Independent Contractor Non-Disclosure Agreement: All You Need to Know
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Thinking about hiring independent contractors?
This type of business relationship certainly has quite a few benefits for the employer. However, recruiting independent contractors carries its own risks. As a client, you don’t control how and where the contractor performs their work, but you do have full control of the outcome of their work. Still, the contract you’re signing with them may not be enough to protect your confidential information or trade secrets.
What should you do in this case? Can an independent contractor sign an NDA? What should this agreement include?
This article will guide you through drafting a confidentiality agreement and keeping your company information safe.
What is a non-disclosure agreement?
A non-disclosure agreement (or NDA) is a type of document used between an employer and an employee (which can also be an independent contractor) which prevents the employee from sharing any confidential information related to the company they’re starting a business relationship with. At the same time, it protects the company from intellectual property theft that may occur by a third party if the contractor shares employer's trade secrets or other privileged information.
The primary purpose of this document is to legally protect the employer from unauthorized disclosure of the company’s financial information, customer lists, or other proprietary information belonging to the hiring party.
In 2018, research showed that one third of employees across the US are legally bound by this agreement.
It’s critical to draft this legal document with high precision since there have been cases of abuse of NDAs to cover up harassment at the workplace. The non-disclosure agreement should only refer to sensitive information regarding the company’s know-how, finances, and future plans.
Can an independent contractor sign an NDA?
Yes, not only can you have your independent contractors sign an NDA, but it’s also recommended. The NDA should be a regular part of your agreements with independent contractors every time the project requires working with sensitive information.
Although it’s not required by the governing law in most states, a large percentage of companies include this agreement in their contracts with freelancers, especially if they’re hiring remotely. They’ve actually made it a regular part of their remote work policy.
This agreement isn’t only meant for your full-time employees, and it’s in your best interest to protect your intellectual property and other company secrets before you share any of it with the contractor. The same way you’ve defined your working relationship with the independent contractor by having the project conditions, duration, and other specifics in writing, you should make sure you do it with your confidential info.
Do independent contractors sign non-compete agreements?
Many people confuse NDAs with non-compete agreements. A non-compete agreement is a document that prevents an employee or contractor from working for a competitor during or after their contract with the current employer.
A standard NDA can (but doesn’t always) contain a clause about competition.
However, when it comes to independent contractors, non-compete agreements aren’t common practice. Independent contractors typically work with several clients so adding a non-competition clause to their contract would limit who they could work with and directly affect their earning potential.
California, for instance, even refuses to enforce these agreements.
Why should you have your independent contractor sign an NDA?
We already said that this agreement forbids that an independent contractor discloses confidential information without your prior written consent with any third parties.
Other than protecting your know-how and other trade secrets, this contract also:
- Acts as a warranty that you own all the intellectual property (i.e. the outcome of the contractor’s work) that the independent contractor creates
- Demands that the independent contractor notifies you of potential conflicts of interest before you begin your business relationship
- Allows you to solve a potential conflict between your company and your contractor by submitting an arbitration process instead of a trial
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What if the independent contractor breaches the agreement?
An independent contractor isn’t allowed to share privileged information with a third party whether it’s inadvertently or on purpose. If the independent contractor breaches the agreement and you find out about unauthorized disclosure of your confidential information, you have the right to:
- Immediately terminate your contract with them
- Sue them for monetary damages
However, to enforce this, you need to make sure all your contractors have signed the same agreement because otherwise, you may not win the lawsuit due to inconsistency.
What should you include in an independent contractor NDA?
If you’ve never drafted an NDA before, you may be wondering what this agreement should include. We’ll walk you through some essential elements of the non-disclosure agreement, but bear in mind that you’re allowed to customize it to fit your company’s needs.
Here’s a rough draft of an NDA:
- State the names of the parties involved (your company name and the independent contractor’s name). If your independent contractors are planning to hire subcontractors, it’s the contractor’s duty to inform you of the fact and provide you with their names so they can be included in the NDA
- Describe as accurately as possible the confidential information that should not be discussed with third parties
- Describe the obligations of the parties involved that they need to comply with according to the agreement
- Add any exclusions to the NDA, if applicable
- Define the terms of this agreement, such as the time period over which the contractor isn’t allowed to disclose privileged information
- Define what consequences the breach of the agreement may carry and how they’ll be put into force
Most employers have a hard time describing the confidential information to be included in the contract. Think about what business secrets you need to share with the contractor for them to perform their work.
Here are a few examples:
- Financial information
- Business projections
- Customer lists
- Trade secrets
- Operations and processes
- Marketing plans
- Company initiatives
- Research data
- Source code
- Payroll and personnel records
These are all types of confidential information an independent contractor may be required to keep secret while and after working with you. Disclosing such information with another business may hurt your competitive advantage or lead to intellectual property theft.
How to write a non-disclosure agreement?
If you need a more detailed guide to writing the entire agreement, you’ll find it in this section.
Step 1: State the name of the parties involved and include their contact information, as well as the effective date of the agreement.
Step 2: Note that throughout the contract your company name will be listed as “Client” and contractor name as "Contractor".
Step 3: In article one, define confidential information your independent contractor will be required to keep secret and return after the project is done. For example, the company’s know-how may be demonstrated to the contractor both in written and oral form, as well as electronically, therefore such confidential information should also be included in the agreement.
Step 4: Define in which forms the contractor won’t be allowed to disclose the privileged information they have access to.
Step 5: Define the period of confidentiality and non-use. This period typically starts on the effective date of the contract and ends a while after your work with the contractor has finished.
Step 6: State any exclusions from the contract - any situations in which the contractor will be allowed to discuss confidential information or types of information to which the agreement doesn’t apply.
Step 7: Add a clause about disclosures required by law. In case the court, for instance, requires the contractor to share confidential information, they need to inform the client timely so the client has the time to react appropriately with a waiver, or by seeking a protective order.
Step 8: Disclose the ownership of the confidential information and state that the independent contractor is required to return all used data after the project is done - they’re not allowed to keep or multiply it.
Step 9: Add the Injunctive relief clause which states that the independent contractor is fully aware of the irreparable damage that dissemination of the client’s confidential information could cause to the company, and that they accept that the client is entitled to injunctive relief in case they breach the agreement.
Step 10: Add the non-solicitation clause, which protects your clients from being approached and “stolen” by your independent contractor after your agreement is over.
Step 11: Cover indemnification - here you should describe the consequences of a breach of the agreement.
Step 12: Add the governing law section to define under which law the agreement is created.
Step 13: Add the entire agreement clause, which states that the NDA contains the whole understanding between the contractor and the client.
Step 14: Finally, don’t forget the severability clause, which protects the validity of the agreement even if one part or section of it is in any way deemed invalid or illegal.
Better safe than sorry
A well-written NDA is an important tool your business because it allows you to confidently hire independent contractors. This contract protects you from potential damage and allows you better control over your contractors’ handling of the data you need to share with them for project needs.
There are many template NDAs on the web you can reference—we have one ourselves. But if you’re not a legal expert, it's best to have a professional help you draft an NDA that is customized to your business.
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Disclaimer: This article is for informational purposes and should not be considered legal advice. Consult a legal expert for contract advice.