The Clause That's Quietly Making Your Contractor Look Like an Employee

If your startup's contractor paperwork came from a template site, an AI assistant, or a former employer's handbook, this is worth four minutes.

Check your Independent Contractor Agreement; Does it have a non-compete?

A few weeks ago, I was reviewing contractor onboarding documents for a tech startup. The company had done what a lot of businesses do: it had a solid independent contractor agreement, then layered on the usual operational paperwork, an NDA, data security requirements, onboarding policies, and a few standard acknowledgments.

Most of it looked routine.

Then I got to one provision that didn't.

The company clearly intended these workers to be independent contractors. Its contractor agreement said so. But elsewhere in the onboarding paperwork, it had imposed a level of control that pointed in the opposite direction: a three-year non-compete, broad enough to bar a contractor from working anywhere near the industry, quietly carried over from what looked like an old employee handbook.

That is an easy mistake to make.

Businesses tend to focus on the independent contractor agreement when they think about worker classification. But regulators and courts are not limited to the document labeled "Independent Contractor Agreement." They can look at how the relationship actually works, including the policies, procedures, restrictions, and day-to-day controls imposed outside the contract.

One stray provision probably will not turn a contractor into an employee by itself. But it can become evidence of exactly the kind of control that makes an independent contractor classification harder to defend.

Here's why this shows up so often at companies under twenty people. Nobody sat down and decided to impose a three-year non-compete on a part-time contractor. What happened is that someone needed paperwork fast, pulled a document from a previous job or a template site, or asked an AI assistant to draft one, changed the company name, and shipped it. Then the next hire got the same packet. Then the one after that. By the time anyone reads it closely, six people have signed it, and the provision that made sense for a full-time employee at a company with two hundred staff is sitting in the file of a designer who works eight hours a month.

The AI route deserves its own note, because it's now the most common one and it fails in a specific way. Ask a language model for a contractor agreement and it will give you something clean, readable, and organized. It will also give you the most statistically common version of that document, and the most common contractor agreements floating around the internet are lightly edited employee agreements. The model isn't making an error. It's faithfully reproducing the same mistake everyone else already made, which is exactly the mistake this article is about.

If you have contractors and you can't remember who drafted the agreement they signed, you're in the group this is written for.

Why This Clause Backfires on the Company That Wrote the Independent Contractor Agreement

Here's what surprised the founders I was working with when I walked them through it: the risk in that non-compete ran toward them, the company that wrote it, not just the contractor being asked to sign it.

Independent contractor status isn't just a label you put at the top of a document. Courts and regulators look at the actual relationship, and one of the things they look at closely is control. Can this person work for whoever they want? Do they run their own business, set their own hours, take on other clients? Or does the company treat them like staff in every way except the paycheck?

A broad non-compete cuts hard against contractor status. It tells a judge, or a state unemployment office, or the IRS, that the company believes it has the right to control where this person works after the relationship ends, which is exactly the kind of control employers exercise over employees, not the kind clients exercise over contractors they hire for a project. If that classification ever gets challenged, whether because of a tax audit, an unemployment claim, or a dispute over the contract itself, the non-compete becomes evidence used against the company, not for it. Misclassification findings come with back payroll taxes, unpaid overtime, workers' comp premiums, and penalties that dwarf whatever the non-compete was supposed to protect.

It gets worse when you look at how most of these agreements are actually structured. Ask a contractor how many hours a month they're guaranteed, and the honest answer is usually zero. No minimum commitment, no guaranteed retainer, work requested as needed and nothing promised in between. That's a completely normal way to structure a contractor relationship, and it's actually one of the factors that supports genuine independent contractor status, because it shows the person isn't economically dependent on you the way an employee would be.

But that's exactly what makes the non-compete sitting next to it so hard to defend. You can't credibly tell a regulator "we don't control this person, they're free to work for whomever they want, we don't even guarantee them any hours" in one breath, and then tell the contractor "you can't work for anyone in our industry for three years" in the next. Those two positions cancel each other out, and a court or agency evaluating your relationship will notice.

Pennsylvania Law Doesn't Save You Here, Either

Pennsylvania courts will enforce a non-compete against a contractor, but they don't do it lightly. Going back to the Pennsylvania Supreme Court's 1976 decision in Piercing Pagoda v. Hoffner, a restrictive covenant has to be tied to a legitimate relationship, backed by real consideration, and reasonably limited in time and geography. Courts have extended that framework to contractor agreements, but only where the business justification actually looks like the kind you'd see in employment: protecting client relationships or facilities the company built, not just a general desire to keep someone from competing.

A Pennsylvania appellate court upheld a non-compete for a personal trainer who'd built his book of business using his employer's facility and client base. That's a fact pattern with a real justification behind it. Compare that to a federal appellate court, applying a similar reasonableness standard, that struck down a non-compete against a contractor who developed his own customers and gained no real advantage from the company's training or confidential information. That's the more common situation for consultants, freelancers, and specialized service providers, people who bring their own expertise to the table and build their own client relationships as they go. A three-year, industry-wide restriction doesn't hold up well against someone who never had guaranteed hours, a guaranteed rate, or any of the security that would normally justify asking for that kind of loyalty.

The Two-Hour Problem

Here's the version of this that should really give business owners pause: nothing in a typical ad hoc contractor agreement stops a company from engaging someone for a single two-hour project and walking away having locked up three years of that person's availability to work in their field. Pay for two hours, own three years. Say it out loud and it sounds like a bad deal even to the company that wrote it.

That imbalance isn't just bad optics. It's a real legal problem. Recall the second requirement from Piercing Pagoda: the restriction has to be supported by adequate consideration. Courts weigh what someone actually received against what they're being asked to give up. A contractor with no guaranteed hours, no guaranteed rate, and no guaranteed term has very little to point to as consideration for a multi-year restriction on their livelihood. The more lopsided that trade looks, the easier it is for a court to conclude the covenant simply isn't supported by anything real, non-compete included.

The FTC Chapter Isn't Over, Even Though the Ban Is

If you've heard that non-competes got banned nationally and assumed the issue went away, it's worth an update. The FTC's 2024 rule that would have banned nearly all non-competes nationwide is dead. It was blocked in court, and the agency formally withdrew it from the federal register in early 2026. But the FTC didn't walk away from the issue. It's now pursuing non-competes case by case under its general authority to police unfair competition, and it's been active: a national pest control company was ordered to stop enforcing blanket non-competes against its workforce, and the agency has sent warning letters to employers in healthcare and staffing over agreements it considers overbroad. Meanwhile, states have kept legislating in this space on their own, several now ban or sharply restrict non-competes outright. The message for any business owner is the same one it's always been, just louder: broad, one-size-fits-all restrictive covenants draw exactly the kind of attention you don't want, from regulators and from anyone helping your contractor read the fine print.

What Actually Protects You

None of this means you have to hand over your business's protection along with a contractor's independence. You just have to reach for the right tool.

If what you're actually worried about is a contractor walking off with your client list, a narrowly drafted non-solicitation clause does that job without trying to control where they work. If you're worried about them exploiting confidential information, that's what a well-built confidentiality provision is for, and it's the one restriction that holds up almost everywhere, because it protects information rather than restricting a person's livelihood.

If your concern is a contractor moonlighting for a direct competitor while actively working on your project, a narrow conflict-of-interest clause tied to the active engagement handles that, without following them around for years after the relationship ends. And if the real goal is making sure the work product they create for you is actually yours, that's a properly scoped intellectual property assignment, one that covers what they build for you specifically, not their general expertise or the tools they walk in the door with.

Put those four pieces together and you've protected everything a non-compete was supposed to protect, without the piece that actually undermines your own contractor classification.

Worth a Conversation

Most of the misclassification problems I find took about ten minutes to spot and would have taken about twenty minutes to prevent. They're almost never the result of bad judgment. They're the result of paperwork nobody has read end to end since the day it was first copied.

If you're not sure what your contractors actually signed, that's worth a short conversation. You can schedule a call or video consult on my site, email, or call and we'll find a time.

I work with early-stage companies across Pennsylvania, and most of this work happens remotely, so where you're based doesn't change much. Founders tend to reach out at three moments: before onboarding the next contractor, when an investor or acquirer starts asking about IP chain of title, or right after a contractor pushes back on something in the packet. The first one is considerably cheaper than the other two.

This post is for general informational purposes and isn't legal advice for any specific situation. Non-compete and independent contractor law varies by state and depends heavily on the facts of your business. Contacting the firm does not by itself create an attorney-client relationship; that relationship is formed only by a signed engagement agreement.

H. Robert Fischer, Esq., CIPP/US Fischer Legal Services, PLLC Business, IP, and privacy counsel for Pennsylvania companies