Non-Compete Clause for a W2 Contract Worker

[SChinFChin]

Just to add a few comments. I agree with all the others here.

My sick parents hired attendents the last few years, through an agency. Initially, they paid the agency $11.00/hour, and found out the attendents get paid around $7.00/hour, and then SS and taxes withheld. Currently the rate to the agency is $14/hour with the attendents making $10/hour.

Some years back, in the IT field, I was a project manager for an SAP implementation, where we paid the contractor around $100/hour to $150/hour, and found the programmers were paid around $65/hour.

Around the same time, I was talking to an IBM mainframe programmer when the agency bills the client around $40/hour, and pays him around $25.00/hour.

From what I see, what agencies charge clients, compared to what they pay the temp workers is around the range of what your agency bills, relative to what you are being paid. This I see from low paid attendents to highly paid SAP programmers.

What about your contract restrictions?? My parents went through several attendents in the last several years. For the first three, they all asked my parents to drop the agency and pay them direct the very first month or two they got there. What is boils down to is it's better getting paid $14/hour (in some cases off the books) compared to getting paid $10/hour, and then having to pay taxes on it. Apparently, they look at their temp agency as a "free booking" agency where they get a client lead, drop the agency like a rock, and then work direct for the client.

So, agencies got smart and protect themselves with contracts. It's true, it's hard to enforce. I know of cases where temp workers initially coming through agencies then work directly for the client, is not found out at all. But as others have pointed out, both the worker and the client can be sued.

How valuable is an agency??

I spoke with an SAP programmer and he tells me that he makes $10,000/month, and I know and he knows we got billed for around $15,000/month. Why didn't he go it alone?? He tells me that when he was making $15,000/month direct, he'll have a project for 6 months, then spend another 6 months trying to land another project.

With this agency, he's working day after day, month after month, year after year, and they keep him busy all the time. He makes more at $10,000/month, working 12 months of the year, much better than making $15,000/month, and only working 6 months.

And how about low paid attendents.

We did look into paying them on the books at one time. But by the time we got hold of payroll services, buying UI, WC, and general liability insurance, it's just simpler to pay them via an agency paying a few dollars extra. The big advantage too is if the attendent get sick, or goes on vacation, the agency finds another "body" for you right away.

Which why agencies are referred to as "body shops".

People don't go through temp agencies to cheat on taxes. The agencies cover the UI, WC, and in the case of the SAP project, we don't have a layer of insanely high paid people around when the project hits a low point. I was one of the company systems analysts, though I got paid well, but I would be resentful if someone got on the payroll at $150 hour, which is the going rate, and I got paid only half as much.

[cbg]

No, I don't think you're going to be convinced by any answer that does not tell you that you can go to work directly for the client company tomorrow and get paid $40 an hour, with no repercussions. I don't think any answer that does not include the words, yes, you are absolutely right and the staffing agency is cheating you big-time, will make you happy.

Since I cannot in honesty give you the answers that will satisfy you, I'm bowing out. Please feel free to pay an attorney to tell you what jk and I have told you for free.

Have a nice day.

[sane]

No, I don't think you're going to be convinced by any answer that does not tell you that you can go to work directly for the client company tomorrow and get paid $40 an hour, with no repercussions. I don't think any answer that does not include the words, yes, you are absolutely right and the staffing agency is cheating you big-time, will make you happy.

Since I cannot in honesty give you the answers that will satisfy you, I'm bowing out. Please feel free to pay an attorney to tell you what jk and I have told you for free.

Have a nice day.

Actually, I had sent my question to a paid lawyer online and I got this response from him:
"Yes they cannot extend it beyond the original one year term. You can work for the employer after you leave them. In our experience with staffing agencies they threaten action and complain but in my employment practice Ameritemps and some of the smaller agencies have never once filed suit against one of their temps for violation of the non compete clause. They have already gone beyond the time and they cannot unilaterally extend it forever. You could even argue that the project has finished and you are free to work for the employer without penalty."


I just wanted another real educated opinion from a public forum to confirm, but like what they say you get what you pay for... Even the terms you used in your advice tell me you have no any professional experience in law and you have repeatedly failed to clarify whether you are an attorney or not. Your responses are based on personal opinion on what you perceive as fair or not, but obviously not on a knowledge of the legal system.

I thought I'd find lawyers on this forum, but all I found is job hunters who like the fact that they make money off others hard work and will do anything to make it seem moral. Well, I've given my staffing agency $23,000 net income so far, I think that's more than enough given what they have done for me which is basically nothing. I'm not giving them free money anymore.

For anyone in my same situation who has read this post, please don't get discouraged by what you read here, its not remotely close to the real legal advice you would get from a real paid lawyer, and I'm speaking from experience I had talked to a lawyer and the contrast of his advice and the responses I got here is appalling. Never try to save money by getting an advice here. Talk to a real lawyer!


EDIT:
SChinFChin, my agency does not give me anything. I've never even seen any of their employees faces. All work was done over email and phone. They arranged for the interview , told me to go make the interview and that was it. I get nothing from them. Also, I wouldn't have thought of doing that in my first 6 - 12 months. But I've been working for so long and I really don't see anything in return. I'm not trying to trick the staffing agency, I've been working for 14 months and generating a good income for them and they can't even offer me a reduced medical coverage rate ?!

[Mr. Knowitall]

There are two different concepts at play here - the notion of a "W2 Contractor" who works directly for the employer, and that of a worker who is employed by a contracting agency and assigned to work for one of the contracting agency's clients. In the former situation you're employed by the company for which you're performing services, they withhold taxes in a manner akin to what they would do if you were an employee, but they otherwise treat you like an independent contractor and issue you a 1099 at the end of the year. In the latter context you're an employee of the agency that hired you, not of the company for which you're performing services. I suppose it's possible that you're in a hybrid situation - that the company that hires and pays you did so on the basis of a W2 contract, and that you received a 1099 at the start of 2009 (not a W2) and just got (or are about to get) another for 2010, but I suspect you're actually their employee. Could you clarify?

Here's the thing: If you're working for the contracting agency, you don't get to redefine the concept of a "project" based upon what you're doing for their client. Odds are very high that your contract with the agency defines a project as any work you do during your assignment to that particular client. The project is the assignment. Is that in fact what your contract says? If so, as long as you continue to be assigned to the clenient, it's all part of the same project.

Nobody can "unilaterally extend" your contract - if you don't want to continue working under the contract you're free to quit. If you continue to work under a contract beyond the initially projected completion date, you've consented to that - and the extension is by virtue of your consent. If better jobs were on the horizon throughout the past year, nothing prevented you from quitting to take one.

Here's the deal: when an agency provides employees to a company, both the employee and the agency sign contracts. The specifics can vary by state, but the employee typically agrees that he can't work for the client to which he's assigned for a period of time after the contract ends. The employer agrees not to recruit workers that are sent to them by the agency, but that they can hire an assigned worker if they pay the agency a fee. If the fee is paid, the employee is released from the noncompete and everybody's happy. If it's not paid, the agency can do a number of things including declaring a breach of contract and pulling its other workers off off the client's site, suing for damages, attempting to bill for the amount due, suing the employee under the noncompete and seeking an injunction against their working for the client.... Their approach is going to depend upon the full context of the case. Your notion that the agency can't sue their client for breaching its contract, or for enticing an employee to breach is contract, is not correct.

In terms of this,

"Yes they cannot extend it beyond the original one year term. You can work for the employer after you leave them. In our experience with staffing agencies they threaten action and complain but in my employment practice Ameritemps and some of the smaller agencies have never once filed suit against one of their temps for violation of the non compete clause. They have already gone beyond the time and they cannot unilaterally extend it forever. You could even argue that the project has finished and you are free to work for the employer without penalty."

The first alarm bell that this isn't great advice somes in the first sentence. The initial term was not one year, but was just short of five months. Second, yes, they can extend beyond that initial term per the language you've quoted.

The second sentence is problematic - it boils down to, "They could sue, but in my experience that's unlikely." That's anything but telling you that they don't have a binding contract or that they can't sue - she's telling you to roll the dice.

The third sentence is as problematic as the first. They've already gone beyond what "time"? She hasn't read the full contract, and you didn't give us the opportunity either, but from what you've posted the "time" appears to be the duration of your assignment to the client firm. If there's language in the contract that clarifies what "completion of the project" means, by all means share it. Or hire a lawyer to actually review the full contract.

The notion of "they cannot unilaterally extend it forever" is also, as I previously indicated, silly. You are not a slave - if you don't want to extend your work under the contract, you can quit. If you choose to continue working, you're consenting to the extension.

The last sentence seems pretty rash - it assumes that you or the client get to define "the project". Again, read your contract and you will likely find that is not the case - you will likely find that you are assigned for the duration of "the project" and that any declaration that "the project" has ended would conclude the contract and require the client to lease you through a new contract.

So, what does the contract actually say?

[pm6]

I have worked as a contractor in the IT field for 14 years now, in a variety of roles, and have even been a permanent employee of a staffing agency for a while. So, I feel qualified to comment on this topic, and I have great interest in it. For purposes of this discussion, I'll speak as if the contractor is being paid as a W-2 employee of the staffing firm.

There are industry norms for the spread between what the contractor is paid and what the staffing agency bills. The agency has to pay sales commission, pay administrative staff salaries, carry liability insurance, and pay 1/2 of the Social Security and Medicare tax. They probably won't cover any medical insurance or offer any paid time off unless the contractor accepts a salaried position.

Here's the problem - the staffing agency does not usually reveal the billing rate to the contractor, and is free to make the spread as large as they can. What't the problem here? It is twofold - if either the contractor or the client finds out the spread is unreasonably large, they will feel cheated; either underpaid or overcharged. It can't be a good thing for the staffing company, but some are greedy and more interested in todays paycheck than in building long term relationships with contractors or clients.

Also, the need to pay any sales commission diminishes as time goes by. A salesman makes a sale and the commission is based on a 3 to 6 month term. If the contractor stays a long time (more than 6 months) the staffing firm pockets even more profit because they are no longer paying a perhaps 20% commission rate on the spread.

About non-competes - yes, all the staffing companies have them, and no, it is very, very rare that one will be enforced. First, it depends on the location if they are even enforceable. If overly broad (e.g. you cannot work for any company in an industry for a year) they are not enforceable. Even when they are ironclad and valid in court, a staffing company will be VERY hesitant to enforce it.

Why? One word: reputation. If they sue you, they implicitly sue the client. They will never do business with that client again, ever. Word could spread in the business community that staffing agency X sued a client's contractor even after the client paid them a generous spread for over a year. Result? Staffing agency X has a much harder time finding business.

My advice is to be upfront with the client you are working for, and have the client express an interest in defending you from any ill-advised legal action the staffing agency may consider. It would take a very greedy agency owner and a very foolhardy business mind to pursue it. Good luck to you!

[SChinFChin]

EDIT:
SChinFChin, my agency does not give me anything. I've never even seen any of their employees faces. All work was done over email and phone. They arranged for the interview , told me to go make the interview and that was it. I get nothing from them. Also, I wouldn't have thought of doing that in my first 6 - 12 months. But I've been working for so long and I really don't see anything in return. I'm not trying to trick the staffing agency, I've been working for 14 months and generating a good income for them and they can't even offer me a reduced medical coverage rate ?!

Other points I might point out is the OP is only looking at the spread between what the client pays, and what he gets paid from the standpoint of the contractor, and NOT from the standpoint of the client. As my parents hired home attendents through agencies, and I as project manager IT professionals, I have some understanding of the client's viewpoint.

My parents DO UNDERSTAND that the attendent is only paid $10.00/hour, and the agency is paid $14.00, but the $4.00 increment they see is for:

- Liabilty protection in the event the attendent injures them or causes damage.
- A source to obtain additional types of professional help, such as nurses, and social workers.
- Backup attendants in the case the attendent goes on vacation, or gets sick.

The company I work for on the IT project uses agencies because:

- They beleived they have someone to turn to or blame if a project goes terribly wrong. One company in particular hired an IT guy directly, and after the project was done, was left in a lurch because the programmer moved back to his own country. If it was through an agency, they could've asked for additional resources.

- Some professionals rates are far higher than the pay of people working in the company, and companies want to keep these people off the payroll, else the pay scales get all out of line.

The OP is only looking at what the agency earns in relation to HIS NEEDS, but fails to realize the need of the client and what the client itself is paying for.

When my parents knowingly pay the agency MORE than what the agency pays the attendent, they couldn't care less if the agency NEVER SAW the attendent, or how long the attendent worked for the agency, or if their contact is by phone or email. They are paying for the additional support the agency is able to provide, in providing other services and insurance.

Putting it differently, they're paying the attendent $10/hour for shopping, cooking and cleaning, and the additional $4.00 an hour to the agency for:

- Company portion of FICA and medicare
- Bookkeeping services, the agency handles all the employer part of the taxes
- Insurance coverage in the event the attendent causes damage
- Determine if they need nursing/social services and provides them.
- Maintaining a pool of backup attendents

These services are for the needs of the client and the client only and the contractor attendents only concern is whether the $10/hour is in line with what SHE DOES, and whether my parents OVERPAID the $4/hour for additinal services is NONE OF THEIR BUSINESS. These needs DO NOT GO AWAY no matter how long the attendent works for the agency, or if the agency never spoke to the attendent.

The same issues applys to IT contractors.

Of course the attendent or IT contractor does not know or care for any of this, their only beef is the agency UNFAIRLY made money off of them.

UPDATE

My parents negoitiated the rate down to $13/hour, from the stated $14/hour, with the attendent paid the same. The agency agreed to do their part of the service for $3.00hour. This is strictly a agency/client issue and negotiation, with nothing to do with the attendent.