You hire an employee and pay her a salary. In order to earn more money at your business, she voluntarily chooses to transition to “independent contractor” status. Question: Does that transition trigger the non-compete agreement executed at the time the employee started at the company? Broadly interpreting the employer/employee employment contract, a Florida Appellate Court recently held that the employer could argue that the transition did not negatively affect the otherwise valid restriction. This employer friendly decision ‒ a reversal of the trial court’s findings ‒ involved the following basic facts:
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Employee signed a seemingly valid non-compete agreement restricting future employment for a 2 year period within a 100 mile radius of “any store, office, or facility of the company.”
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During training, the former employee held a salaried position;
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Once trained, the employee chose to act as an “independent contractor” allowing her to earn a commission and subjecting her to payments for her share of the business’s rent, supplies, utilities and insurance. She was also responsible to pay taxes on her commissions;
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The agreement contained the clause “Any subsequent change or changes in my duties, salary or compensation, will not affect the validity or scope of this Agreement . . . ;”
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More than two years after her transition to “independent contractor,” the former employee started a competing business approximately 5 miles from the company’s offices.
In the employer’s suit to enforce its non-compete agreement it cited Florida Statute §542.335(1)(b) claiming that it had a legitimate business interest justifying the restrictive covenant. The motion properly alleged that the restrictive covenants were reasonably necessary to protect the company’s established business interests pursuant to Florida Statute §542.335(1)(c). Also included in the employer’s motion were the 4 elements required for a temporary injunction (irreparable harm, lack of an adequate remedy at law, substantial likelihood of success on the merits, and a public interest favoring entry of the injunction.)
In response, the former employee argued that even if valid, the 2 year restrictive period began to run when the former employee chose to become an independent contractor and was no longer salaried. See Anarkali Boutique, Inc. v. Ortiz (Fla. 4th DCA 2012).
The appellate court reversed noting that Florida courts are required to construe a contract as a whole and to broadly give effect to every provision of the agreement. Using that more broad interpretation of the contract, the appellate court held that the change in the former employee’s status from an employee to an independent contractor “did not cause the 2 year non-compete period to begin running. Instead, the two year non-compete period did not begin running until the worker left the company.” Id. Ultimately the Anarkali Boutique Court remanded the matter to allow the trial court to make factual findings as to whether or not the employer had proven the requirements set forth in Florida Statute §542.335. Nonetheless, this case was a clear victory for the employer whose decision to allow employees to earn a larger salary and build a client base was not manipulated to undermine an otherwise duly negotiated restrictive covenant.
Practitioner’s Note: Although the employer was able to pursue its arguments upholding its restrictive covenant, this case demonstrates another example of the importance of tailoring your non-compete agreement to the specific situation your business faces. Had the non-compete agreement in this case ‒ where the employer knew in advance that it would offer salaried employees an opportunity to work on a commission-only basis ‒ it could have included in its non-compete agreement language broad enough to specifically address that situation. Had the contract contained that language, the employer may have more easily retained its customers and would have, almost assuredly, limited the costs of litigation and enforcement.
If you would like additional information on trade secrets law, please contact one of the Burr & Forman Non-Compete & Trade Secrets team members.
