Sixteen percent of Americans report earning money through an online gig platform. Gig work model started out with Uber, DoorDash, TaskRabbit and the likes in the 2010s, and has now expanded into healthcare, retail, and other industries.
Many gig workers are classified by their employers as “independent contractors,” which means they are not getting health benefits, vacation days, and other perks normally associated with being a W-2 employee. A the same time, many companies may tightly control the workers’ tasks in ways that run counter to the idea and the legal requirements for an “independent contractor” classification.
The Federal Trade Commission (FTC), which is tasked with investigating and penalizing anti-competitive behavior in the market place, has recently issued a policy statement addressing various employment disparities faced by gig workers, including restrictive covenants a/k/a “non-compete restraints.”
According to the FTC:
Restrictive contract terms may constitute unfair or deceptive acts and practices in violation of Section 5 of the FTC Act if they unfairly harm workers, render a gig company’s representations misleading, or prevent fair competition for workers.
Federal Trade Commission, Policy Statement on Enforcement Relate to Gig Work (2022)
The FTC has previously used its authority to prohibit certain one-sided clauses in credit contracts, stop abusive use of a one-sided clause allowing a financing entity to obtain uncontested judgments against small businesses, prevent contractual clauses suppressing negative consumer reviews, and invalidate illusory choice-of-law and venue-selection clauses that, in very fine print, left the forum state undetermined. The agency has now indicated that it will scrutinize potentially unfair non-compete restraints in gig workers’ agreements.
Specifically, the FTC stated:
The Commission will continue to investigate the effects on workers and competition of any non-compete clauses in the gig economy. Non-compete provisions may undermine free and fair labor markets by restricting workers’ ability to obtain competitive offers for their services from existing companies, resulting in lower wages and degraded working conditions.62 These provisions may also raise barriers to entry for new companies. Such provisions may violate Section 1 of the Sherman Act64 and the FTC Act’s prohibition on unfair methods of competition.65 The Commission will also investigate contractual limitations, such as liquidated damages clauses66 or nondisclosure agreements,67 that may be excessive or overbroad and effectively operate as non-compete provisions. Moreover, the Commission recognizes that companies may be able to effectuate the same harmful results through imposing a variety of other restraints that restrict worker mobility.
Federal Trade Commission, Policy Statement on Enforcement Relate to Gig Work (2022)
While the FTC is signaling that it will focus more on unfair labor provisions in gig workers’ employment agreements, including non-compete and no-poach restraints, the courts in Texas have not definitively shut down the enforcement of non-compete restraints in independent contractor agreements.
CONCLUSION: Employers should be careful in using non-compete restraints in their independent contractor agreements as an overly aggressive use of such restraints may help workers establish misclassification violation under the Fair Labor Standards Act. At the same time, independent contractors should not assume that any non-compete restraints in their agreements with their employers are not enforceable in Texas. When in doubt, both employers and employees should consult with an employment attorney.
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.