In Virginia, independent contractors can be held to noncompete agreements to the same extent as regular employees. But beware. A Fairfax County Circuit Court judge decided last month that all bets are off if the “independent contractor” should really have been classified as an employee. Although the Virginia Supreme Court has not yet spoken on the subject, Judge John M. Tran crafted a lengthy, well-reasoned opinion in Reading and Language Learning Center v. Sturgill holding that misclassifying employees as independent contractors violates Virginia public policy and is grounds for voiding the contract–including its noncompete and nonsolicitation provisions–even if the misclassification is unintentional. In other words, reasoned Judge Tran, independent contractors will only be bound by noncompete agreements if they have been properly classified as independent contractors.
Reading and Language Learning Center (“RLLC”) is a speech therapy practice that provides services to people with speech, language, or reading disorders. In 2014, Charlotte Sturgill was a recent graduate of a master’s program in speech-language pathology. To obtain her license and certification, Sturgill was required to complete a supervised clinical fellowship, which she arranged to do with RLLC. RLLC hired her with an agreement titled “Agreement between Private Practitioner and Independent Practitioner” which classified Sturgill as an independent contractor and contained the following non-compete clause:
RLLC and the Consultant agree not to employ any contracted employee or contract with any current client of the Other for a period of two (2) years after the expiration of the contract between RLLC and the Consultant.
Under a subcontract RLLC had with a company that provides special education assessments and intervention services to public charter schools, RLLC assigned Sturgill to provide services at Ingenuity Prep Public Charter School in D.C. during the 2014-2015 school year. When the contract with Ingenuity ended, Ingenuity offered Sturgill a position as an in-house speech-language pathologist. When she notified RLLC of her plans to accept the position, RLLC terminated her and sued her for alleged violation of the noncompete and for tortiously interfering with RLLC’s business expectancy interests.
Those familiar with noncompete law in Virginia will recognize right off the bat that the noncompete clause at issue here is problematic because it violates the so-called “janitor test.” Restrictive covenants that prohibit employees from working in any capacity for a competitor are overbroad and unenforceable, as they are broader than necessary to protect the employer’s legitimate business interests. As one circuit court put it, “an agreement so facially broad as to prevent an auto detailer from tendering his services to clients of his former employer as a concert promoter, fishing guide, sous chef, or plumber, inter alia, cannot be upheld.” (See Integrity Auto Specialists, Inc. v. Meyer, 83 Va. Cir. 119, 125 (Chesapeake 2011)).
Setting aside the issue of whether taking an in-house position with Ingenuity Prep amounted to “contracting” within the meaning of the noncompete (it didn’t, the court held), the language used was clearly overbroad because it purported to restrict all contracting of any sort and was not limited to speech pathology services. As the court observed, “she cannot sell them furniture, provide them with cleaning services, or plan any school functions.”
RLLC’s response was, in essence, “Let’s be realistic. Sturgill would not have taken a position as a janitor or fishing guide, and we would not have cared if she did. Obviously, our concern was only with her taking a position that actively competes with us. Everybody knows that.” (My words, not theirs). The court was having none of it. By its very nature, the janitor test is somewhat silly in that is hypothesizes an absurd result. What matters, the court held, is what the language of the contract actually says, not what the employer or its employees assume it to mean. “Ultimately,” Judge Tran wrote, “an employer cannot sustain an in terrorem effect on its workers simply because it had succeeded to do so in the past.”
Followers of this blog may recall my discussion a few years ago of the Assurance Data case, in which the Virginia Supreme Court held that noncompete cases should not be dismissed on demurrer where an issue of fact remains as to the reasonableness of the restriction. While RLLC v. Sturgill was decided after an evidentiary hearing on a plea in bar, the court commented that an evidentiary hearing was not really necessary in this particular case because RLLC had failed to proffer a legitimate business interest supporting the restriction against all contracting, arguing only that “schools often try to steal their therapists.” With no other business interest at issue, and in light of the broad scope of the noncompete language, Judge Tran noted that he would have held the agreement overly broad and unenforceable on its face, even without an evidentiary hearing.
What’s more interesting about this opinion to me is the next section of the opinion, in which the court held the noncompete agreement was void for violating Virginia public policy. Outside of the employment-at-will context, courts don’t often invalidate contracts for illegality or violation of public policy. The novel argument made by Sturgill was that the “Agreement between Private Practitioner and Independent Practitioner” was invalid because it mischaracterized her as an independent contractor rather than an employee. After careful consideration, the court decided the agreement did misclassify the nature of the employment relationship, and ultimately agreed that for this reason, the noncompete provision could not be enforced against her.
Public policy is hard to define but generally refers to the principle that no one can lawfully do that which has a tendency to be injurious to the public welfare. In the wrongful-termination context, the Virginia Supreme Court has held that while all statutes reflect public policy to some extent, terminating an employee in violation of the policy underlying any one of them will not automatically support a cause of action for wrongful discharge. (See City of Virginia Beach v. Harris, 259 Va. 220, 232 (2000)). This was not a wrongful-termination claim, however, so the court was not limited to consideration of the few statutes the violation of which would support a claim for wrongful termination.
The court instead looked to the advantages to be unjustly gained by employers from misclassifying their employees and the resulting harm to the public. Numerous rights and obligations of employers and their employees are governed by state and federal statutes that don’t apply to independent contractors. Thus, by misclassifying employees as independent contractors, employers avoid having to pay holiday, vacation and overtime pay; they avoid having to contribute towards Social Security and Medicare; they don’t have to pay unemployment and workers’ compensation insurance; and they avoid having to withhold income tax. The employee misses out on valuable benefits, and the government loses tax and insurance revenues. On top of all this, the employer gets an unfair competitive advantage over its competitors who play by the rules.
Here, RLLC went out of its way to state expressly that it had no intention of withholding taxes or paying “FICA, FUTA, self-employment, income and similar taxes,” which the court found to amount to a deflection of responsibility that violated Virginia law.
After analyzing the nature of Sturgill’s position, the requirements placed upon her work, and the amount of supervision she was subject to, the court reached the conclusion that Sturgill was, in fact, an employee of RLLC, and the agreement containing the noncompete restriction was void in light of the fact it misclassified her as an independent contractor. Judge Tran reasoned that where an employer “deprives a worker of statutory rights, while reaping benefits to the detriment of the entire workforce and the government,” the situation is injurious to the public welfare, regardless of whether the misclassification was willful or in bad faith.