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

A 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. 

And if you're thinking the collapse of the FTC's federal non-compete ban changes that calculation, it doesn't. Enforceability and classification are two separate questions, and only one of them got easier.

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.

Key Takeaways

• A non-compete in an independent contractor agreement is evidence of employment. It restricts the worker's independence, which is exactly what classification tests examine.
• The FTC's federal non-compete ban is dead, formally removed from the Code of Federal Regulations in February 2026. That changes enforceability but not classification risk.
• Even in states where non-competes are fully enforceable against employees, including one in an IC agreement still creates misclassification exposure.
• Confidentiality terms, IP assignment, and a narrow non-solicitation clause protect the same business interests without signaling control.

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.

Ultimately, non-competes may be a bigger classification liability than most companies realize.

Where Non-Compete Law Stands in 2026

The FTC finalized a rule in April 2024 that would have banned most non-competes nationwide. It never took effect. A federal court in Texas vacated it in August 2024 in Ryan LLC v. FTC, holding the Commission had exceeded its authority. The FTC initially appealed, then voted 3-1 in September 2025 to drop the appeals and accede to the vacatur. In February 2026, the rule was formally removed from the Code of Federal Regulations.

So there is no federal ban on non-competes. The FTC retains case-by-case authority under Section 5 of the FTC Act, and it has used it, most visibly in a 2026 consent order against Rollins, the parent company of Orkin, covering more than 18,000 workers. But the blanket rule is gone.

State law now governs enforceability, and it's a patchwork:

• California, Minnesota, North Dakota, and Oklahoma ban non-competes for most workers. California goes furthest under SB 699, where simply asking an employee to sign one is itself a violation.
• Roughly two-thirds of states still enforce them for qualifying employees, subject to reasonableness limits on scope, duration, and geography.
• The trend is toward more restriction, not less. Utah banned healthcare non-competes effective May 2026. Tennessee introduced a $70,000 minimum compensation threshold and Virginia a severance-or-void rule, both effective July 2026. Washington's near-total ban is signed and takes effect in 2027.

Still, none of that changes anything about independent contractor agreements.

The enforceability question asks whether a court will uphold the restriction. The classification question asks whether the restriction is evidence that your contractor is really an employee. A non-compete can be perfectly enforceable in Florida or Texas and still hand the DOL a data point in a misclassification case. Winning the first question doesn't help you with the second.

If anything, the collapse of the federal rule makes this more urgent. Companies that shelved non-competes in 2024 while the FTC rule was pending are now dusting them off, and some of those templates are going straight into contractor agreements where they never belonged.

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.”

How Worksuite Can Help

The template problem is the root of most of this, and it's fixable at the source.

Worksuite generates contractor agreements from legal-approved templates configured per jurisdiction, so a contractor in California receives a different agreement than one in Texas or Germany. Legal approves the language once, and every agreement issued from that template inherits it. Nobody is copying an old employee offer letter and stripping out the parts that seem irrelevant.

Worker classification runs as a stage in the contract workflow before signing, evaluated against the applicable federal, state, and local tests across all 50 U.S. states and 190+ countries. The outcome is stored on the contract and the worker's profile, so the reasoning behind the decision is documented rather than reconstructed later. Classification decisions are backed by indemnification.

And because every contract lives on the worker's record alongside their classification, onboarding documents, and payment history, auditing your existing agreements for problem clauses is a search rather than a project.

Book a live demo to see how Worksuite builds compliance into contractor agreements from the start.