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Many considerations go into determining whether an individual can legally be classified as an independent contractor, but two major issues are the degree of direction and control that a company maintains over a worker, and the degree of financial control that the contractor retains.
Independent contractors typically have the right to determine where and when work is performed and how to complete the work (including decisions about what tools, processes, and services to use). An independent contractor is often given a desired outcome but is then left to determine how to achieve it.
In addition to control over their behavior, independent contractors should retain a measure of financial control, particularly over his or her opportunities for profit or loss. This condition was considered in a court case in which a cleaning company hired maids as independent contractors.
In that case, the company's classification of all maids as independent contractors was found to be in violation of the Fair Labor Standards Act. The error resulted in an award of back pay and damages in the amount of $184,505.26. Perez v. Super Maid, LLC, July 14, 2014
While the court found several faults with the independent contractor classification, one notable fact was that the individuals were required to sign a noncompete agreement. The agreement prohibited the workers from accepting direct employment with any of the company's customers for three years after they stopped working with the company.
Maintaining financial control means that independent contractors are typically able to utilize their skills in the open market, deciding which jobs to take and which to reject. They typically work for more than one company and often do so concurrently. A noncompete agreement restricting those abilities will, in many cases (and specifically in this one), threaten an independent contractor classification.
When a noncompete is truly necessary to protect a company's legitimate business interests, employers should consider whether the individuals should be classified as employees. Employers might also consider whether a confidentiality agreement protecting specific company information or trade secrets might be more appropriate than a noncompete.
While it is possible for employers to legally use restrictive covenants such as confidentiality agreements with independent contractors, a noncompete agreement may threaten the contractor status. For that reason, employers may want to check with legal counsel before using such an agreement in this way.