What is an Independent Contractor NDA?
What is a Independent Contractor NDA?
A Non-Disclosure Agreement for independent contractors (sometimes called a contractor NDA) is a legally binding contract that protects a business’s or startup’s sensitive information by prohibiting the independent contractor from disclosing or misusing that information. These agreements are usually signed in situations where the business is going to be providing sensitive, proprietary information to an independent contractor to perform work on the business’s behalf.
However , it isn’t enough for these agreements to simply state that the independent contractor can’t disclose information. They should also contain clear and specific definitions of what information is considered confidential. These agreements usually also include notice requirements so that if the independent contractor receives a request for any confidential information, the independent contractor must inform the disclosing business of the situation. This provides the disclosing business with an opportunity to cancel the request before confidential information is disclosed.
Essential Terms of an Independent Contractor NDA
The essential elements of an NDA should be:
Definition of the term "Confidential Information": This is the part of the agreement that lists and describes the types of confidential information that the parties will be sharing. Be sure to include sensitive business information including salary, personnel records, accounting, contracts, and customer information.
Obligation of the Contractor: This section typically contains a reference to a "Duty of Candor and Honesty," and a non-disparagement provision that applies during the engagement as well as after the termination of the relationship. There should be language requiring prompt notification to a designated representative of the Company upon the receipt of any subpoena or order issued to the Contractor or those under its direction or control.
Obligation of the Company: In this section, the Contractor agrees to hold the Company harmless for the disclosure of information by the Company’s officers, employees, and agents. It also restricts the Contractor from making use of or copying any of the Company’s property and provides the Company with the right to search any Company property, belongings, or vehicles for company documents, equipment, and tools.
Exceptions: The exceptions definition clarifies that information that is in the public domain isn’t considered confidential, nor is information disclosed after receiving consent from the Company. Also, there is typically a carved-out exception for new information gleaned by the Contractor pursuant to his or her work for the Company.
Term: For how long does the confidentiality obligation last? Some agreements call for a 3-year or even a 7-year term, while others last indefinitely. It is important to know that if the information is a trade secret protected under state law, the time limitation simply must give the Company a reasonable period of time to regain its advantage over competitors to whom the trade secret was disclosed.
Injunction Relief: This section provides that the NDA shall be governed by state law, and the court shall be able to grant injunctive relief in the event of a breach to stop any further disclosure or misuse of the confidential information. If the Contractor goes out of business and reorganizes under another name, the Company can pursue remedies against the new name.
Benefits of Utilizing an NDA with a Contractor
Both clients and contractors can benefit from having a contractor sign a non-disclosure agreement (NDA). For the client, an NDA provides security by ensuring the contractor will not disclose any confidential or sensitive information related to their work. The protection of this information is essential to the preservation and operation of the business. With many types of consulting jobs, the contractor will have access to your customer data, pricing, or intellectual property. NDAs help protect against the need for costly contractual challenges with the contractor, and can be an easy way to protect against an employee moving to a competitor. Depending on the nature of the business, an NDA may be a necessary prerequisite for the client to disclosing confidential information to a contractor. For the contractor, an NDA provides assurance that the client will keep any proprietary information confidential and not disclose it to any unauthorized third parties. This is especially important for independent contractors performing consulting services across state and national borders, where exposure to different state and country trade secret laws would otherwise be risky. NDAs can also provide assurance for contractors that the client-owned data will not be sold or authorized for any purpose beyond that directly involved in the performance of the consulting services.
NDA Breach and its Legal Consequences
Contractor violation of a Non-Disclosure Agreement entitles the business to seek to enforce the NDA. An NDA violation may entitle the business to injunctive relief; the ability to get an order from the court that the contractor cease using or disclosing confidential information. Even if the business does not seek injunctive relief, there may be significant money damages for the violation which the business can ask the Court for. While injunctive relief is the preferred remedy in cases of NDA violation, an award of money damages may also be available.
Courts in Georgia and every other state have the power to enforce NDAs and award both injunctive relief and money damages. There are several potential types of money damages available against a contractor who violates an NDA. The amount of money damages available depends in part on how the NDA violation occurs.
If the contractor takes action to improperly take confidential information or proprietary information, the party harmed by the breach of the NDA may be able to recover money damages in amounts required to compensate it for the harm caused. If the breach of the NDA results in actual damages to the business, the business is entitled to collect money damages against the contractor who violated the NDA. The Recovery of actual damage amounts allows the business harmed by the NDA to be made whole.
Attorney fees are also available if provided for in the NDA or pursuant to a contract the NDA states that it is governed by. A provision for attorney fees under the NDA is preferred, and is something that any successful business will insist on, in its NDA.
If the breach of the NDA is the misappropriation of trade secrets, punitive damages may also be available. If the breach of the NDA is shown to be willful and wanton, the harmed party may be entitled to punitive damages to punish the party who committed the wrongful acts.
How to Create a Solid Independent Contractor NDA
When designing an independent contractor Non-Disclosure Agreement, it is important to cover all of your bases in order to ensure that the agreement protects you and is enforceable. Specifically, there are many factors that must be considered in the drafting process. First, consider whether your independent contractor NDA is one-way or mutual. Regardless of how many individuals are party to the agreement, it is possible for the agreement to be one-way or mutual based on the purpose of the transaction. In a one-way NDA, confidential information is only being disclosed by one party. For example, when drafting an agreement where confidential information is only being disclosed by you to a contractor, the one-way NDA will work in your favor. Conversely, a mutual NDA would be appropriate if two parties are sharing confidential information. For example, if you are hiring a website designer to retain the services of a company that also has its own confidential information, the appropriate NDA is one that is mutual.
Next, it is best practice to include a definition section within the body of the NDA. This section can be tailored to meet your specific needs, but should at minimum define the terms "Confidential Information," "Disclosing Party" and "Receiving Party." It may be useful to also define the term "Proprietary Information" if your business has proprietary information that is separate from its confidential information . When drafting the NDA, remember that confidential information is information that cannot be publicly disclosed, while proprietary information refers to information that gives you or your business a competitive edge. Common items that are typically considered confidential information include trade secrets, business operations, technical data and customer lists.
The next item worth considering is whether or not to include a non-solicitation provision within the NDA. A non-solicitation provision prohibits your independent contractor from contacting your customers as part of the terms of the confidential arrangement. Non-solicitation provisions can apply to both independent contractors and employees and can be extremely beneficial to the business. Typically, a non-solicitation provision starts for the duration of the term of the NDA. In other words, in the case of your independent contractor NDA, the non-solicitation provision would apply the term of the contractor’s services with your company.
If you are choosing to enter into an independent contractor NDA, then you are likely creating a contract around a new opportunity. In this case, consider also incorporating a non-competition provision into the NDA. A non-competition provision is very similar to a non-solicitation provision in that it prohibits the independent contractor from providing similar services to any other parties in a similar capacity. A non-competition provision is particularly important if you are providing proprietary information or trade secrets to an independent contractor where proprietary information and/or trade secrets are involved.
Common NDA Mistakes
Common Mistakes in Independent Contractor Non-Disclosure Agreements
One significant mistake is failing to spell out what constitutes confidential information. Definitions should be as detailed as possible to avoid confusion. Many independent contractors mistakenly think anything they create for the company is confidential, but this is not always the case, especially with the Fair Competition Agreement.
Another common mistake is an NDA with no expiration date. The contract should set forth the length of time confidential information is protected. Some confidential information, like client lists, may need to be protected indefinitely, but other information may only need to be protected while the independent contractor is working for the company.
A third frequent error is identifying restrictions that are unreasonably broad and could hinder the independent contractor’s ability to do business after their relationship with the company ends. These restrictions will probably be unenforceable but challenging to write again once the independent contractor leaves.
Independent contractor non-disclosure agreements should be short and to the point. An agreement that goes on for pages may not be read carefully and understood completely, raising questions about its enforceability in court. It also should be signed before the independent contractor begins doing any important work.
Finally, be sure that you are giving the independent contractor something in exchange for signing the NDA. Obvious trade-offs include proper compensation for work done or a bonus paid for completing a project, but you may also give them a copy of their work after the contract ends.
Independent Contractor NDA vs. Employee NDA
With respect to NDAs, there are two different types of agreements: (1) an employee NDA and (2) an independent contractor NDA. They are very similar but there are subtle differences. An employee NDA is generally governed by the Texas Uniform Trade Secrets Act. Whereas an independent contractor NDA is generally governed by the Texas Covenants Not to Compete Act.
The Texas Uniform Trade Secrets Act provides that you can prevent your employees from using your trade secrets. Your employees have a duty to keep your trade secrets confidential even without the use of an NDA. It’s important to note that even if your independent contractors have access to your trade secrets, they may not owe you a duty with respect to your trade secrets if you don’t have an NDA, but they generally are prohibited under the common law doctrines of misappropriation and breach of fiduciary duty .
The Texas Covenants Not to Compete Act is very different: An independent contractor NDA (also referred to as an enumerated agreement) can contain confidentiality agreements, non-competition agreements and/or non-solicitation agreements. If your independent contractor NDA defines your trade secrets, you can prevent your independent contractors from disclosing your trade secrets (confidentiality agreements). If your independent contractor NDA prohibits the independent contractor from competing against you, if certain requirements are fulfilled, this independent contractor NDA will likely be enforceable under Texas law. If your independent contractor NDA prohibits an independent contractor from soliciting your other independent contractors or employees, if certain requirements are fulfilled, this independent contractor NDA will likely be enforceable under Texas law.