The IRS and DOL have some pretty steep penalties in store for employers who misclassify workers as independent contractors when they are actually employees. But there are peripheral legal issues involved as well. A recent court case in Pennsylvania demonstrates what can happen in litigation.
Categorization Impacts Enforceability
A company that hired an independent sales representative was denied a preliminary injunction enforcing a non-compete agreement. The federal court of appeals found that the worker was actually an employee of the company rather than an independent contractor. The covenant itself was not necessarily in violation of Pennsylvania law (although the laws in that state don’t look favorably on non-competition contracts).
However, the main sticking point for the courts was that the company had treated the sales rep as an employee. This included exerting a great deal of control over how the rep conducted business. By doing so, the company had effectively breached the agreement to the extent that it was no longer enforceable.
Another interesting point affecting the case was the timeline. The employer had the sales rep sign the agreement 6 months after he commenced work. Pennsylvania state labor laws prohibit employers from requiring employees or contractors to sign a restrictive covenant after hiring unless there is a change in the relationship such as a raise, promotion, or other incentive that would benefit the employee or contractor.
What this Means for Pennsylvania Employers
First, employers must make every effort to classify workers correctly so that agreements won’t be breached by the very nature of the employment/contracting relationship. Second, restrictive covenants should be signed during onboarding rather than being negotiated after the fact whenever possible. With automated Universal Onboarding, there is no risk of accidentally overlooking an important form, policy, or agreement during hiring.
