Clients often wonder whether they can restrict a consultant, independent sales representative, or other independent contractor from working for a competitor after the independent contractor agreement has terminated. In Illinois, if a company grants its employee access to trade secrets or other confidential information, then the company often seeks to use restrictive covenants (e.g., non-compete or non-solicitation clauses) to restrict that person from joining a competitor or otherwise using the company’s confidential information and trade secrets to unfairly compete. Those covenants are often enforceable if they are designed to protect a legitimate business interest and are reasonable in breadth, duration, and geographic scope.
But what do you do about your independent contractors who also will have access to sensitive information, sometimes information that is even more sensitive than the information accessed by your employees? Many companies are not comfortable simply relying on good faith or non-disclosure agreements with those independent contractors. Because of that, businesses often enter into agreements with independent contractors that contain restrictive covenants. But are those covenants enforceable and if so, to what extent?
The answer depends on which state’s law applies. In Illinois, the courts view such clauses as being analogous to restrictive covenants found in employment agreements and subject them to the same type of enforceability analysis. See Eichmann v. National Hospital & Health Care Services, Inc., 308 Ill. App. 3d 337, 343 (1st Dist. 1999).
For example, in Eichmann, the court held that a restrictive covenant in an independent contractor agreement should be reviewed in the same manner as a restrictive covenant in an employment agreement, rather than using the less stringent analysis for such covenants as part of a contract for the sale of a business. Id. However, courts in some other states have disagreed. E.g., Imaginative Research Associates, Inc. v. Ramirez, 718 F. Supp. 2d 236, 253 (D. Conn. 2010) (independent contractor agreement was not an employment agreement, “and therefore Defendants cannot rely on restrictive-covenant case-law in attacking [that] provision as an unenforceable [agreement]”) (applying Conn. Law).
Accordingly, if a company wants to include a non-compete or other restrictive covenant in its independent contractor agreements, then it must understand which state’s law applies and ensure that the agreement complies with the standards that will be applied to determine the enforceability of the covenant.
There are many other considerations in determining whether a company should use restrictive covenants with independent contractors even where it is possible to do so. For example, in some circumstances, courts may consider the existence of a restrictive covenant as some indicia that an independent contractor is actually an employee. See, e.g., Bayer v. Dep’t of Employment Sec., 2014 IL App (2d) 130033-U, ¶ 33 (“The presence of a restrictive covenant, even absent evidence of enforcement, strongly supports the Director [of Employment Security’s] decision and suggests an employment relationship rather than an independent contractor relationship.”). In other circumstances, a court may find the opposite to be true. See, e.g., Rabe v. Rasic, 2012 IL App (1st) 102570-U, ¶ 28 (rejecting the argument that terms of an independent contractor agreement that included, among other things, a non-compete agreement, established an employment relationship between anesthesiologist and surgical facility).
A full evaluation of all relevant facts and circumstances must be performed to determine the best course of action in each situation. The attorneys at Tomlinson & Shapiro regularly counsel clients on these matters and are ready to assist your company. Please contact us by calling (312) 715-8770 or by filling out the information at https://www.tomlinsonshapiro.com/contact/ to schedule a consultation.