Will treating an individual as an employee rather than an independent contractor – when the parties have agreed to an independent contractor arrangement – preclude enforcement of a non-compete agreement? The Third Circuit Court of Appeals recently answered this question affirmatively, affirming a District Court Order denying an employer’s application for a preliminary injunction.

In Figueroa v. Precision Surgical, Inc., No. 10-4449 (April 12, 2011), Precision and Joseph Figueroa entered into an independent contractor agreement which contained a number of restrictive covenants, including a non-competition provision for a twenty-four month period following the expiration of the agreement. When Precision moved toward treating Figueroa as an employee rather than a contractor, Figueroa balked at the new arrangement and Precision terminated the agreement. Figueroa then commenced a lawsuit against Precision alleging that the restrictive covenants were unenforceable. Precision counter-claimed for injunctive relief, asserting that Figueroa had violated the agreement by working as an independent sales representative for one of its direct competitors.

The Third Circuit affirmed the District Court’s holding that Precision could not demonstrate a substantial likelihood of prevailing on the merits because it appeared that Precision did not abide by the terms of the agreement. The District Court had concluded that Precision had likely breached the agreement by treating Figueroa as an employee, rather than providing him the flexibility of an independent contractor required by the agreement. Additionally, the District Court had found that Precision had failed to pay Figueroa commissions called for by the agreement when it made certain deductions from the commission payments. The court never analyzed the non-compete provision itself.

Although unpublished, this case reminds us that an employer’s breach of a contractual arrangement may impair its ability to enforce a restrictive covenant. What makes this case unusual, however, is that the so-called breach appeared to place the employer in compliance with the law because at first blush, it appeared that the individual was not truly an independent contractor and that the employer properly sought to treat him as an employee.