Non-compete Agreement Void Based on Misclassification as Independent Contractor

the situation

You bring someone on as an independent contractor—and as part of the agreement, he agrees to a non-competition provision. If it is determined that you really should have classified the worker as an employee, could that jeopardize the enforceability of the non-compete?

the ruling

Just last month, a judge in Fairfax County found that it could. The Reading and Language Learning Center v. Charlotte Sturgill, Case No. CL-2015-10699 (August 4, 2016).

The Reading and Learning Center (“RLLC”) is a private speech therapy practice that assists children and adults with speech, language or reading disorders. Charlotte Sturgill was a recent graduate of a master’s program in speech-language pathology and needed to complete a supervised clinical fellowship to obtain necessary licenses and certifications. She entered into an agreement with RLLC titled “Agreement Between Private Practitioner and Independent Practitioner.” According to the agreement, Sturgill was an independent contractor and was to provide services to RLLC for the 2014-2015 school years. The agreement also contained a non-compete clause which essentially said that both RLLC and Sturgill agreed not to employ or contract with any current client of the other for two years after the expiration of the agreement.

RLLC was a subcontractor to another company and through this relationship, provided services to Ingenuity Prep Public Charter School. Problems arose when Ingenuity Prep decided to look for a full time employee to fulfill its speech pathology needs instead of using the services of RLLC and the other company. Sturgill applied for and was selected for the position. When she informed RLLC that she was taking the position with Ingenuity Prep (after being reminded of her obligations under the non-compete), RLLC terminated her based on her statement that she intended to breach the non-compete. RLLC then brought a lawsuit against Sturgill, alleging claims of breach of contract and tortious interference with a contract.

One of Sturgill’s arguments was that the agreement containing the non-compete was void because it was in violation of public policy based on RLLC’s misclassification of her as an independent contractor. The court agreed.

The court explained that although there is no statute in Virginia that directly penalizes the misclassification of workers, there are a number of statutes designed to protect employees but not independent contractors. And if Sturgill was misclassified, a number of Virginia and federal statutes were implicated, including those related to unemployment taxes and other employment taxes, along with federal anti-discrimination statutes. The court concluded that “in a misclassification situation, an employer deprives a worker of statutory rights, while reaping benefits to the detriment of the entire workforce and the government. This kind of act is undoubtedly injurious to the public welfare.”

The court found that Sturgill had been misclassified in light of the significant level of control and supervision exercised by RLLC over Sturgill. Since the agreement misclassified Sturgill as an independent contractor, it was void for violating Virginia public policy and thus the non-compete was not enforceable.

the point

It is no secret that the dangers of misclassifying workers as independent contractors are significant. Although other courts may not agree with this circuit court’s conclusion, this is one more potential vulnerability of these types of arrangements of which employers need to be aware.