restrictive covenants, including a non-compete agreement. Figueroa worked under the ICA for several years and Precision required him to, among other things, devote all of his time to selling Precision’s products, report to Precision on a daily basis, attend monthly meetings, wear the company’s logo, and obtain permission from the company before giving quotes to certain prospects. A dispute between them ensued and Figueroa left the company and filed suit to invalidate the non-compete. Precision filed a counterclaim to enforce the non-compete seeking an injunction to prevent Figueroa from working for a competitor.
Figueroa raised the “unclean hands” defense by claiming that Precision breached its agreement because the company had misclassified him as an independent contractor when he was really an employee. Both the trial court and the U.S. Third Circuit Court of Appeals agreed and the company’s request for an injunction was denied.
What this Means for You
While the court’s decision to deny the injunction was based on more than just the fact that the company misclassified the independent contractor, it is very likely that the contractor/employee would have prevailed under this theory alone. Accordingly, it is imperative that if you have Independent Contractor Agreements with restrictive covenants, such as non-competes, that the individuals working under those Agreements are properly classified as independent contractors and are not, in fact, employees.