The Problem With Non-Competes

Why The Contract Shop® Doesn’t Sell Non-Compete Contract Templates

When you start growing your business, you need help. That may mean it’s time to start outsourcing some of your work to a contractor. But as you get ready to bring them onboard you might realize you don’t want anyone learning your unique process and then taking it to a competitor — or even using it to create a competitive service or product!

That’s a normal concern for anyone who is trying to grow a business and team. It’s also totally normal to wonder if you need a contract to cover your booty. Unfortunately, though, the type of contract that is best suited for this situation (a non-compete contract) isn’t going to protect you like you think it will. Plus, if you’re working in a contractor capacity with people, you can’t actually ask them to sign a non-compete. 

 

Contractors + non-competes = no-go.

You might think that asking a contractor to sign a non-compete is pretty standard. After all, you’re just asking them to not sell your trade secrets to the enemy, right? Wrong. Actually, you cannot ask a contractor to not work with competitors, because you have no employment relationship with them.

In case you’re new to the employee vs. contractor argument, the IRS has an entire resource on this. Basically, it comes down to three things:

• Behavioral Control: Are you controlling a person’s work hours, the tools they can use, or even the training they receive to do their job? That might be an employee.
  
• Financial Control: If a person’s services are available to the market (yes, including your competition), they’re a contractor or freelancer. If their services are not available to the market, that’s an employee.
  
• Relationship: Are you providing benefits for a person’s work? They’re an employee. Are the services they provide critical to your business functioning? Again, might be an employee.

While we’re not experts in legal hiring practices, we do want you to understand that there are clear differences between working with a contractor and working with an employee. With an employee, you can request work during specific hours, offer specific training, and have them provide services that are critical for the function of the business. You can also ask employees to sign a non-compete. But you cannot ask a contractor to do so.

If non-competes are out, now what?

We’re betting that most of the initial team members you bring on are going to be contractors — especially if you are an online service-based business. It can be scary to bring on a contractor without protection, and might even lead you to wonder if you’re just training up your competition later.

Our best recommendations? Keep reading. 

Build incentive

Respect your contractors, and build strong relationships with them. You’d be surprised how motivated contractors and freelancers are to serve their clients well, and many of them understand how serious it is to serve you well in return. Here at The Contract Shop®, we pay our contractors well, we pay them on time (this is a big one!), and we always let them know we’re grateful for their work and their time. Little things like gift cards and individual messages from our founder, Christina Scalera, go a long way, too! 

Build a brand

This is a bit more involved than a couple of steps, but it will help you ease worries that you’re just training your competition or giving away trade secrets. When you build a brand, you establish your name and your reputation in the marketplace. Your audience will know you, know your style, your process, and what makes you stand out. If someone were ever to enter the market with your brand and your style, they’ll know who is the real deal and who is not. Plus, it gives you a stronger leg to stand on should you ever need to take someone to court over something.

Build in privacy clauses

While you can’t use a non-compete with your contractors, you can ask for privacy. A confidentiality clause, which is built into our contract templates, can ensure your contractors are not using anything they've learned from your company to apply it to others. It also helps to limit access to just the assets your contractors need. For example, our graphic designers don't see the whole content strategy and how we set that up. They just get tasks to create certain graphics.

A final note on hiring

If you really think a non-compete is necessary for the work you do, or you realized you are technically treating your contractors like employees, it might be time to think about offering employment. If you're really ready to hire and establish a non-compete, engage an attorney familiar with employment law in your state for specifics to your situation.

We don't offer employee agreements at The Contract Shop® because we know that each state and each business's need is different. It's a huge disservice to sell a templatized employment agreement without reflecting the nuance of each business, state, and job position!

Whether you’re working with contractors for the time being or work as a contractor yourself, don’t forget to check out our contract templates. You’ll find a variety of working relationships, and our Independent Contractor template is a great place to start.