After freelancing for a few years, I’d seen — and signed — my fair share of employment and project contracts. And if there was a non-compete clause, I probably only gave it a brief glance. After all, when you’re just starting out as a freelancer, a current client is worth a dozen clients you don’t have yet. So why worry?
I didn’t — until an angry phone call changed my mind. The vice president of the company I’d been working for told me curtly that my new passion project was in direct competition with the company and that I was to “cease” as soon as possible.
It was ridiculous, I thought. How could my little side project compete with a huge marketing firm? I felt oppressed and furious. But the regular paycheck won out, as it often did, and I gave up my side hustle.
Here’s the thing, though: I probably didn't have to. I just didn’t know my options.
These days, it’s not as easy for companies to bully freelancers with an overly broad non-compete agreement. But just in case one comes up for you, here's everything you need to know about non-compete clauses and how — whether you're a full-time freelancer or building a side hustle — not to end up in the same situation I did.
Can non-compete clauses hurt your side hustle?
They can, but not always. A non-compete clause in your employment contract means you can’t work for your employer’s competitors — sometimes even for a specified period of time after you leave the company. The agreement usually specifies a geographic area in which the employee must refrain from competing.
But who counts as a competitor, exactly? That can often be tricky to nail down.
Traditionally, non-compete clauses can damage or even end a freelance career in multiple ways. Perhaps you signed a non-compete with your full-time employer, only to realize that it means you can’t write a blog on the side. Maybe you’re a children’s book illustrator eager to sign on a new client — until you realize that the non-compete clause in your freelance contract prevents you from illustrating another children’s book for a full year.
Sound scary? Don’t panic yet. There are two reasons non-compete clauses don’t automatically destroy every side hustle.
Non-compete clauses are no longer as popular
First, it’s gotten a lot harder for employers to threaten their employees by litigating and enforcing a non-compete clause in court. In fact, the current thinking is that non-compete clauses hinder the flow of talent in the workforce and can damage the economy.
In 2023, more than 50% of the states restrict the usage and interpretation of non-compete clauses, and the FTC has actually moved to ban non-compete clauses in employment contracts throughout the entire country. Some states, like California, North Dakota, Montana, and Oklahoma, have banned non-compete clauses altogether.
Non-compete clauses must meet certain criteria
To be enforceable, every non-compete clause must meet the following criteria:
- ✓ The agreement must protect a legitimate business interest
- ✓ The scope and length of the agreement should be reasonable
- ✓ The agreement must be in line with the public interest
If the non-compete clause doesn’t protect a legitimate business interest, have a reasonable scope of time and location, and be in the public interest, then it’s likely to be considered invalid. More on that in a bit!
How to get ahead of non-compete clauses before you start freelancing
The best time to scrutinize any non-compete provision is before starting a new side hustle. Why? Because while some employers won’t bother, others might sue you for breaking your employment agreement. That could mean financial losses — not to mention wasted time and money building a side hustle that might have to cease business.
So, before signing your first client as an independent contractor, here are some steps you can take to understand your company’s non-competition policy.
Tip #1: Review your employment contract and employee handbook
Some employment agreements have a “No Moonlighting” clause that restricts their employees from any other jobs while employed by this company.
If you have this kind of employment contract, then you should probably consider seeking permission from management before starting any side hustle — and definitely if your side hustle is in the same (or a closely related) industry as your day job.
You can also find information about your company’s non-competition rules in the new employee handbook or in any orientation materials.
Tip #2: Separate your resources
This is particularly true for remote work. It may be tempting to use your company’s laptop or Zoom account to run your side hustle, but that’s something that many IT departments can track.
The repercussions could be a slap on the wrist — or this could be a legitimate reason to fire you. Even if it’s not expressly prohibited in the employee handbook, it’s better to get separate equipment and resources for your side hustle.
Tip #3: Consider registering your business
Incorporating or creating an LLC around your freelance operation is a good way to separate your side hustle from your day job. The corporate entity protects your personal assets from any lawsuit based on your side hustle. Your company expenses, personal finances, and any billing for your day job should all be discrete and unrelated activities.
Keep in mind, though, that an LLC won’t help you with your taxes. Your side hustle will be taxed the same with or without one.
If you’re in it for the tax savings, you’re better off taking advantage of business write-offs. With these, any money you spend on your side hustle can be knocked off the income you have to pay taxes on. So if you earned $10,000 a year from freelancing, but racked up $2,000 in subscriptions, subcontractors, and home office expenses, you’ll only be taxed on $8,000.
You can track these write-offs with Keeper, a tax app for freelancers and side hustlers. It scans your transactions for work-related purchases and helps you claim them at tax time.
Loopholes that can invalidate non-compete clauses
Knowing about your company’s policy on side hustles before it becomes a problem is the best option. But if it’s already too late and your employer is demanding an end to your freelancing, don’t panic yet. It’s time to take a closer look at your contract to see if there are any loopholes in your contract — and if those loopholes can render your non-compete invalid.
If any of the following apply to you, it’s best to consult an attorney before going to your employer.
Unreasonable time or area restrictions
Probably the first thing to check in any non-compete clause is how you’re being restricted from competing with the company in terms of time and geographic area.
If your non-compete clause doesn’t mention these items, it’s probably too vague. But if your employer is trying to restrict you for an unreasonable amount of time, or keep you from an unreasonably large geographic area, then the clause will be difficult to enforce.
No legitimate business interest
Ask yourself: What’s the purpose of this non-compete clause? If your boss just doesn’t want you to work in the industry, the clause is probably not valid. On the other hand, if the clause was included because your expertise and experience at another company could ruin an upcoming product launch, then it might stand.
Why? The first reason is personal, but the second is a legitimate business interest. If the only motivation behind the non-compete is personal, then it’s likely invalid.
Enforcement is not in the public interest
This one is easy. You’re told that the non-compete will not be enforced, but it is. Or you were forced to sign in order to get company health insurance. Or it could be the case that enforcing this non-compete clause might hinder competition in that industry.
Whatever the reason, it’s not in the public interest to reward an employer’s bad or even illegal acts. In this case, it’s likely that the non-compete clause — and perhaps other clauses in the employment contract — can be voided.
Lack of consideration
With so much in the media about how non-compete clauses are ruining the economy, it’s becoming more common for courts to require that employers offer a little something extra (known as consideration) for your signature.
If you weren’t given enough consideration for a particularly restrictive non-compete clause, then it may be deemed unenforceable.
How to negotiate a valid non-compete clause
Say you work for a wedding magazine, but also write your own blog about Zoomer weddings. One day, your boss asks you to take the post down. Or, even worse, they ask you to take the whole blog down.
You might be tempted just to cave and stop blogging so you don’t lose your day job. But before you do, see if you can negotiate to get something for the sacrifice you’re about to make.
Tip #1: Offer a percentage
These days, employers are often encouraged to support their employee’s side hustles. Your employer might even let you out of a non-compete in exchange for a percent of gross revenue. If you have a good relationship with your boss, this direct approach might be best.
Tip #2: Agree to the non-compete — but get something in return
If the non-compete clause is solid and created in good faith, and if your company has a legitimate reason for enforcing it, then the best course might be to just accept.
That said, you could also ask for something from your employer in return for giving up your side project. Whether it’s a written testimonial or reference for your website, or a mention on social media, it's perfectly fair to request compensation for giving up a side hustle — and the money you might have made.
Tip #3: Talk to an attorney
Yeah, yeah, this is where we tell you to call a lawyer. But let me tell you, as a lawyer, that should be your last resort. You want to spend your time and resources building a business as a solopreneur, not litigating a non-compete clause in court.
But, frankly, if nothing else has worked, it’s good to get some legal advice on your specific employment situation, as well as what the laws are in your specific state.
If you aren’t stealing clients or confidential information, or acting in a way that’s actively damaging your employer, then it’s very possible to work around a non-compete clause. Talking to an attorney might be the most cost-effective and efficient way to find out if you have more rights than your employer says.
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At Keeper, we’re on a mission to help people overcome the complexity of taxes. We’ve provided this information for educational purposes, and it does not constitute tax, legal, or accounting advice. If you would like a tax expert to clarify it for you, feel free to sign up for Keeper. You may also email firstname.lastname@example.org with your questions.