I am employed via W-2 and bound to a non-compete agreement stating that I cannot be paid for work outside of said W-2 employment.

Is it a breach of contract to perform work on behalf of an LLC which I own 100%, where payment is received by the LLC and not me personally?

  • 2
    It may well come down to the exact wording of the non-compete argreement, the law in your State, what the parties understood the agreement to prohibit, who drafted the non-compete, and so on. But if you entered into an agreement with a secret out that you expected would completely negate the other party's entire benefit of the agreement, then you entered the agreement in bad faith. – David Schwartz Feb 24 '18 at 1:37
  • David's right, this is a close call. Get a lawyer to read the whole thing. If any outside employment is expressly prohibited, it's probably unenforceable as against public policy. If what you're doing doesn't violate the terms, it doesn't matter if you're acting in bad faith (only insurance contracts require good faith beyond avoiding plain fraud). Do you pay yourself dividends or draw a salary? Or do you reinvest all profit into the business? – Patrick87 Mar 26 '18 at 11:16
  • @Patrick87 "only insurance contracts require good faith beyond avoiding plain fraud" This is just flat incorrect. The majority rule is that the covenant of good faith and fair dealing is incorporated in all contracts by operation of law and cannot be waived. Only insurance contract have a separate bad faith tort, but failure to act in good faith is a breach of every contract on a contract theory. – ohwilleke Mar 27 '18 at 4:24

Yes it is a breach of contract. Your LLC will not limit your non-compete liability.

There is a matching case: Gilford Motor Co Ltd v Horne [1933] Ch 935.

  • Probably, but I wouldn't count on a 1933 case on non-compete law and corporate law still being good law without doing further research because those areas of law have evolved a lot since then and have had significant statutory modification in many cases. E.U. directives may also influence its validity. – ohwilleke Sep 21 '19 at 6:45

In practice, the conduct you describe is almost sure to be found to be a breach of the non-compete. You are still doing competing work employed when employed by another. You are also receiving all economic benefit that arises from that arrangement. Even if your violation didn't violate the express terms of the agreement, you would probably be held liable for acting in bad faith to circumvent the agreement.

Of course, all of that assumes that the underlying non-compete is itself enforceable at all. Many states, e.g. California, are legally very hostile to non-compete agreements and decline to enforce them on public policy grounds absent some very specific conditions. But, if the underlying non-compete would be valid if you went to work as a W-2 employee for a competitor, you are almost surely in breach in the scenario you suggest.

  • does it mean if i register llc in California I have better chance to win non-compete dispute with out-of-state former employer? – lowtech Sep 21 '19 at 3:11
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    @lowtech Probably not. The state of organization of the LLC has little to do with the choice of law applicable to the non-compete, which is often stated expressly in the contract and would ordinarily be the employer's state of business. – ohwilleke Sep 21 '19 at 6:44

On the face of it the non-compete only prohibits paid employment, if you work for free that would be OK.

That means that you must not benefit financially in any way from the work. You are proposing that the work you do will increase the profits of a company you have proprietorship of - this would be a clear benefit to you and prohibited.

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