Competing Laws Jam Up Hiring Independent Contractors

The Bottom Line

• Actions by agencies loosening certain rules around independent contractor use will encourage businesses to consider engaging more independent contractors.
• Though federal laws are loosening, employers must abide by a patchwork of state laws that govern rules based on where work is performed.
• Strict local laws may push companies to reconsider whether they want to hire independent contractors or restrict where their independent contractors are allowed to work.

As businesses celebrate the May announcement by the Department of Labor of its adoption of a more business friendly approach to classification of independent contractors under the Fair Labor Standards Act and anticipate similar future federal actions, they undoubtedly will consider how to use more independent contractors given the relationship is far cheaper and easier than the employment relationship.

However, it’s important for businesses to understand that beyond misclassification concerns, the law regarding the contractor relationship has changed on the state level in several ways.

Just a few years ago, businesses could approach the independent contractor relationship with little concern or planning. Businesses might run into states with new hire reporting laws applicable to independent contractors or might have encountered a one-off state independent contractor law, such as the one in Tennessee extending its I-9 requirement to independent contractors working in that state.

However, often business could get by getting a completed W-9, potentially not even thinking through issues such as where the work was going to be performed.

But the independent contractor relationship isn’t the wild west anymore. While still nowhere close to being as burdensome as employment law compliance, the once relatively rare state law protections for independent contractors are now rapidly increasing. And, virtually all the independent contractor protectionist-type laws will apply based on where the work is performed, much like employment laws, even if the contractor is fully remote.

The importance of understanding the independent contractor law landscape also isn’t limited to businesses in states most likely to use independent contractors. Businesses with work in states with more robust misclassification laws, such as states using an “ABC” type test or economic realities type test, also need to pay attention to the ever-increasing regulation of the independent contractor relationship.

Businesses in these states still use independent contractors from time to time, either because the worker meets the more burdensome tests or because the company is willing to take the misclassification risk in light of correspondingly expensive employment laws in the state. A state with more robust misclassification laws is more likely to have some protections for independent contractors as well.

Two types of laws applying to independent contractors are likely to be encountered by businesses using contractor work: freelancer laws and laws prohibiting and limiting the use of restricted covenants.

Freelancer Laws

The characterization of the first set of laws as “freelancer” laws is misleading. So-called “freelancer laws” encompass a set of burdensome contractual rules that apply well beyond what a normal businessperson would classify as a freelancer.

In reality, all of the state “freelance” laws essentially encompass independent contractors making more than a certain dollar amount and provide few exceptions, such as doctors, lawyers, sales representatives, or construction contractors (depending on the specific law).

Three states and a handful of cities have adopted these laws to date.

The California Freelance Worker Protection Act, which went into effect on Jan. 1, 2025, applies to independent contractors working in California where payments total $250 or more in a 120-day period.

The law requires a written, signed agreement with the worker containing: the name and mailing address of both parties; an itemized list of services to be performed; the value of the services and the compensation rate or method; payment due dates or method to calculate the due date; and due dates for reporting of work or services.

The New York Freelance Isn’t Free Act, which went into effect August 2024, applies to independent contractors working in New York where payments total $800 or more in a 120-day period. Like the California law, the New York law requires a written agreement with a similar list of terms, but doesn’t require a signature, and multiple documents can satisfy the requirements.

The Illinois Freelance Worker Protection Act, which went into effect in mid-2024, applies to independent contractors working in Illinois where payments total $500 or more in a 120-day period. The law requires documentation containing similar information as the New York and California law, but doesn’t require execution of that document.

All three laws require retention of the documents for a specific period (two years in Illinois, six years in New York, and four years in California) and require copies to be furnished to the worker.

Consequences for failure to abide by the laws vary, but can include adverse contractual terms being imposed, multipliers for payment failure, fines, and attorney’s fees. Contractors paid through their own single person entity are explicitly covered under the California and New York laws if the only worker of their entity is the one providing the services.

The laws are based upon older city laws, including the New York City Freelance Isn’t Free Act, the Los Angeles Freelance Worker Protection Ordinance, the Columbus City Code and the Minnesota Freelance Worker Ordinance. Note that the Los Angeles law specifically requires the email addresses of the parties to be in the agreement, something not required by the other laws.

Finally, the Seattle Independent Contractor Protection Ordinance provides its own twist on the requirements. The city requires much of the same information to be given to independent contractors who work in Seattle and are paid $600 or more in a year in the form of a notice, plus additional information such as the notice date, locations of work, expense reimbursement, and deduction information.

In addition, it requires a disclosure form notifying independent contractors of certain rights, as well “payment disclosure” forms, requiring furnishment of documentation to the independent contractor with each payment with certain detailed information.

For larger, more permanent relationships, laws often only require examination of an existing agreement to insert any information required that isn’t already included in the contract. However, for businesses with work that is temporary, sporadic, or spontaneous, the requirements will require changes in business operations.

Businesses will need to think more carefully about the scope and value of the work and logistically implement a system to ensure workers receive the document prior to performing the work (and sign the document as applicable).

Regulating Restrictive Covenants

Businesses must also consider laws seeking to prevent or limit the application of restrictive covenants to independent contractors.

These laws aim to ban noncompetes, seek to limit nonsolicitation agreements and noncompetes to higher level workers, or require various procedures and language to be included in post-work restrictions, including simple confidentiality agreements.

Exceptions to the laws generally only apply in limited situations, such as when there is a transaction.

As to the first class of these laws, the most well known is in California, which makes offering a noncompete agreement to an independent contractor not just enforceable, but also illegal. This sort of restriction is still trending, with the Federal Trade Commission trying unsuccessfully to ban noncompetes completely (even with independent contractors) last year.

Michigan and Tennessee passed bills earlier this year that are currently pending and would prohibit businesses from entering into noncompetes with any worker, including independent contractors.

Other states take aim at these restrictions by requiring the independent contractor to receive a certain amount of money.

For example, in 2025, Washington State raised the threshold for a noncompete to be valid in an independent contractor relationship to independent contractors making $301,399.98 or more. The threshold also applies to nonsolicitation agreements that prevent solicitation of anything more than current customers, such as former customers, prospects, or vendors.

Virginia also takes this approach, setting the threshold at the median hourly wage for the state and applying the prohibition to nonsolicits unless the nonsolicit is limited to restricting the worker from providing a service to a customer or client of the employer if the employee initiates contact with or solicits the customer or client.

Perhaps the broadest of restrictions come out of Colorado. The statute requires that for both independent contractors with nonsolicitations (which are only permissible for higher paid workers) or confidentiality agreements, the agreement must either be provided at the outset of the relationship or the Company must provide the agreement at least 14 days before the effective date or new consideration; and the agreement is accompanied by a separate document signed by the worker that clearly summarizes the terms of the restrictions.

If a company presents a confidentiality agreement or nonsolicit to an independent contract that violates these requirements, it is liable for actual damages and a penalty of $5,000. If the company “threatens” the employee in connection with signing a noncompliant agreement, it is a misdemeanor.

Additionally, independent contractor agreements with confidentiality or nonsolicitation provisions that seek to choose a jurisdiction other than Colorado are illegal.

Finally, it’s noted under a different Colorado law, the Protecting Opportunities and Workers’ Rights Act, nondisclosure and confidentiality provisions in independent contractor agreements will be void unless they either explicitly carve out the ability to disclose discriminatory or unfair practices or comply with a burdensome list of other criteria.

The POWR Act’s provisions, unlike Colorado’s law regarding restrictive covenants, isn’t unusual. It’s common for states to include independent contractor agreements in the requirements to carve out specific circumstances from confidentiality provisions.

While noncompetes may not be typical in independent contractor agreements in many industries, nonsolicitation and confidentiality provisions are widely used.

Given that “noncompete laws” sometimes cover independent contractors and are now extending to mere solicitation and even confidentiality restrictions, businesses should be sure to review their independent contractors restrictions with an eye to the same.

Practical Implications

Awareness of these requirements and the overall trend to regulate the independent contractor relationship is critical for businesses that are apt to violate these laws that aren’t only relatively new, but closest in nature to employment laws.

The independent contractor relationship is historically handled outside of human resources, and employment attorneys may not be the ones that give advice to clients on independent contractor relationships.

Rather, independent contractor relationships historically have fallen to financial officers at companies and general corporate attorneys at law firms, who may be unfamiliar with the structure of such laws; for example, the fact that choice of law provisions can’t mitigate the interstate law risk and are in fact sometimes illegal isn’t an issue you typically see with other business contracts.

Businesses may not even know where their independent contractors are working. Given the complication of hiring contractors in many states, businesses should consider whether restricting work location, which is common with employees, can be feasible. Businesses should consider mandatory, individual arbitration clauses in independent contractor agreements.

While arbitration can’t fully mitigate the risks, provisions help prevent sometimes catastrophic multi-worker litigation actions, make claims less appetizing to plaintiff’s attorneys, and are an overall cost saver.

Finally, businesses should accept that the days of having one simple form of independent contractor agreement are over if they have contractors in multiple states. Independent contractor agreements will either need multiple state disclosures and nuances or the business will need multiple forms. Given the complexity, businesses are strongly encouraged to contact their legal counsel to discuss their compliance efforts in the independent contractor space.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alicia Samolis is chair of Partridge Snow & Hahn’s labor and employment practice. She represents businesses and management in labor and employment litigation and compliance matters.

Write for Us: Author Guidelines