Why Non-Competes Don’t Belong in Independent Contractor Agreements

By Cristin Monnich, Head of Global Compliance Strategy & GM of AOR at Worksuite

TL;DR

A recent ruling by the Fourth Circuit sends a clear message: using non-compete agreements in independent contractor relationships can seriously backfire. In a case involving misclassified nurses, the court highlighted non-competes as one sign the workers were actually employees under federal law. Simply put, non-compete clauses have no place in independent contractor or freelancer agreements — in any form. 

If you’re using freelancers or independent contractors, now is a good time to audit your agreements. This article breaks down the case, explains why non-competes for independent contractors create a huge liability, and offers safer, smarter contract alternative to protect your business 

A Teachable Moment from a $9M Verdict

In Chavez-DeRemer v. Medical Staffing of America LLC, the Fourth Circuit affirmed a $9 million judgment against a staffing company that classified nurses as independent contractors. The Department of Labor argued they were employees under the  Fair Labor Standards Act (FLSA)—and the court agreed.

Among the many red flags? The company required these workers to sign non-compete agreements, limiting their ability to work elsewhere even after the engagement ended. That restriction contributed to the court’s finding of economic dependence—a key element of employee status under the law.

Bottom line: well-intentioned contract clauses can undermine your classification strategy. If you’re worried about confidentiality or client relationships, there are much better alternatives available to protect your business without inviting reclassification or class-action lawsuits. 

Why Non-Competes Raise Classification Flags

When agencies, courts or tax authorities assess whether someone is self-employed or an employee, they look at the totality of the relationship—especially around control and independence.

A non-compete limits work and runs contradictory to the concept of true independence. Putting limitations around where a contractor can work, whether during or post-engagement, gives the appearance of a dependent or employer-employee relationship.

Here’s how it plays out across different classification tests:

• IRS Common Law Test: Evaluates the level of control over how work is performed and the contractor’s ability to earn income independently. A non-compete restricts income opportunities elsewhere.
• DOL’s Economic Realities Test: Focuses on whether the worker is economically dependent on the company. Blocking access to other clients or jobs strongly signals dependence.
• ABC Test: Used in many U.S. states for unemployment and worker classification laws, this test requires that contractors operate independently. A non-compete can violate this standard by tying a contractor to your business even after work ends.
• In short: non-competes may be a bigger classification liability than most companies realize.

What to Use Instead (That Still Protects Your Business)

Here’s the good news: you don’t need non-competes to safeguard your company’s interests. Most teams use them to protect intellectual property, client relationships, or sensitive information—which can be handled more cleanly.

Try this instead:

• Confidentiality Agreement
  Covers any confidential materials shared during the engagement—without limiting future work opportunities.
• Clear IP Ownership Language
  Use “work made for hire” clauses and assignment of rights to ensure your company owns all deliverables.
• Narrow Non-Solicitation Clause (Optional)
  If needed, use a short, time-limited clause preventing the contractor from poaching clients or employees. Keep it targeted and justified.

This toolkit protects what matters—your business, your IP, and your client base—without creating the appearance of control or dependency.

Where We See This Go Wrong (and How to Fix It)

Most companies don’t include non-competes in contractor agreements to harm or misclassify their independent talent. Most likely, they’re just reusing templates or copying over employee contract language into their Freelance agreements without realizing the downstream effects.

If that sounds familiar, you’re not alone. A few simple steps can go a long way:

• Start with your templates: They Matter.  Review your independent contractor agreement templates in partnership with your legal or compliance team. If working with freelance talent is new territory—or if your templates haven’t been revisited in a while—now is the time. These agreements aren’t just administrative paperwork; they’re foundational to how the relationship is defined and defended. Investing time to thoughtfully structure them can make all the difference in managing compliance and risk.
• Watch for Hidden Employment Triggers:  Audit your contracts for language that implies an employee relationship—especially around exclusivity, non-compete clauses, or directives around when, where, and how work is performed. A proper freelance agreement should leave no ambiguity: this is a business-to-business relationship, not an employer-employee one.
  Avoid reusing job descriptions or repurposing employee offer letters or onboarding templates. These are not fit for purpose. Instead, treat your freelance partners the way you would any external vendor or service provider—because that’s exactly what they are.
  
• Train your internal teams (HR, Procurement, Legal, Finance) on what should and shouldn’t go into an IC contract. Sometimes it’s a big mindset shift to appreciate the nuance of engaging freelance talent—because they’re individuals, it’s easy to forget they aren’t part of the internal team.

Cristin’s Perspective

“Non-competes and contractor status absolutely do not mix. By trying to mitigate certain IP or confidentiality risk, you could potentially be creating greater liability for your organization through restricting the ability of independent talent to engage with other clients. You can protect your business and stay compliant—with purpose-built freelance contracts and better tools.”