What is an Independent Contractor Non-Disclosure Agreement?
An independent contractor non-disclosure agreement is a legally binding contract between a business and any independent contractors they may hire during their relationship. Such an agreement is important for both parties because it helps to define the information that can and cannot be shared outside of the confines of their relationship, and gives the conditions upon which that information may be used or disclosed.
Typically, a non-disclosure agreement will cover areas such as prohibiting the disclosure of intellectual property, trade secrets and other proprietary information , covering the sharing of information with third-parties and even setting out a clear plan of how the information should be returned upon the completion of the engagement.
A fair and balanced independent contractor non-disclosure agreement will be written in such a way as to not indiscriminately prevent the independent contractor from working on similar projects for other clients. It will only prohibit the contractor from using information that is unique to the business that engaged him or her, and that could potentially harm the business in some way, if it were disclosed.
Components of a Non-Disclosure Agreement
To be effective, a Non-Disclosure Agreement should contain the following key elements:
Confidentiality Obligation: The confidentiality obligation is the cornerstone of a Non-Disclosure Agreement. The specific language does not necessarily need to track the language used in the statute. However, the obligations set forth in the NDA must be consistent with what is set forth in the statute. In addition, the NDA must more specifically identify confidential information in a way that is not required by the statute – for example, the NDA may list specific customers or other protected information that the statute does not address.
Duration: The duration of the confidentiality obligation cannot be greater than the statutory period (generally two to five years in California depending on the information at issue). Federal law prohibits non-compete agreements in most cases that apply for a longer duration. As a best practice, the NDA should provide a clear date that begins the confidentiality obligation based on when the agreement is executed. The date should not be potentially open to interpretation (e.g. the date that information was disclosed to the employee and not the date that the employee executed the Non-Disclosure Agreement). In the alternative, the NDA could identify whether it is effective until cancelled/terminated by either party, or automatically terminated only if the parties execute another agreement.
Scope: Even if the NDA were not an employment agreement, the narrow scope of the NDA would have to track the statute. Any confidentiality obligation that is broader than trade secrets would also be void. The NDA should define the scope by identifying a limited group of customers or services or products. Moreover, the NDA must have a temporal limitation as the statute is limited in duration. An NDA cannot have a scope that makes it unlimited in duration for purposes of the statute. Although the NDA should not contain non-competition obligations that are otherwise prohibited, the NDA may contain non-competition obligations in a limited way defined at the time of execution.
Benefits of Using a Non-Disclosure Agreement with Contractor
A non-disclosure agreement when hiring contractors is important for the same reasons you would use one with an employee: to protect sensitive information. However, none of this protection is guaranteed when you hire a contractor or freelancer. Unlike employees, independent contractors are not required by law to sign a non-disclosure agreement. It is strictly voluntary, and if you hire one without bringing it up first, there’s a good chance they’ll refuse.
So, whether or not you can get a contractor to agree to a non-disclosure agreement depends on the type of work you’re hiring them for. For example, if you’re doing desk work or providing a service where the contractor won’t have access to sensitive information, there’s likely no need to press the issue. However, if the contractor will be privy to sensitive information, including client or employee data, company strategies, financial information, or anything that could be classified as intellectual property—including proprietary designs, processes, and other trade secrets—then it’s a good idea to at least bring it up and explain its importance for your business.
Getting a non-disclosure agreement from your contractors helps protect your business, but that doesn’t mean it’s a slam dunk. Even if the non-disclosure agreement’s terms are reasonable, the contractor may still refuse to sign it. In this event, you have to decide whether or not you’re willing to employ someone who has access to sensitive information without a non-disclosure agreement. You have a few options: (1) state that the contractor does not have to sign (and you’ll just have to put proper controls in place with that person so that they can’t access sensitive information); (2) refuse to hire the contractor; or (3) consider whether or not the type of work you’re hiring them for is worth putting sensitive information at risk.
NDA for Employee v. NDA for Contractor
When entering into a non-disclosure agreement with an independent contractor, the employer should keep in mind that the information disclosed may still be deemed confidential and protected under common law by the Uniform Trade Secrets Act (UTSA) or the Defense Trade Secrets Act of 2016 (DTSA) in addition to the NDA. The DTSA is a federal statute, which provides a remedy for misappropriated trade secrets. Similar to trade secret laws, the NDA provides a means of protecting confidential information disclosed to independent contractors.
Confidential information generally includes product development, financials, marketing, sales, customers and proprietary information. The intent of the NDA is to prohibit the independent contractor from using confidential information outside of the business relationship with the employer. Thus, it may be more important for an employer to require an NDA of an independent contractor rather than an employee. A violation of the NDA could result in litigation and loss of business, goodwill and harm to customers, which is harmful to an employer and the business relationship.
One key distinction is that with employees, the NDA is initially drafted as a unilateral nondisclosure agreement, where one party (the contractor) promises to hold confidential the disclosed information of the other. With independent contractors, however, the NDA is generally considered mutual and both parties agree not to disclose all of their respective secret information. Because of this, NDAs for independent contractors contain provisions specific to non-solicitation and non-compete restrictions. In other words, an employee does not need an independent contractor NDA because the independent contractor already has allowed itself to be bound by an agreement containing such provisions. This is to ensure the confidential information of both parties to the NDA is protected.
Best Practices to Consider When Drafting an NDA
When drafting a non-disclosure agreement with an independent contractor, employers should consider consulting with a legal professional to ensure that the NDA aligns with state laws governing independent contractors. Additionally, it is recommended that NAAs be clearly drafted without vague or overly broad language and that they are tailored to specific confidential information and trade secrets that the independent contractor has access to or knowledge of. Redacting specific vendor names, business strategies, manufacturing practices , or customer lists where possible could help attorneys arguing over the legitimate business interest of the trade secret.
If your company chooses to use this template, the following ten categories (discussed above) can be included in the non-disclosure agreement and should be considered:
• Definition of Confidential Information
• Purpose of Disclosure
• Obligations of the Consultant Regarding Confidential Information
• Exclusions From Confidential Information
• Ownership of Confidential Information
• Term and Return of Confidential Information Upon Termination of Employment
• Miscellaneous (including other contractual stipulations such as non-solicitation or non-compete)
Consequences for Violating a Non-Disclosure Agreement
A breach of a non-disclosure agreement can carry serious legal and professional ramifications for an independent contractor. First, at the outset, the independent contractor may be terminated. Whether the employer chooses to proceed with termination will depend on the severity and circumstances of the breach. Beyond termination, the employer may choose to inform other individuals and entities of the breach. In some circumstances, it may even choose to disclose the breach publicly, especially if it raises legal issues that involve officer and director liability or shareholder actions against the company. Moreover, if the employer believes that its company secrets have been compromised, it may choose to take enforcement litigation against the contractor (and perhaps others) to shield itself from losses due to competitors who have gained access to secret information. If the breach is serious and is caused by actions that were actually illegal, the independent contractor could face criminal investigations and prosecutions, as well as personal civil liability.
Common Questions About Independent Contractor NDAs
Unfortunately, non-disclosure agreements are complex, and tend to raise more questions than answers. The following are answers to five common questions.
How long is an independent contractor non-disclosure agreement enforceable? There are limits on the length of time for which a non-disclosure agreement may be enforced. The time period depends on the state of enforcement. Texas law, for instance, limits enforcement to two years. California courts find 3 years to be appropriate. Florida courts uphold independent contractor non-disclosure agreements that last for five years. Under Georgia law, there are no time limits on non-disclosure agreements. Confidently, Georgia courts enforce non-disclosure agreements that have lengthy (ten year) non-disclosure periods. Likewise, Georgia courts have declined to invalidate confidentiality agreements for lack of consideration in cases with no stated time limits.
Are independent contractor non-disclosure agreements enforceable if I delay performance under my independent contractor agreement? Yes, delaying performance to keep secrets to your self does not impact the enforceability of your independent contractor non-disclosure agreement.
What is trade secret misappropriation? One of the most commonly used means to settle nondisclosure disputes is trade secret misappropriation. Trade secret misappropriation occurs when you disclose an independent contractor’s trade secrets. Independent contractors who inadvertently disclose trade secrets can end up paying significant penalties.
Can I resign and then disclose my former employer’s trade secrets? Employers and independent contractors part ways for a variety of reasons. Sometimes , a disputed independent contractor agreement leads to the termination of your independent contractor agreement. Sometimes, party simply disagree about the results of a project. If your independent contractor agreement has been terminated and you decide to disclose your former employer’s trade secrets after resigning, you may find yourself in hot water. Resigning from your position does not excuse disclosure of an independent contractor’s trade secrets. Instead, the court will likely rule that you are liable for disclosing trade secrets.
Are independent contractor non-disclosure agreements enforceable if they include both a non-disclosure and non-solicitation requirement? Yes, both non-solicitation and non-disclosure restrictions can be included in an independent contractor non-disclosure agreement. Non-solicitation requirements are similar to non-compete agreements. A non-solicitation agreement prohibits you from soliciting business that is similar to that of your former employer. Non-solicitation clauses must include a reasonable time limit. Whether a non-solicitation agreement is enforceable depends on the employment context. For example, if the independent contractor’s employer provides you with access to client lists and client information, and depends on those lists and that information to make money, you are likely to be bound by any non-solicitation clause. This is good news for your former employer and bad news for you if you want to practice your craft independently in the future.