In recent years, state courts have questioned whether independent contractors can be placed under enforceable post-engagement noncompetition agreements. Last week, the Fourth Circuit Court of Appeals (which includes North Carolina, South Carolina, and Virginia) signaled that attempts to place contractors under such restrictions weighs on the side of characterizing the relationship as employment under federal law.

In Chavez-DeRemer v. Medical Staffing of America LLC, the Fourth Circuit affirmed a $9 million verdict against a staffing company sued by the Department of Labor over claims that independent contractor nurses assigned by the agency to health care facilities were employees as defined under the Fair Labor Standards Act. The district court’s opinion included a detailed analysis of the economic realities test used to distinguish between employment and contractor status. The Fourth Circuit majority agreed that the agency exercised substantial control over the nurses, including pay rates, scheduling, and disciplinary functions.  

As part of its explanation of the agency’s control over the nurses, the Fourth Circuit noted that they were required to sign noncompete agreements, which indicated economic dependence on the agency, given its control over their activities post-engagement. As a result of this determination, companies considering using noncompetition agreements with contractors must calculate both the chances of enforcing the agreements, as well as the impact of the agreements on any future misclassification claims. In many circumstances, the company using contractors may conclude that a confidential information agreement is sufficient to protect its business interests while avoiding any perception that they created an employment relationship under federal law.

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