Much has been written about misclassification of employees as independent contractors. Discussion often focuses on the economic consequences of misclassification, such as the IRS concluding that it has been deprived of revenue. For instance, the Small Business Administration says that proper classification matters because it “affects how you withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment taxes.” In a recent decision, a panel of judges from the United States Court of Appeals for the Third Circuit found one more reason it matters: companies may not be able to enforce restrictive covenants against individuals misclassified as independent contractors.

In Figeuroa v. Precision Surgical, Inc., the Third Circuit Panel upheld a district court decision denying a preliminary injunction. The district court declined to issue a preliminary injunction enforcing a restrictive covenant because it found that Precision Surgical had breached its Independent Contractor Agreement (“ICA”) with Figueroa by treating him as an employee, instead of “according him the flexibility to be accorded an independent contractor.”