What Companies Need to Consider Before Asking an Independent Contractor to Sign a Noncompete Agreement
As courts continue to be critical of noncompete agreements, employers must remain informed and proactive to make sure their agreements can withstand judicial scrutiny. Around this time last year, we reported on annual increases to noncompete salary thresholds in various states, which are again on the horizon for 2025.
Employers should therefore be sure to review their agreements for compliance with salary thresholds. And, while noncompete agreements are top of mind, employers should consider another critical noncompete issue: noncompetes in independent contractor agreements.
Before asking an independent contractor to sign a noncompete agreement, employers should do the following: (1) review state-specific noncompete law, including law that relates specifically to independent contractors; (2) understand the “rule of reason” and make sure all agreements are narrowly tailored, which takes on enhanced importance for parttime service providers who are presumably providing services to other companies; and (3) take steps to make sure the noncompete agreement will not jeopardize the independent contractor classification.
- State Law
As we have continued to report, noncompete law is rapidly evolving and differs significantly from state-to-state. Not only does state noncompete law differ generally, but it also differs with respect to independent contractors specifically. The below sample of state law descriptions demonstrates some of the different ways states can approach this topic.
Washington. Washington law technically permits noncompete agreements for independent contractors, but the Washington legislature has enacted stringent salary thresholds that are adjusted annually for inflation. As of 2025, the state imposes a salary threshold of $123,394.16 for employees, which is measured by the total earnings reported on an employee’s W-2. In comparison, the salary threshold for independent contractors is more than twice as much, at $308,485.43, measured by the payments reported on a 1099-Misc. Wash. Rev. Code Ann. § 49.62.050.
Oregon. Oregon, like its northern neighbor Washington, imposes a salary threshold and various notice requirements. The statute uses the word “employee” throughout, and explicitly excludes “independent contractors” from the definition of “employees,” implying that the restrictions set forth in the statute do not apply to independent contractors.[1] However, at least one Oregon court has suggested otherwise, applying the statutory requirements to independent contractors without referencing the statutory text that excludes independent contractors form the definition.[2]
Texas. In Texas, courts treat noncompete agreements with independent contractors the same as noncompete agreements with employees.
- The Rule of Reason
No matter the jurisdiction, the “rule of reason” always applies to noncompete agreements. This point is critical for noncompetes entered by independent contractors.
Noncompete agreements must not be broader than necessary to protect a business’s legitimate interests. In practice, this means a noncompete agreement might need to be considerably narrower for an independent contractor than for an employee performing similar duties. If an independent contractor is only working part-time for a company with the shared understanding that the contractor will rely on work from other companies to develop a full workload, then courts are unlikely to enforce a noncompete agreement that unduly inhibits the contractor from securing a full workload. To keep agreements sufficiently narrow, companies may choose to narrowly define what constitutes a competitive business, such that the definition only encompasses aspects of the business for which the contractor performed services. It might choose to forego a geographic restriction and instead apply a customer-based restriction, one that only extends to customers the contractor interacted with on behalf of the company. It might choose to limit the temporal scope to the agreement to the term of the consulting relationship. Whatever the limitations look like, companies should think critically about how they can make their independent contractor noncompete agreements narrower than the noncompete agreements employees are asked to sign.
- Independent Contractor Classification
In some cases, a noncompete agreement can jeopardize the independent contractor classification. If a court or agency is skeptical as to whether an individual qualifies as an independent contractor (rather than an employee), some jurisdictions view the noncompete agreement itself as evidence of employee status. For example:
Indiana. In Jackson v. Leader’s Institute, LLC,[3] the court applied the economic realities test to determine whether an individual was an independent contractor or an employee. When the court considered the permanency and duration of the working relationship — one of factors in the economic realities test — the court factored into its analysis the existence of a noncompete agreement.
Mississippi. In Handyman House Techs, LLC v. Mississippi Department of Employment Security,[4] the court held that a maintenance and repair worker was an employee, not an independent contractor. One factor the court considered that weighed in favor of the employee classification was the existence of a noncompete agreement.
Idaho. Idaho courts have looked to the existence of (and substance of) noncompete agreements to determine whether an individual is properly characterized as an independent contractor. See State ex rel. Indus. Comm’n v. Sky Down Skydiving, LLC[5]. (“Although noncompetition clauses are permitted for independent contractors under Idaho Code section 44-2701, such a provision is more indicative of the type of control an employer typically exercises over an employee.”)
One simple step that companies can take is to avoid referring to an independent contractor as an “employee” in a noncompete agreement. However, mere verbiage is not sufficient to avoid classification issues. Consideration should be given to how a broad noncompete for an independent contractor might be viewed by a court as foreclosing working for other companies (and thus indicating control of the company over the worker).
Employers should also be mindful of the Defend Trade Secret Act of 2016 (DTSA). The DTSA’s immunity notice provisions apply to employees and “any individual performing work as a contractor or consultant for an employer.” Therefore, the DTSA immunity notice should be included in independent contractor noncompete agreements entered between a company and an individual performing work as a contractor or consultant.
Employers expecting to enter noncompete agreements with independent contractors should work with counsel to make sure their agreements comply with applicable state law, are reasonably tailored for the independent contractor involved, and are not going to jeopardize the independent contractor classification. We will continue to monitor and report on developments in this area of the law.
[1] See Or. Rev. Stat. Ann. § 653.295(8)(c); Or. Rev. Stat. Ann. § 653.310(2)(a).
[2] See Naegeli Reporting Corp. v. Petersen, No. 3:11-1138, 2011 WL 11785484 (D. Or. Dec. 5, 2011).
[3] No. 114-CV-00193-TWP-DML, 2015 WL 7573228, at *7 (S.D. Ind. Nov. 24, 2015).
[4] 337 So.3d 681, 689 (Miss. Ct. App. 2022).
[5] 462 P.3d 92, 101 (Idaho 2020)
