When determining enforceability of non-competition and non-solicitation agreements (referred to in this article as “non-competes”), a threshold issue is whether the subject employee is an employee at all. Special rules in Minnesota govern non-competes applied to 1099 independent contractors, as distinguished from W-2 employees. Normally, non-competes for employees signed after the onset of the employment relationship must be supported by independent consideration. That is, the employee must receive something of value, above and beyond mere continuation of employment (i.e., “sign this or you’re fired”). Sanborn Mfg. Co. v. Currie, 500 N.W.2d 161 (Minn. Ct. App. 1993). Typically, this consideration takes the form of a signing bonus, raise or significant expansion of job duties. Courts impose this rule to redress the imbalance of power between employees and employers, and to effectuate Minnesota’s longstanding policy disfavoring non-competes as partial restraints of trade. National Recruiters, Inc. v. Cashman, 323 N.W.2d 736 (1982).
For independent contractors, by contrast, no such independent consideration is required to support a “mid-stream” non-compete. That was the holding in Schmit Towing, Inc. v. Frovik, A10-362 (Minn. Ct. App. Nov. 9, 2010) (unpublished), the one Minnesota case to date addressing the question. Non-competes also will be enforced in the context of franchisee-franchisor relationships, where necessary to protect legitimate business interests. In ADCOM Express, Inc. v. EPK, Inc., C6-95-2128 (Minn. Ct. App. May 21, 1996) (unpublished), the court found the non-compete to be reasonable, and therefore enforceable, in part because a clause in the contract allowed the subject franchisee to terminate the relationship at any time, with advance written notice.
Nonetheless, a trap for the unwary remains: employers utilizing contractors must take care in drafting their agreements such that post-employment restrictive covenants survive when the contract or relationship ends. The contract at issue in Burke v. Fine, 608 N.W.2d 909 (Minn. Ct. App. 2000) contained a two year limited non-compete barring employment with a specific employer. The contract elsewhere contained various conditions upon which either party could terminate the independent contractor relationship. It also, however, included a two year term. The contractor in Burke v. FIne worked beyond the initial two year term, and the parties continued to operate under the expired contract as though nothing changed. They did not formally “renew” the contract after the two year term elapsed, which per the agreement, could have been done in writing. Under these circumstances, the court held that the non-compete clause expired with the expiration of the original contract. This outcome could have been avoided easily by stipulating that the non-compete language survives the expiration of the original term, and the post-employment prohibitions go into effect from the date the relationship ends, regardless of when or how the parties end their relationship.
The takeaway is obvious. Although non-competes are less disfavored under the law as applied to contractors, they are still disfavored to an extent by courts. Survival clauses are necessary to ensure enforceability beyond the initial term of contracts of limited duration. Presumably, an open-ended contract without a specific end date, or self-renewing contract, would not raise the concerns at issue in Burke v. Fine. Finally, employers should take care to make sure that individuals treated as independent contractors for payroll purposes are, in fact, not employees under both the Minnesota and IRS tests. Significant financial consequences, not limited to enforceability of noncompetes, can result from improper classification.