Independent Contractor Agreements in Tennessee: Classification, Ownership of the Work, and Restrictive Covenants

Businesses hire independent contractors for flexibility, and many workers prefer to run their own business. The written agreement is where both sides set expectations about the work, payment, ownership, and confidentiality. But the agreement does not decide on its own whether the law treats the worker as a contractor, and different agencies apply different tests.

The label in the contract does not control

Every test discussed below looks at the substance of the relationship:

• Federal employment taxes: if the relationship is employment, "the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial" (26 C.F.R. § 31.3121(d)-1(a)(3)). The IRS warns that a business that classifies an employee as an independent contractor with no reasonable basis may be held liable for employment taxes for that worker.
• Federal wage-and-hour law: the Department of Labor's current regulation states that labeling employees as "independent contractors" does not make the Fair Labor Standards Act's protections inapplicable (29 C.F.R. § 795.105(a)). Its current Fact Sheet 13 (revised March 2024) adds that receiving a 1099 or signing an independent contractor agreement does not by itself make a worker an independent contractor under that Act.
• Tennessee workers' compensation: the Tennessee Supreme Court has said the statute is construed liberally in favor of finding that a worker is an employee, and that once an employment relationship is established, the employer bears the burden of proving the worker was an independent contractor (Lindsey v. Trinity Communications, Inc., Tenn. 2009). In Lindsey, a contract calling the worker an independent contractor was not enough when the facts showed employment.

A good agreement still matters. It records what the parties intended, sets the business terms, and handles ownership and confidentiality. It works best when it describes the relationship as it will actually run.

Tennessee workers' compensation: seven factors

Tennessee's workers' compensation law lists the factors used to decide whether a worker is an employee or an independent contractor (Tenn. Code Ann. § 50-6-102):

1. The right to control the conduct of the work;
2. The right of termination;
3. The method of payment;
4. The freedom to select and hire helpers;
5. The furnishing of tools and equipment;
6. Self-scheduling of working hours; and
7. The freedom to offer services to other entities.

In Lindsey v. Trinity Communications, Inc. (Tenn. 2009), the Tennessee Supreme Court explained that no one factor is entirely indicative, but the primary factor is the right to control the conduct of the work. The test is whether the right to control existed, not whether it was exercised. A business may have some right to control the results of the work without creating an employment relationship. The Court also noted that the right of termination has taken on "controlling significance," because a power to end the relationship at will is inconsistent with the independence a contractor usually has (quoting Masiers v. Arrow Transfer & Storage Co., Tenn. 1982).

Outside construction and coal mining, the workers' compensation law generally reaches employers using the services of five or more persons for pay (§ 50-6-102). Construction has its own rules, discussed below.

Tennessee unemployment insurance: twenty factors

For unemployment insurance, Tennessee uses a different test. Under the Tennessee Employment Security Law, an individual who performs services for wages is in covered employment if the relationship qualifies as employer and employee under the twenty factors described in IRS Revenue Ruling 87-41 (Tenn. Code Ann. § 50-7-207). The same twenty factors govern Tennessee's wage-and-hour statutes (Tenn. Code Ann. § 50-2-111). The factors include instructions, training, integration into the business, the right to discharge, and the right to terminate, among others. The twenty-factor test was added by 2019 Pub. Ch. 337, effective January 1, 2020.

One caution: a Tennessee Department of Labor and Workforce Development help-center article still describes a three-part "ABC" test for unemployment insurance. The Department's main employer page explains that the ABC test applies to services performed before January 1, 2020 and the twenty factors to services on or after that date, which matches the statute. If the Department audits a business's classifications, it is worth confirming which standard the auditor is applying.

Construction has special rules

Tennessee treats construction differently. Construction services providers must carry workers' compensation insurance on themselves even if they have fewer than five employees, unless an exemption applies, such as being listed on the state's exemption registry under the conditions the statute sets, or being covered by the hiring party's policy (Tenn. Code Ann. § 50-6-902). Other points:

• A general contractor, intermediate contractor, or subcontractor is liable for compensation to an injured employee of its subcontractor to the same extent as the immediate employer, with exceptions for registered exempt providers, when the injury occurs on or about premises where the general contractor has undertaken the work or that it controls (Tenn. Code Ann. § 50-6-914(a), (b), (e)).
• On a commercial construction project, no more than three registered exempt providers performing direct labor may use the exemption, and the general contractor must designate them in writing and keep a record (§ 50-6-914(b)(2)).
• A contractor may require a certificate of workers' compensation insurance from its subcontractors and providers (Tenn. Code Ann. § 50-6-916).
• An employer that is required to carry coverage and does not, or that misclassifies employees to avoid proper premium calculations by concealing payroll, employee counts, or duties, fails to secure workers' compensation. The penalty is generally one and one-half times the average yearly premium at assigned-risk rates for the period of noncompliance, less any premium paid, with a $1,000 minimum for construction employers. Two or more violations within five years raise the penalty and permanently bar a construction employer from the exemption registry, and penalties for misclassification go to the state's employee misclassification education and enforcement fund (Tenn. Code Ann. § 50-6-412).

The federal tests

Federal tax. For employment tax purposes, the IRS applies common-law rules. An employment relationship generally exists when the business has the right to control and direct the worker not only as to the result, but also as to the details and means by which the result is accomplished (26 C.F.R. § 31.3121(d)-1(c)(2)). The IRS groups the evidence into behavioral control, financial control, and the type of relationship. When status is unclear, either the business or the worker may ask the IRS for a determination on Form SS-8.

Form 1099-NEC. A business reports payments to a non-employee for services on Form 1099-NEC. According to the IRS, the reporting threshold is $600, or $2,000 for payments made after December 31, 2025. The $2,000 threshold may be adjusted for inflation beginning in 2027.

Federal wage and hour law. Under the Fair Labor Standards Act, the question is the economic reality of the relationship: whether the worker is economically dependent on the business for work or is in business for themself. The federal rule is in transition, and the current picture has three parts:

• The 2024 rule. The Department of Labor's 2024 regulation (29 C.F.R. part 795, effective March 11, 2024) weighs six factors under the totality of the circumstances. The current version of the Department's Fact Sheet 13 says the rule is the subject of litigation and remains in effect for private litigation. In private lawsuits, though, courts decide the question themselves. In Tennessee, federal courts apply the Sixth Circuit's six-factor economic reality test (Keller v. Miri Microsystems LLC, 6th Cir. 2015).
• Enforcement since May 2025. In Field Assistance Bulletin 2025-1 (May 1, 2025), the Department directed its investigators not to apply the 2024 rule's analysis in enforcement matters and to rely instead on the July 2008 version of Fact Sheet 13 and a 2019 opinion letter it reissued as Opinion Letter FLSA2025-2. The bulletin applies to matters in which no back wages or penalties had been paid as of May 1, 2025.
• The 2026 proposal. On February 26, 2026, the Department proposed rescinding the 2024 rule (91 Fed. Reg. 9932, published February 27, 2026), a change that would also apply to the Family and Medical Leave Act and the Migrant and Seasonal Agricultural Worker Protection Act, and replacing it with an analysis similar to its 2021 rule, built around two core factors: the nature and degree of control over the work, and the worker's opportunity for profit or loss based on initiative or investment. The Department also said the actual practice of the parties is more relevant than what may be contractually or theoretically possible. The comment period closed April 28, 2026. As of October 2026, the Electronic Code of Federal Regulations still shows the 2024 rule, and I have not seen a final rule replacing it.

Because the federal standard may change, an agreement drafted today should be reviewed again if a final rule is issued.

Who owns the work

This is one of the most commonly missed issues in contractor agreements. Copyright belongs initially to the author of the work (17 U.S.C. § 201(a)). For a work made for hire, the hiring party is treated as the author (§ 201(b)). But for a contractor, a work qualifies as a work made for hire only if it is specially ordered or commissioned for use in one of nine listed categories (a contribution to a collective work, part of a motion picture or other audiovisual work, a translation, a supplementary work, a compilation, an instructional text, a test, answer material for a test, or an atlas), and the parties expressly agree in a written instrument signed by both of them that it is a work made for hire (17 U.S.C. § 101).

Whether a worker is an employee for this purpose is decided under the general common law of agency, not by the label in the agreement (Community for Creative Non-Violence v. Reid, U.S. 1989). Many contractor deliverables may not fit any of the nine categories. For those, the contractor owns the copyright unless it is transferred, and a transfer of copyright ownership is not valid unless it is in a writing signed by the owner of the rights or the owner's authorized agent (17 U.S.C. § 204(a)). A contractor agreement should therefore include an express present assignment of the work product and related rights, signed by the contractor, rather than relying on "work made for hire" language alone.

For contractors, the same rules cut the other way: unless you sign an assignment or a qualifying work-for-hire agreement, you may keep rights in what you create. Read the ownership section closely, including whether it reaches tools, templates, or know-how you brought to the job.

Confidentiality and trade secrets

The Tennessee Uniform Trade Secrets Act (Tenn. Code Ann. § 47-25-1701 et seq.) defines a trade secret as information that derives independent economic value from not being generally known or readily ascertainable by proper means, and that is the subject of reasonable efforts to keep it secret (§ 47-25-1702). A confidentiality clause in a contractor agreement can be part of those reasonable efforts. Two other points:

• A contractual duty to maintain the secrecy of a trade secret is not void or unenforceable solely because it has no time or geographic limit (§ 47-25-1708(b)(1)).
• A written contract is not required to bring a claim for misappropriation of a trade secret under the Act (§ 47-25-1708(c)).

Federal law adds a notice requirement. Under the Defend Trade Secrets Act, an employer must give notice of the Act's whistleblower immunity in any contract with an employee that governs the use of trade secrets or other confidential information, and for this purpose "employee" includes an individual performing work as a contractor or consultant (18 U.S.C. § 1833(b)(3), (4)). A cross-reference to a policy document that sets out the reporting policy satisfies the requirement, which applies to agreements entered into or updated after May 11, 2016. An employer that leaves the notice out may not recover exemplary damages or attorney fees under that Act against the person who did not receive it.

Non-competes and non-solicits after the 2026 statute

A Tennessee statute effective July 1, 2026 applies to proceedings occurring, and agreements entered into, renewed, or amended, on or after that date. For independent contractors, the key provisions are:

• Time presumptions. A court must presume a restraint against a former employee or independent contractor reasonable in time if it lasts two years or less from the date the relationship ends and is not associated with the sale or ownership of all or a material part of a business or an equity interest in one. A longer restraint is presumed unreasonable (Tenn. Code Ann. § 50-1-210(a), (b)(1)).
• Confidentiality and non-solicits. The section says it does not prohibit an employer from enforcing a confidentiality or nondisclosure agreement, a client or customer non-solicitation agreement, or an employee non-solicitation agreement (§ 50-1-210(c)).
• Modification. A court may modify a covenant to make it reasonable and enforceable (§ 50-1-210(d)).
• The $70,000 pay floor. Tenn. Code Ann. § 50-1-211 bars an employer from requiring, requesting, or enforcing a non-compete against an employee whose annualized compensation is less than $70,000. The section is written in terms of employers and employees and does not mention independent contractors. How it applies to a worker who signed as a contractor but is later found to be an employee is a question I am not aware of any Tennessee court having decided yet.

The presumptions address time only. Whether a covenant is reasonable in scope and geography, and whether it protects a legitimate business interest, still comes from Tennessee case law. Here is how the 2026 law and the case law work together.

Portable benefits for contractors

A 2025 Tennessee law, the Voluntary Portable Benefit Act (Tenn. Code Ann. § 50-1-1101 et seq.), allows a hiring party, the contractor, or another person to contribute voluntarily to a portable benefit account for an independent contractor. Those contributions must not be used as a criterion for determining the worker's employment classification under Title 50 or Title 65, Chapter 15 of the Tennessee Code (§ 50-1-1103(b)). If contributions come from the contractor's own pay, the withholding must be in a clear, unambiguous, and prominently displayed written agreement, the contractor must opt in, and the contractor may opt out at any time (§ 50-1-1103(c)). The Act speaks to classification under those Tennessee titles; it does not address the federal tax or wage-and-hour tests.

Other clauses worth getting right

• Scope and deliverables: describe the result to be delivered and how acceptance works, rather than how the contractor must do the work day to day.
• Payment: rate, invoicing, due dates, expenses, and what happens to work in progress if the agreement ends.
• Termination: notice periods and termination for breach. Under the workers' compensation case law above, a right to end the relationship at will points toward employment.
• Insurance and indemnity: what coverage the contractor carries, proof of coverage, and who bears which losses.
• Governing law and forum: which state's law applies and where disputes will be heard.

Every contractor relationship turns on its own facts, and the agreement should match how the work will actually be done. If you are hiring a contractor or have been asked to sign a contractor agreement in Tennessee, my office can review the agreement with you. For restrictive covenants specifically, see how Tennessee's 2026 non-compete law works.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific agreement or working relationship.