Avoid These Legal Traps When Launching a Side Hustle

According to some studies, one-in-three Americans has a side hustle, defined as a “job or occupation that brings in extra money beyond one’s regular job and main source of income.” While some employers do not care about such side hustles as long as an employee performs well at their full-time job, other employers can take an issue with it. Thus, before starting a side hustle, employees should do the following to avoid landing themselves in hot legal waters:

Review Your Employment Agreement

Employment agreements will generally state whether an employee can engage in other jobs while working for an employer. Some employment agreements contain what is commonly called No Moonlighting clause, which can say something like: “During the Employee’s employment with the Employer, the Employee agrees not to accept or continue in any job, consulting work, directorship, or employment without the written approval of senior management of the Employer.” Thus, an employee may need to seek permission from management to engage in a side hustle.

A lot of employment agreements have a more limited No Moonlighting clause that only requires permission from management if an employee engages in a business similar to the employer’s business.

Also, employees should review their employment agreements for Non-Compete Restraints to make sure that the side hustle does not violate those restrictions. Most such restraints only prohibit employees from engaging in work that would compete with their current employer’s business. However, many non-compete agreements are written so vaguely that it may not always be clear what is considered “competitive activity.” When in doubt, an employee should have an attorney review their non-compete agreement to make sure that the side hustle is not going to violate the restraints in their employment contract.

Finally, employees should review their employment agreements for any language that addresses who owns the intellectual property created by an employee while employed by the employer, generally called an Intellectual Property Assignment clause. Some employment agreements contain very broad language that states that any inventions or ideas created by employees are property of the employer. Thus, employees whose side hustle involves generation of ideas need to make sure that their ideas do not become an employer’s property. When in doubt, they should consult with an attorney regarding the best way to achieve that goal.

Review Employee Handbook

Employees should also review their employee handbooks or manuals regarding any language that may prohibit them from working for another employer.

Do Not Use Company Resources

It may be tempting, especially when working remotely, to use the company’s computer system, email, or other resources to run a side hustle. However, that is a sure way to upset the employer and give them a justifiable reason for termination. Additionally, using company resources for non-company business is often expressly prohibited in employee manuals. Finally, using company resources, may also lead to an employer having a valid claim that anything created by an employee with the use of company resources or during the work hours belongs to the company (see the intellectual property assignment clause above). In short, using company resources for a side-hustle may have serious legal consequences.

Set Up a Legal Entity

While one is not required to have a legal entity to run a side hustle, it is certainly a wise decision to create one. It may cost $200 – $300 dollars to register a business, but having a company generally protects the owner of the business from potential liabilities arising out of running such business, as long as the owner keeps personal and company expenses and finances separate. Employees should consult with an attorney to set up a company correctly in the beginning, in order to avoid legal issues down the road.

Leiza Dolghih is the founder of Dolghih Law Group PLLC.  She is board certified in labor and employment law and has 16+ years of experience in commercial and employment litigation, including trade secrets and non-compete disputes. You can contact her directly at leiza@dlg-legal.com or (214) 531-2403.

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