Make Sure Your Employees Are Really Employees (Figueroa v. Precision Surgical, Inc.)

Trying to distinguish between who is properly classified as an independent contractor is way beyond the scope of this blog.

However, it apparently has some relevance in non-compete cases. I have not seen a case like this before, but the Third Circuit has affirmed a denial of a preliminary injunction motion in a non-compete case because the "independent contractor" really was treated as an employee.

Joseph Figueroa challenged the validity of his restrictive covenants with Precision Surgical, Inc. As part of his contention, Figueroa claimed that his status as an independent sales representative was not honored while he was engaged by Precision Surgical. Figueroa reasoned that Precision Surgical breached the underlying agreement (which contained a non-competition covenant) by treating him as an employee. The district court and Third Circuit agreed and found Precision Surgical was unlikely to succeed on the merits of its counterclaim for a non-compete violation.

Among the relevant factors in the court's determination:

(1) Figueroa was given the title "account executive"

(2) He was required to regularly report, attend sales meetings, and received instructions on how to dress.

(3) Precision Surgical made deductions on his commission payments.

(4) Precision Surgical terminated the relationship when Figueroa refused to convert to W-2 status.

As I have told clients before, a non-compete (or more likely, a non-solicit) covenant for an independent contractor can be enforceable. Problems generally arise, though, when a disgruntled former contractor applies for unemployment compensation, and questions arise as to whether he or she was misclassified.

For those employers who do use non-competes in connection with independent contractor agreements, make sure those agreements are followed and that you're not exercising undue control over your people.

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Court: United States Court of Appeals for the Third Circuit
Opinion Date: 4/12/11
Cite: Figueroa v. Precision Surgical, Inc., 423 Fed. Appx. 205 (3d Cir. 2011)
Law: Pennsylvania
Favors: Employee