Government contractors and commercial businesses alike frequently retain consultants and independent contractors to perform certain types of work, particularly in the construction, healthcare, and information technology industries. This is so because utilizing independent contractors, as opposed to employees, can offer some attractive benefits to companies. For instance, utilizing independent contractors may reduce company overhead, general and administrative, and fringe benefit expenses; it may allow for flexible work schedules, particularly on projects with indefinite schedules or workloads; and it may permit companies to avoid incurring worker overtime costs during periods of heavy business activity. Meanwhile, companies have attempted—often with success—to limit some of the risks of utilizing independent contractors by including non-competition provisions in consultant and independent contractor agreements. These provisions often prevented independent contractors from simultaneously working for a company and its competitor, exposing the company’s proprietary or confidential information to disclosure to the competitor. However, a March 29, 2021 decision from the United States District Court for the Eastern District of Virginia, Alley v. Quality Eco Technologies, LLC, throws a wrench into that practice. The Alley case calls into question whether a company can enter into a non-compete agreement with an independent contractor, weakening protections for government contractors and commercial businesses and opening them up to potential employer liability.

In Alley, the defendant was a Virginia-based company operating in the “eco-friendly ventilation, air filtration, insulation, and power conservation” industry. A group of the company’s “Installers” filed a lawsuit under the Fair Labor Standards Act (FLSA) seeking payment of alleged unpaid minimum wage and overtime compensation. The company classified the Installers as independent contractors and paid them on commission basis. In their suit, the Installers claimed that they were actually treated as employees, in which case the company was required to pay them for their regular and overtime hours worked. The company filed a motion to dismiss the lawsuit, claiming, among other things, that the Installers were, in fact, independent contractors and therefore not entitled to the protections of the FLSA.

In considering the question, the Court identified the factors courts in the Fourth Circuit (Virginia, Maryland, North Carolina, South Carolina, and West Virginia) consider in determining whether a worker is an employee or an independent contractor: “(1) the degree of control that the putative employer has over the manner in which the work is performed; (2) the worker’s opportunities for profit or loss dependent on his managerial skill; (3) the worker’s investment in equipment or material, or his employment of other workers; (4) the degree of skill required for the work; (5) the permanence of the working relationship; and (6) the degree to which the services rendered are an integral part of the putative employer’s business.” Analyzing the Installer’s claim, the Court concluded that “the facts presented . . . create a reasonable inference that [the company] exercised substantial control over the manner in which the Installers worked.” The Court explained that “[p]erhaps most persuasively,” the company “required the Installers, despite their roles as independent contractors, ‘to sign a non-compete agreement prohibiting them from performing work for any [company] competitors both during, and for a time period after, their employment with [the company].’” Based substantially on the existence of the non-compete agreements, the Court concluded that the company exhibited control over the workers, indicating that the company and Installers were employer and employees rather than principal and independent contractors.

It remains to be seen whether the Alley decision will have any lasting impact on Virginia or regional employment law. The presence of a non-compete provision in a consultant or independent contractor agreement is not, in and of itself, sufficient to establish an employer-employee relationship; it is likely that most courts would require additional facts to support the conclusion that an individual is an employee. However, the case identifies a number of potential risks for employers:

  • The inclusion of a non-compete provision in an independent contractor or consultant agreement could be a significant factor in transforming the consultant or independent contractor into an employee.
  • If a court concludes that the workers are employees, the company could be subject to additional pay and benefit requirements or potential liability under the FLSA or other wage payment statutes, including back regular and overtime wages, plus liquidated or multiple damages and attorneys’ fees.
  • Even if a court does not conclude that a worker is an employee based on the existence of a non-compete provision in a consultant or independent contractor agreement, the court could refuse to enforce the non-compete provision as applied to independent contractors.
  • The invalidation of a non-compete provision could expose the company’s proprietary or confidential information to competitors if the worker elects to provide services to a competitor.

In light of Alley, and the risks it brings, government contractors and businesses operating in the private sector should review their independent contractor and consultant agreements and modify them as necessary to prevent those risks from becoming reality.

If you have questions about drafting or modifying independent contractor or consultant agreements, please contact Matt Feinberg, the author of this blog, or a member of PilieroMazza’s Litigation & Dispute Resolution, Labor & Employment, or Labor & Employment for Government Contractors groups.