Q: A very productive independent contractor has approached my agency and proposed to switch from her host agency to my agency. She has shown me her existing independent contractor agreement. It is 24 pages long, and it has all kinds of horrible restrictions that are obviously designed to keep her from ever switching hosts. I know that no court would uphold these kinds of restrictions if she were an employee, but do the same rules apply to independent contractors? If not, what advice would you give us to avoid liability if she comes over to us and brings her clients?
A: Courts in every state disfavor restrictive covenants that keep employees from competing after employment. However, those cases do not apply to independent contractors (ICs).
The host-IC relationship is a business-to-business relationship, so courts presume that the arrangement was freely negotiated at arm's length. So the IC should not count on a court's help in striking down any of the restrictions.
The exception would be the case where, although labeled an IC, she is really an employee because the host controls when, where and how she works. In that case, it is much more likely that a court would reclassify the relationship as one of employment, in which case the rules against restrictive covenants might apply.
By the way, one common misunderstanding in the travel industry is that, if the IRS or a state government agency would reclassify the relationship, it follows that a court would, too. That's not the case, as courts generally decide reclassification cases based on their own precedents, not the guidelines of government agencies.
Another common misunderstanding is that clients brought in by an IC, either at the beginning or during the term of the relationship, automatically belong to the IC, regardless of what the contract provides. In fact, an IC contract can stipulate that clients brought in by the IC belong to the host, or that those clients' bookings may not be moved, or both.
Under the 24-page contract, if the IC were simply to walk away and get suppliers to move all pending bookings, or if the IC were to persuade clients to cancel and rebook with your agency, the IC would breach several provisions in the agreement. If your agency encouraged her to breach, then the host could successfully sue your agency for inducing breach of contract.
Your best bet is to figure out how to avoid having the IC breach her contract in the first place by carefully devising a strategy to avoid breach, or if this is not possible, to negotiate the IC's way out of the contract.
For example, if the contract states that no compensation is earned unless the IC agreement is in effect at the time the host's commission is received, then the IC must assume that she will never get any compensation on future travel after she leaves. If this is not acceptable to the IC -- which it generally isn't -- you could try to help the IC negotiate a compromise.
You could have a three-party agreement under which, if the old host agrees to cooperate in transferring the bookings and releasing any ownership rights to the client, your agency would agree to remit to the old host what would have been the old host's share of the commission.
To be able to negotiate such an arrangement, make sure that the IC is not already breaching her contract when you approach the old host. In addition, don't have the IC sign your agency's IC agreement until the negotiations are finished and a settlement agreement has been signed.