Louisiana's First Circuit Refuses To Enforce Non-compete Law Against Independent Contractor Without A Written Agreement
Louisiana’s most recent decision involving non-compete agreements may have a significant impact on businesses who maintain relatively informal relationships with their workers. In J4H, L.L.C. v. Derouen (opinion available here), the First Circuit was asked to determine whether a non-compete agreement between a Houma-based hair salon, Just 4 Him, and one of its stylists was enforceable.
The business structure of the Just 4 Him salon is not particularly unique. The salon owners reached separate verbal agreements with individual stylists concerning their schedule and how their earnings would be split with the salon. Beyond the percentage of their fee retained by the salon, stylists did not pay any additional amount to rent their chairs or stations, and the salon provided hair dryers and hair products for their use. Stylists were paid weekly and no social security or income taxes were withheld from their paychecks. From outward appearances, the stylists were considered independent contractors.
The noncompetition agreement appeared in a six-page Operating Manual that all stylists were required to sign. In addition to setting forth general procedures for the operation of the salon, the manual provided that stylists must agree not compete with Just 4 Him by opening or working at a sports- or male-themed salon in Lafourche or Terrebonne Parishes for 2 years after their termination. That’s precisely what Mrs. Derouen did when she opened a male-themed salon in Houma just a month after leaving Just 4 Him.
Like the trial court, the appellate panel had little trouble deciding that Derouen was, in fact, an independent contractor. Most telling for the court, and the basis for its decision, was a “judicial confession” from the salon’s earlier court filings that Mrs. Derouen was an independent contractor. The court correctly refused to allow Just 4 Him to change positions on that important issue.
Having established Mrs. Derouen’s employment status, the court then had to decide whether the non-compete complied with Louisiana law. Louisiana Revised Statute 23:921(C) authorizes independent contractors, “whose work is performed pursuant to a written contract,” to enter into noncompetition agreements with their employers.
Just 4 Him ran into trouble because its primary agreement with Durouen – concerning her hours and pay – was merely verbal. To avoid that problem, the salon argued the Operating Manual satisfied the statutory writing requirement. The court disagreed, however, finding that because the Operating Manual contained neither an agreement about wages nor the services Mrs. Derouen was to perform, her work could not be considered to have been performed pursuant to it for the purpose of La. R.S. 23:921(C). Ultimately, the court held that because the salon could not establish the Mrs. Derouen’s work was performed pursuant to a written contract, it did not meet the statutory requirements, and, as a result, Just 4 Him was not entitled to enforce the non-compete. Derouen was free to run her competing salon, despite having signed the non-compete with Just 4 Him.
What employers – especially those who hire workers as independent contractors – should take away from this decision is that strict adherence to the statute is a prerequisite to the enforcement of a non-compete agreement. Under La. R.S. 23:921(C), if a worker is an independent contractor – and that’s not always an easy conclusion to reach – in order for a non-compete agreement to be valid, the contractor must be working pursuant to a written agreement. Interestingly, there is no similar requirement for workers who are classified as “employees.” According to J4H, that agreement should at least specify (1) the contractor’s pay and (2) the services the contractor is expected to perform. Of course the best practice is to capture all employment agreements in writing, whether the workers are short-term independent contractors or longer-term employees. That way any future dispute over pay or benefits can be more quickly resolved, and owners can avoid unforeseen pitfalls when they attempt to enforce their non-compete agreements.