Wednesday, June 8, 2011

Misclassifying Worker Can Invalidate Restrictive Covenant Agreement

The Third Circuit Court of Appeals has held that a non-competition agreement was unenforceable where it misclassified a worker as an independent contractor when he was, in fact, an employee. Figueroa v. Precision Surgical, Inc., 2011 U.S. LEXIS 7583 (3d Cir. Apr. 12, 2011).

In 2004, Joseph Figueroa entered into an independent contractor agreement with Precision. The agreement contained a non-competition covenant. In 2010, Figueroa asked Precision for a new independent contractor agreement, but Precision terminated the relationship after the parties disagreed on the status of Figueroa going forward – Precision wanted to convert Figueroa to employee status whereas Figueroa wanted  to remain classified  as an independent contractor. After they parted ways, Figueroa sued to declare the original non-competition covenant unenforceable (despite that he had he wanted to be deemed an independent contractor), and Precision sought injunctive relief to enforce the agreement.

The Third Circuit Court of Appeals affirmed the district court’s denial of an injunction, finding, among other things, that, because Precision breached the original agreement by treating Figueroa as an employee, the company could not win its underlying claim. The court found that Figueroa was always treated as an employee – for example, he was required to maintain an office at Precision, attend regular meetings, post his schedule in a company calendar, and received dress code instructions. As such, the agreement treating him as an “independent contractor” was invalid and unenforceable.

Employers should be careful when classifying workers as employees or independent contractors, not only for purposes of complying with the Fair Labor Standards Act and related laws, but, as we now know - to enforce restrictive covenants and other work-related agreements as well.

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