Subcontractor Non-Compete Agreement: What It Is
A subcontractor non-compete agreement is a legally binding contract that restricts a subcontractor’s post-termination ability to compete with a particular business or company. This type of agreement generally prevents the subcontractor from starting a competing business or working for a competing company within a specific geographic area and for a specified amount of time. While the length and scope of the non-competition may vary, the key component of this type of agreement is consideration, or something of value that is being exchanged between the employer/company and the subcontractor.
The non-compete agreement seeks to protect a company’s confidential business information and trade secrets. For example, this may include customer lists, proprietary information, supplier lists, research and development data, or other information that gives the company a competitive business advantage.
As a threshold matter, it is important to understand the types of relationships that the agreement can cover . Strictly speaking, a subcontractor is a business entity that enters into an agreement to perform work or provide certain services on behalf of another business. In other words, the subcontractor does not have a direct contractual agreement with a client/customer or end-user. Instead, the subcontractor acts at the direction of another entity (the general contractor/employer) to fulfill contractual obligations it has with a client.
In this regard, an agreement between a business and a subcontractor is governed by contract law, similar to a business-to-business agreement. Courts interpreting restrictive covenants generally look for some type of benefit being exchanged. This can take the form of a buyout agreement, sale of business, merger, or other something similar. In a business-to-business relationship, this could include include a merger or a buyout. In an employee-employer relationship, it could include salary and benefits. However, in this instance, consideration likely would be measured as the opportunity to do business with the company, because the subcontractor does not have a direct business relationship.
Are Non-Compete Agreements Enforceable by Law?
Legal Enforceability of Subcontractor Non-Compete Agreements
In most states, drafting a non-compete agreement is not as easy as it seems. The drafter may think that if a violation occurs, the drafter can simply ask the court to enforce the clause in the agreement as it is written and then allow the contractor to collect on the contract on the terms set forth therein; however, this is not necessarily the process and outcome. In many states, courts do not routinely enforce any restrictions on a subcontractor’s activities. Some states may expand or alter a subcontractor’s restrictions so that they are much more restrictive than agreed to between the parties in the original agreement. And not just in a uniform manner across the board. The "going and coming" rule applies in the state’s favor of the non-compete. Meaning that the contractor may be found to have violated the non-compete clause while on the way to or from work. Even if they are not on their way to a job site for the current contract, a court may find such an act to violate the spirit of the clause, if not specifically the language of the clause. Ohio is one such state which interprets and expands the scope to the employers’ favor.
But not all states expand the subcontractor’s restrictions. Some states, such as New York and California, will void a non-compete that violates the statute or one that is overly broad and violates public policy. The law of Illinois is that if the post-employment restraint is necessary to protect a legitimate business interest of the employer, and the restraint is no greater than that which is required to protect that interest, and it does not impose undue hardship on the employee or contravene public policy, then the restraint is enforceable.
The laws of the various states on non-compete agreements have not arguable enough been explored. Consequently, certain reputable contracting companies may inadvertently buy subcontracts where non-compete agreements are not legally enforceable between those contractors, subcontractors or even employees. Thus, advising caution is warranted.
Must-Have Components of a Subcontractor Non-Compete Agreement
The terms of a subcontractor non-compete agreement should be reasonable in scope and duration, always with the primary goal of furthering the legitimate business interests of your company. The scope of the agreement must explicitly include the types of activities that will be restricted, including the specific types of products and/or services. It may also address the use or disclosure of confidential information. Non-compete restrictions must be clearly delineated, and the geographic scope of the restricted activities must also be reasonable, considering the operations of your company and the services the subcontractor will be providing.
The prohibited activities should generally be broken down into categories. One common restriction is that the subcontractor will not engage in competitive activities of any kind for a specified period of time, which is often one or two years. For trades where there is frequent physical contact with clients, it is also wise to restrict solicitation or communication targeting those clients even after the passage of time in order to protect relationships.
Some states impose a six-month minimum for non-compete agreements, but the preferred and most often used length is one year. Because there is some overlap between the expiration date of the contract and the expiration of any non-compete, this is one reason why many prefer a two-year period (one year of your active contact with the client plus an additional year thereafter).
The Pros and Cons for Both Sides
For subcontractors, the major benefit of a non-compete agreement is in the guaranteed job security that it provides during their employment with the company. For many companies, the presence of such an agreement can serve to deter a subcontractor from poaching customers and clients after severing ties with the company, since such an action would be in clear breach of the signed contract. Additionally, a non-compete agreement can discourage one or more subcontractors from competing with the company while they are still affiliated with the business. Companies can also derive obvious benefits associated with having a uniform set of expectations and rules that it enforces among all its subcontractors. Finally, signing such an agreement means that the subcontractor has demonstrated their willingness to follow the company’s mission, culture and values prior to the signing of any employment contract.
There are also a number of drawbacks associated with non-compete agreements, both for subcontractors and for companies. For subcontractors, these agreements can potentially damage business relationships that would otherwise exist without them, making it harder for a subcontractor to obtain future work. There are many reasons that a subcontractor might end up leaving a company, and circumstances outside of the control of the subcontractor might lead to a relationship breakdown. It is true that the majority of subcontractors who leave one company and go to work for another still continue to collaborate on a regular basis with their previous employer. Non-competes can also limit the subcontractor’s potential for future employment, especially if they intend to remain in the same industry in the short- to medium-term future. Potential employers would be less likely to offer work if the subcontractor’s relationship with their previous employer is currently contentious. Additionally, there’s the potential concern that, during their reaction to a perceived contractual breach, the company involved in the non-compete agreement would be tempted to circumvent the agreement and file for legal enforcement. Legal defense in such a case could therefore cost the subcontractor considerable time and money.
For the company, similar concerns exist, but they are more significant because of the stakes involved. Since the company is the entity that implements and enforces the non-compete agreement, a perceived breach by one of its subcontractors might prompt the company to act prematurely, leading to costly litigation in the future. Companies also run the risk of alienating subcontractors by requiring the signing of a non-compete agreement. This is not always the case, of course, but subcontractors may be wary of companies that ask for such an agreement because they are uncertain about the potential for future reinforcement. Customers and clients may also be wary of companies whose subcontractors have been forced to sign non-compete agreements, especially if the subcontractor in question had a positive working relationship with them.
Non-Compete Agreement Alternatives
In lieu of a non-compete, consider alternative contractual agreements to protect your business. These include: An enforceable confidentiality and trade secret agreement, which will keep your business secrets confidential, and, if drafted appropriately, will give you full rights to enforce restrictions against the disclosures and use of your company’s trade secrets, even without a non-compete restriction . A non-solicitation agreement provides for a specified time limitation on solicitation of clients or customers after termination of the subcontractor relationship. An acknowledgement concerning post-termination competition, such as "I understand that this subcontractor agreement prohibits direct and indirect competition by me with [the Company] at any time during the term and for a period of [X number of months] after the end of the term." This type of broad statement will typically only provide limited protection.
Tips for Negotiating a Balanced Non-Compete Agreement
Striking a balance between the need for the company to protect its interests and the rights of the subcontractor is an inherent challenge when it comes to negotiating a non-compete agreement. However, subcontractors can take some general steps that will maximize their chances of being able to do business after the termination of a subcontractor relationship.
First, the time period and geographic scope of the non-compete agreement must be as short and narrow as possible. For example, if you do not work outside of a certain city, you should not agree not to work within that city. If your work is only periodic in nature, you should not agree to a non-compete covering a longer timeframe than that which you actually worked for the company.
Second, the types of services that are considered competitive should be as narrowly defined as possible. A general prohibition on performing the same type of work is likely a legitimate protection. However, if the company is in a variety of businesses (which is very common for large companies), you should not agree that the restrictive covenant applies to any business that the company conducts.
Third, negotiate for a provision which allows you to work contrary to the non-compete agreement if the company does not require you to spend your available time on the job. For example, if you have one client for whom you are working where the blocked activities directly conflict with your work, perhaps you will need to perform those blocked activities to keep the company you were working for in business.
Fourth, and this is not always possible due to the practical realities of doing business, but you should try to have as little "down-time" as possible in-between contracts. While it is rare for a company to go back on the terms of a non-compete agreement, if you are given additional time in between contracts, that could be an opportunity for the company to claim that you breached the agreement.
What Happens if a Non-Compete Clause Is Violated?
When a subcontractor violates a non-compete agreement, a company must take swift action to ensure that they are in compliance with their agreement. The most effective way to stop a subcontractor from violating their non-compete agreement is to simply comply with the terms of that agreement. However, a company may also seek to enforce the non-compete agreement or obtain damages for such actions.
There are several different ways a company can enforce a subcontractor’s non-compete agreement. With a temporary restraining order (TRO) or a permanent injunction, a company may be able to prevent a subcontractor from violating the agreement. A TRO is a short-term injunction that prohibits an individual from violating an agreement or some other legal requirement. A TRO guarantees a speedy disposition of the case, but only lasts for a few months. When a company receives its full injunction, it can be used to substantially limit the subcontractor’s activities. Permanent injunctions are granted after a formal trial has been held and are often enforced until the end of the subcontractor’s non-compete agreement. If a company’s subcontractor violates his or her non-compete agreement, and the company is able to seek an injunction for that violation, the subcontractor can also be liable for certain types of damages. For example, if a company can prove that the subcontractor’s violation of the non-compete agreement harmed its business, the subcontractor can be ordered to pay some of that harm in the form of compensatory damages. Companies can also receive punitive damages when their subcontractors violate non-compete agreements. For example, a subcontractor may be ordered to pay punitive damages if he or she intentionally violated a non-compete agreement. In addition, if the court determines the subcontractor committed fraud, the subcontractor will likely be ordered to pay punitive damages. As you can see, there are many ways companies can enforce subcontractor non-compete clauses that have been violated. It is up to the company to determine what measures will work best for them, but it is also wise to consult with an experienced attorney before moving forward.
A Look at Recent Developments and Examples
The use of non-compete agreements with subcontractors is becoming increasingly prevalent. Originally, non-compete agreements were confined to competition with the Company the subcontractor was working for at the time. However, as many companies are now expanding nationwide or globally, the scope in which subcontractors may face competition from past projects is expanding as well.
Many of the disputes concerning subcontractor non-competition arise over the scope of the restrictive covenants. Courts will enforce non-compete agreements so long as they are reasonably limited in scope by time and geography. As it pertains to subcontractors, most common non-compete agreements restrict subcontractors for a period of 6 to 12 months. Fortunately, in the last few years, courts have begun to further define the limited scope in which they will enforce these agreements. Primarily , courts have begun a trend of enforcing agreements so long as the non-competition agreement only lasts as long as the time period that the subcontractor is performing work for the company. In a recent decision, American Tower Corporation v. Continuous Power, Inc., a California District Court refused to enforce a non-compete clause against a subcontractor whose work was only temporary. In that instance, the court found that the non-compete agreement was unenforceable after the period of contracting requiring the individual’s non-competition had terminated. Accordingly, the individual was free to compete against the company as soon as his work obligations were terminated.
The court also found this non-compete agreement to be unenforceable when it lacked specificity as to what types of work the individual was "restricted" from performing.