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- Employee benefits are not available to independent contractors (ICs) because ICs are not employees. In fact, ICs do not have taxes deducted from their paychecks and must instead pay estimated income taxes in quarterly installments.
- ICs - also known in many situations as freelancers - can minimize their tax burden by reducing their gross income by making use of authorized business deductions.
- You might want to use non-disclosure provisions if you need to divulge private information to the contractor in order for them to work on your project(s).
- Documents, designs, drawings, sketches, assessments, source codes, marketing plans, development and production processes, and technical procedures may all be kept confidential. Similarly, your interface designs, wireframes, drawings, hardware and software layouts, functionalities, and cellular back-ends are all examples of sensitive information.
- Independent contractors, unlike employees, are not required by most state laws to protect business secrets. For example, if you reveal one of your startup’s trade secrets to an IC without a pre-existing confidentiality agreement, the contractor is not really obligated to keep it private.
- By signing a contract, the contractor recognizes that disclosing private information constitutes a violation of the contract - with significant and far-reaching repercussions. Furthermore, the existence of the agreement permits you and the contractor to have an open (and truly productive) dialogue regarding relevant matters.
- Additionally, if you employ a non-disclosure pact with one contractor, you should use it with all contractors that have access to the information. Otherwise, somebody who signed a non-disclosure agreement may allege that you didn't regard the material as classified on a consistent basis.
- Examine the confidentiality agreement for an independent contractor carefully, keeping in mind the specifics of the situation. This is because there is no such thing as a one-size-fits-all solution when it comes to independent contractor NDAs
Who is an independent contractor?
An independent contractor is a person who makes a living by providing goods or services to another person or company (and potentially multiple entities at a time) for a much shorter duration of time than a traditional full-time employee. There are strict distinctions between independent contractors and employees, and each form of employment has its advantages and disadvantages. One working style may be more suited to your startup than the other.
An independent contractor is generally a non-employee who is hired to execute a service for a company. While in principle, an independent contractor has control over the job being done, only an employer can actually manage the expected outcomes. The Internal Revenue Service has set precise standards to identify whether a person is an independent contractor or an employee; this classification affects how the contractor and - if relevant - the startup must manage taxes on compensation (i.e., on contractor payments).
The importance of confidentiality as an independent contractor
An independent contractor is not considered an employee since he/she can be more appropriately thought of as being a distinct commercial entity of their own. Independent contractors can operate as consultants, agents, or brokers, among other things. Others could be creative artists or those who specialize in certain tools and technologies. Unless they work for a union or are highly-compensated managers, most employees do not have a documented employment contract, but an independent contractor must always have one.
It's a good idea to set up a formal contract with each contractor who engages with you since it spells out things like:
- When the working period ends
- What occurs if a party wants out
- What happens if one party fails to meet its responsibilities
From product ideas and customer lists to software and designs, almost every startup has sensitive information. In many circumstances, the revelation of such sensitive information might be disastrous for a startup, especially if the info comes into the hands of market rivals. Furthermore, in today's tech-savvy world, data could be sent around the world in hours (if not in minutes). Because of the high expense of hiring employees, an increasing number of early-stage businesses are hiring "expert" consultants (or independent contractors) to handle a greater portion of their work, ranging from marketing and efficiency analyses to more basic accounting and software-based chores that were formerly undertaken by in-house employees.
All employees are bound by the "duty of loyalty", which states that if they steal trade secrets or act disloyally against the startup, they will face personal liability. Consultants, on the other hand, could work for multiple entities (which could easily include your competition), become employees of current competitors, and can even start their own business that ends up competing with you for clients. An interesting metaphor for understanding how vulnerable your information could be is that consultants frequently work weekends and nights, with sensitive material potentially left strewn over tables (or laptops with a sensitive tab/window open) with no one to oversee what is being leaked.
Simply emphasizing the necessity of safeguarding such data can be advantageous. A confidentiality agreement executed at the beginning of the partnership informs the independent contractor that your startup takes confidentiality seriously. By signing a contract, the contractor recognizes that disclosing private information constitutes a violation of the contract - with significant and far-reaching repercussions. Furthermore, the existence of the agreement permits you and the contractor to have an open (and truly productive) dialogue regarding relevant matters. Before a professional contract is signed, any queries/concerns regarding what constitutes “classified information” could and should be addressed, and both parties should have the chance to debate such matters (along with discussing the provisions and clauses laid down in the contract) so that they are fully aware of the details and consequences of each section of the contract.
When it comes to executing confidentiality agreements with independent contractors, a business has very little to lose and a lot to gain.
The independent contractor non-disclosure agreement is designed for contractors who offer their skills for you/your business and are frequently referred to as "1099 contractors" due to their tax status (they need to use a 1099 form to report their earnings to the IRS). Independent contractors, unlike employees, are not required by most state laws to protect business secrets. For example, if you reveal one of your startup’s trade secrets to a freelancer without a pre-existing confidentiality agreement, the contractor is not really obligated to keep it private. As a result, signing a formal non-disclosure agreement with the contractor is the best way to secure your startup’s private information. In fact, you would even be able to claim monetary damages if the agreement is broken — i.e. if your information is shared without your permission. Because contractors could be anybody in your company - from accountants to content writers to window cleaners, the contract doesn't specify what is secret, instead relying on the trade secret owner (i.e., you, the startup) to designate information as private, whether written or oral. This is not a contract that specifies the terms of employment (compensation, deliverables, etc.).
Additionally, if you employ a non-disclosure pact with one contractor, you should use it with all contractors that have access to the information. Otherwise, somebody who signed a non-disclosure agreement may allege that you didn't regard the material as classified on a consistent basis.
How to use an independent contractor non-disclosure agreement?
Each of the clauses of a standard Independent Contractor Non-Disclosure Agreement is explained in detail below. Here’s a customizable contract template for your perusal.
Fill in the Hiring Party's name or the name of the business. This refers to the entity that is disclosing sensitive information (which is most likely you, the founder who's drafting this contract). Fill in the name of the person or business which will receive or have access to the disclosed data (the “Contractor”). Finally, provide the effective date of the agreement. This is usually the day on which the last party signs the contract.
This section specifies which services the Contractor will provide. Present a brief description of the work here.
What exactly is shielded from disclosure is defined in this section. It's important to remember that if you're supplying documentation, you should mark it as confidential. If the information is voiced, its confidentiality should be explicitly indicated.
This paragraph specifies that the Contractor must keep your trade secrets confidential and will not expose them to anyone without your prior written authorization.
Return of Material
This section specifies that the Contractor has agreed to return any materials you have supplied. Generally, the Contractor has up to 30 days to return the items/materials under the agreement; however, you can extend this time if you desire.
This clause enumerates all the types of information that aren't covered by the contract. Such exclusions are based on court rulings and state trade secret statutes that indicate that this sort of information can not be protected as a trade secret.
This provision establishes the agreement's expiry date for the Contractor. The agreement should ideally be in place for as long as the information is expected to stay confidential.
Acknowledgment of Liability Immunity
Under the federal Defend Trade Secrets Act, including this provision qualifies the employing party (i.e., you) for double damages and attorney expenses.
- Miscellaneous clauses (sometimes known as "boilerplate") are typically written together at the conclusion of a contract.
- Relationships. Most contracts include a clause like this one that disclaims any relationship other than the one stated in the contract.
- Severability. The severability provision states that if you are sued over the contract and the court determines that one portion of the NDA is invalid, then that section can be taken out and the remainder of the agreement would still be legal.
- Integration. The integration option ensures that the version of the contract that you're signing is the most recent version and that neither party can depend on previous assertions.
- Waiver. This section indicates that you have the right to file a complaint about a violation of the NDA even if you don't report it straight away.
- An injunction. A court order instructing someone to do (or not do) something is known as an injunction. If someone breached your NDA, you can demand a court injunction to instruct them to cease utilizing your information.
- Law. The independent contractor agreement can be governed by the laws of any state; however, the most obvious state to include under this clause is the one where you (Hiring Party) are located.
- Judicial authority. The goal of including a jurisdiction clause in an NDA is to persuade each party to agree ahead of time to have jurisdiction in one county or state and to waive the right to sue or be sued in any other jurisdiction.
- Assignations and Successors. This clause legally binds any firm that acquires one of the parties.
- Signing the contract. Someone with the required authority (i.e., an authorized representative) must sign the agreement on behalf of each party. Each party must sign two copies, one of which they should preserve. Both parties will secure an original signed agreement in this manner.
Suggestions to secure your business via an Independent contractor non-disclosure agreement
The first of many stages in preserving and safeguarding your startup's sensitive information is to create a non-disclosure agreement.
The following suggestions can help you secure your business properly:
- Non-disclosure agreements are divided into two categories: unilateral and mutual. When just one party will be revealing and sharing private information, such as when considering bringing on an independent contractor to help your startup, it is a case of unilateral confidentiality and, therefore, unilateral non-disclosure agreements should be utilized. On the other hand, when both parties are exchanging classified data, mutual non-disclosure agreements should be employed.
- Allow prospective contractors at least a few days to study, apprehend, and execute the non-disclosure agreement. This reduces the possibility, or at the very least the validity, of a claim that they did not comprehend the independent contractor’s terms of service.
- Attest 2 copies of the contract - one for you and one for the prospective independent contractor.
- Before you start negotiating with an independent contractor, ensure that you have obtained an independent contractor agreement, along with a confidentiality clause. A confidentiality agreement should be executed in combination with a change in services/terms if the contractor has been working with the startup for a long period.
- It's essential to notify your independent contractors that the resources they're working with are sensitive and proprietary. Weeks after entering into a confidentiality agreement, the contractor might forget the cautions and guidelines contained in the agreement. Therefore, when your business distributes copies of private material, make sure that the term "CONFIDENTIAL" is written in big block letters on the documents.
- Nothing lasts forever - and contractual partnerships are no exception. You should hold a serious meeting with the contractor at the completion of their independent contractor agreement. The contractor should be informed of his or her ongoing responsibilities toward the business at this meeting, including the need to maintain information confidentiality even after the regulating agreement expires.
- Examine the confidentiality agreement for an independent contractor carefully, keeping in mind the specifics of the situation. This is because there is no such thing as a one-size-fits-all solution when it comes to independent contractor NDAs.
Learn more with us
- Founder's agreement template
- Employment non-disclosure agreements
- Consultant non-disclosure agreement
- Confidentiality agreement vs. non-disclosure agreement (NDA)
- Learn more about accounting for startups
Access more guides in our Knowledge Base for Startups.
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If you're looking for help with understanding what an independent contractor non-disclosure agreement is (or executing such an agreement at your startup), we have got your back, get in touch with us.
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