Full Disclosure

In recent discussions with several people, I’ve noticed a trend in certain small businesses. Since there is significant amounts of paperwork and filings associated with hiring an employee, some companies choose to hire their workers as contractors, thereby reducing the obligations between the two parties. Additionally, it allows for more fluctuation in workload, while achieving consistent work by working with the same people all the time.

One of the side effects of this, however, is slightly problematic. Because the contractors are in the same business as their clients, providing a similar set of services, the contractors will want to pursue their own clients. Normally, this would not be an issue, since a standard non-compete clause would protect the employer from losing their own clients to their workers. Here, however, that may not suffice.

Any time the contractor brings on another client, a question must be answered as to whose client that person is. Does is belong to the contractor, since they operate independently of the employer, or does it belong to the company to which they are contracted to?

The advice below is a suggestion, and is not intended to be taken as legal advice. Please consult a lawyer before implementing any of the suggestions below.

One strategy I’ve seen implemented successfully is to create a limit on the size of a client the contractor can take on, and request full disclosure. For example, a company that builds large websites might allow its employees to take on projects under $2000 because they would not pursue such clients in any case. Larger than that and there may be a conflict of interest in addition to creating a distraction while the contractor is supposed to be working for the company.

The catch here is the disclosure – by having employees report all business they are doing on the side, it creates a legitmacy to their side business. At the same time, however, many employees may be reluctant to hand over their project list like that.

The second part, therefore, is in regard to when the employee does in fact bring in a client. Since there is a referral here, it should be treated as such. There should be a known rate for referring a client – either a percentage of the project, or a flat fee on a schedule based on project size.

Whatever the case may be, if you find your employees working on side projects behind your back, beware. Make sure you have a known policy in place that’s fair to both you and the employees, and that it is documented and enforced.