TPR Firm - Can A Non-Compete Be Legally Enforced if You're Hiring 1099 Contractors instead of W-2 Employees as your Production Recruiters?

This discussion is actually a spawn of another on RBC that can be found here. Much like many topics on RBC, discussions lead to new discussions, thereby reinforcing the value of community :) To keep things tidy, I decided to create a new topic. Looking forward to your thoughts and insights :)

Per the discussion on weighing whether a TPR firm should 1099 versus hire W-2, I am in 110% agreement with the fact that top salespeople are interested in commissions (as they trade security for greater potential reward). In fact, it's why I run my own firm - Could there be a better example? :)

However, let me ask a question for a point of not really understanding how this could play out . . . but not being completely in the dark, either. (What I mean is that I am not, nor have zero aspirations to be, an attorney . . . however, I have sat through classes on top of classes regarding law [unfortunately, I might add - lol.] Personally, I have only seen one case in which a non-compete was enforced within our industry, and it was a former W-2 employee (not a 1099 contractor.)

Here is my question: Do you believe, or do you have relevant examples, of whether a true Non-Compete is enforceable with a 1099 contractor who is working for a TPR firm as a Production Recruiter?

[Note: Keep in mind that the context of this question - It is NOT about our typical misclassification examples, such as a 1099 contractor really being co-employed by working at a Client site through a contracting firm, etc. This question is purely from a TPR firm perspective.]

I very well may be incorrect, but my instincts tell me that this arrangement would be quite difficult to enforce, given the fact that the Client (or engaging party of the 1099 contractor) is not withholding taxes.

I may be incorrect here as well, but I have a hard time believing that such a case would be ruled in favor of the Client or engaging party . . . however I do believe it would be quite a deterrent for recruiters who do not wish to sink thousands of dollars into defending themselves (and/or recruiters who have little knowledge about what makes a non-compete enforceable in the first place.)

In the end, I truly wish things were so simple (that we could hire 1099, avoid taxes withheld, be under no obligation to pay any form of benefits, be able to lay the 1099 off 'at will' with no recourse to unemployment insurance, etc.). However, my better judgment tells me that when the chips fall, we would be at a significant disadvantage legally.

Just my $.02 and I look forward to responses.

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Permalink Reply by Sean C. on February 20, 2009 at 6:38pm

Hey Joshua,

My company only uses 1099 contractors for field work, and I've never heard of any dealing with repercussions of a no-compete agreement. I've had a few prospective contractors tell me they couldn't do work for us because they signed a no-compete with another company. Personally, I think you'd have to be a complete idiot to sign something like that and work as a contractor.

Now you have $.04!

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Permalink Reply by CaseyCline on February 22, 2009 at 1:13pm

I could be wrong, but i do not believe this is enforceable with 1099's. To enforce it as a client of the 1099, you are opening yourself up to a misclassification suit on the grounds that you are exerting control on the worker. 1099 = independent contractor, key word: Independent.
The 1099 should be free to work for whomever they chose, free from control from any client/former clients.

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Permalink Reply by Joshua Letourneau on February 23, 2009 at 12:20pm

Heather, my sentiments exactly. At the end of the day, I cannot see a non-compete being enforced against a 1099 independent contractor. Yes, a company can sue, and thereby tie up the defendant (in this civil matter) up for months and months during litigation . . . but to formally win and receive any form of damages? Highly unlikely. I have seen circumstances where the suing party has also been counter-sued for all legal costs in defense. This begs the question, "Was it worth it, at least in the sense that the defendant was tied up for months and months when attempting to launch their new venture?" The answer may very well be an emphatic "Yes", as limiting the defendant's ability to engage in early-stage business may bankrupt them.

The elephant in the room is simply this: By pursuing a non-compete against a 1099 contractor (of whom you paid zero federal withholding, etc.), you may open yourself up to a potential misclassification lawsuit as a result (at least here in the U.S.). Now let's ask the same question again . . . given the risk of such a development, was it worth it to protect a "client list" of organizations that are looking to hire the best people, regardless of source? Sometimes we must be careful because our bluff just might get called.

Now, for my own little flavor, I'll say this: If any firm thinks they're going to engage me as a 1099 in an Executive Search situation, and they think they are going to sue me for a Non-Compete, they will lose . . . and they will lose spectacularly. I just might invest a little of my own money and resources to make an example out of them; an example we can all laugh about here on RBC.

P.S. In closing, let me suggest that we have a global presence on RBC, and there are times when questions or discussions are started where it is difficult to speak intelligently and provide legitimate advice. While I have a grasp of the U.S., I cannot speak to Canada, the U.K., India, etc.

Heather Bussing said:

Generally non-compete agreements only apply to employees. So they would not generally apply to independent contractors. BUT the distinction between an employee and an independent contractor usually gets decided on a case by case basis depending on factors such as where the person works, whose equipment is being used, whether they have independent discretion or are under supervision as to how to perform the job.

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Permalink Reply by Maureen Sharib on February 23, 2009 at 7:49pm

OH MY GOD you girls are hilarious and more than a million billion zillion times worth what I pay to be a member of RBC...

Permalink Reply by Sandra McCartt
In San Franciso i could probably shoot my neighbor for killing my dog and get off on the grounds of justifable homicide...

Reply by Heather Bussing 22 hours ago
Actually in San Francisco and LA, it all depends on what you were wearing at the time. :>

Permalink Reply by Sandra McCartt 20 hours ago
Or if it were a full moon , i had two one eye jacks and i just intended to wound him and not kill him. Now if i planned it, hid in the shrubs and shot him in a cold calcuated manner in the back , welll........and that's point