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Can you tell your contractor he/she cannot work for any other companies?

 

"Can the employer tell an independent contractor that they can only work for the employer vs. for other potential clients/employers? Can you have/enforce a non-compete with an IK?"

This question was asked at a recent webinar, now available on-demand:

"Employee or Independent Contractor? That is the Question!"

Please add your thoughts about it below. Thanks!

Answers

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

If labor experts are weighing in on this from an employment perspective, I would like to add this rider/question:

1. Assume your company is developing a specific solution or product for a company that is going to use it for commercial gain
2. Assume your client wants exclusivity on usage, maybe even rights of ownership of the IP and you agree to not offer anything like this to any (named) competitor for an agreed period. Remember AT&T's exclusive with Apple for the iPhone?
3. If you engage subcontractors (whether incorporated or not), don't you have the right (and maybe even the obligation demanded by your client) to require the same restriction on your subs?

Anonymous
(Tax/Business Consultant) |

Not necessarily and depends on the negotiations between the two parties.

For example...
Apple contracts out to companies in China but many of them DO have contracts outside of Apple. What Apple does is enforce its Privacy in that the company can not disclose any private information about their business arrangements or products to anyone else.

That contractor [company] may not want to be Your ONLY customer.

Too many companies have historically, and foolishly upon hindsight, tied its fate with being the Only contractor to a particular company. If that company shuts down or does poorly, that contracting company may or will be out of a job!

Anonymous User
Title: CFO
Company: Local Government Agency
(CFO, Local Government Agency) |

To my mind, once you tell an independent contractor that they are exclusively yours, you've moved them from 1099 to W-2 and all that implies.

Look up "agency relationship" in employment law. Or review:

http://www.reuters.com/article/2009/04/01/businesspropicks-us-findlaw-dont-treat-c-idUSTRE53063S20090401

Anonymous
(C2C Specialist) |

Going back to Leon Green. Yes, you can tell your contractor that you own the IP. Think of it like owning a painting. If you own the painting you own the reproduction rights as well. If your painting appears in an art book the author has to get your permission and possibly even pay you. If you own a particularly noteworthy piece of art, you can make a few dollars from this.

One thing that wasn't addressed was the size of the "sub". If its a one person shop you're far more likely to possibly have the relationship judged as Employer-Employee. If you bring IBM into your shop and work with them its very unlikely that the auditors are ever going to say that IBM contractors are your employees.

Owning the IP is possible. Placing competitive restrictions afterwards could be an issue. Some limits might be okay but I'd word them carefully. Protecting the IP is perfectly fine.

Sometimes both sides want a contractor relationship but then things change on one side and a lawsuit develops. In my experience this has happened more often than having an auditor question the relationship. The big issue is that parties do not realize that its substance over form. Businesses want excessive restrictions and do not realize that if they loose the case in one instance it may impact everyone they've employed in that manner. Sadly, very few people read contracts and often what's written there is so poorly worded (sometimes intentionally) that both sides are in breach before things even begin.

Yes, this is a valid issue and a problem but more so because both sides have abused it and made things worse. What was relatively straightforward has become far worse.

Anonymous
(HR Manager) |

If your question is whether an employee is consider an employee or an independent contractor, I would initially say it depends on whether the person makes his/her services available to the general public and has the right to control who he/she selects as clients. Putting an exclusivity clause in the contract implies that the employer has control and thus the relationship changes to that of an employer and employee. However, that is only one factor and past and current cases would suggest that it is the totality of the relationship that ultimately matters whether the person is a bonafide employee or IC.

Ern Miller
Title: Co-CEO
Company: Miller Small Business Solutions
(Co-CEO, Miller Small Business Solutions) |

When I meet with a business to discuss developing software for them, of course if asked at that time, I sign something saying I will not share trade secrets revealed during my interaction with them. After the initial interview, I design a plan to develop what they want.

During that plan development, I come up with three price plans. They are: 1. Sole ownership (where everything developed belongs to the client), 2. Sole ownership of the end product (the client keeps the software, but any tools I develop (programmers use tools like a mechanic carries in a tool box...a bit of code I used to make one product may be usable for another client...and I maintain copyright over the programming design, but cannot sell the same software package to another client), 3. I maintain ownership of the software once developed (the client gets the full package and full support) (This third option is when I feel the product could be marketable. For a long distance international carrier, I developed a AP/AR package that read data feeds from their PBX. I saw that I could repackage it and sell it to other international carriers, so I kept the rights to the software and marketed it myself. For a dentist, a friend of mine, he helped me design the software and we jointly marketed it.)

The cost to the client depends on which plan they choose. Normally, I offer tier plan 1. If they balk at the cost, I explain that they get exclusive rights. If they still balk at price, I then offer plan two, where I can keep the tools I develop. Their decision is based on how protective they are over what they show me. It shows that I am flexible but justifies the higher cost. On the times I think I could package the end product, I have the level 3 price in mind, but assume the sale at level 2, and almost without fail during negotiations cost is an issue, and I offer to develop at a price that is really not much more than the cost of development and explain that I would like to maintain ownership of the software. If they balk at that, I suggest a joint ownership, and depending on who does the marketing, the compensation is negotiated.

An example of a time where I maintained ownership was when I wrote a software package for a carpet sales company. I knew I could market the software to a lot of carpet sales companies, so the price I gave them was real low and made money on sales of the developed software.

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