Do You Need an NDA When Hiring Contractors?

If you’re like most businesses, you have information that could hurt your venture if it got into someone else’s hands. NDA's can protect you.

NDA for Contractors

Even if your company doesn’t have top-secret information, like code for a killer new social network or the recipe for Coca-Cola, you have other types of valuable information that need to remain confidential or private.

It could be your customer list, your financial records, or ideas for a new marketing campaign. So how can you protect that information? Today we’ll look at the first line of defense—a non-disclosure agreement (NDA), otherwise known as a confidentiality agreement. It’s standard practice in business to use one. We’ll explore what it is, what it includes, and where you can find a template.

 

What is an NDA?

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An NDA is basically a contract that binds someone to keep a secret. Its main purpose is to create a confidential relationship between a business and its contractors, employees, and any other business partners who might get a behind-the-scenes look at your operations.

The NDA is designed to prevent these individuals from revealing anything that should stay “in-house”—including client information, marketing plans, financial data, competitive analysis, technical information, etc. Perhaps you simply don’t want a subcontractor to talk directly with your clients and disclose their role.

Elements of an NDA?

When hiring a contractor, an NDA helps establish what he or she can and can’t reveal about your business and work. A typical NDA will include the following key components:

Protected Information

Not every bit of your company information needs to be kept secret. For example, will it really matter if anyone finds out who your email provider is or where you get your coffee? While you might think that it’s best to just leave this as broad as possible to protect any and everything, it’s wise to be very specific about what can’t be disclosed publicly.

By spelling out exactly what should be covered, you make sure that the contractor is on the same page. For example, a new contractor may not even realize that they shouldn’t contact your client directly or that you don’t want anyone to know about a new website until it’s released.

Timeframe

Most NDAs don’t last for infinity. You should specify exactly how long the information should stay confidential. This can be as short as the duration that the contractor will be working for you, or a set length of time (such as five years, which is a pretty common term).

Obligations

You may need to define what the contractor can or can’t do with the protected information. In most cases, it would make sense to include that they cannot reveal confidential information to anyone outside of your company. But, in some cases, you may want to add some caveats to this. For example, are there some cases where they can use/disclose confidential information? Perhaps if they have your written approval?

What Happens if There’s a Breach?



An NDA should always include some kind of provision about what happens if there’s a breach of the NDA. You may want to specify what kind of damages you’re entitled to. The usual legal remedy is to sue for damages, but it’s not always easy to calculate what those damages should be worth. That’s why many NDAs also include language on “injunctive relief” – which gives you the ability to get a court order to stop the violator in his or her tracks (see this Harvard Business School template for an example).

Method of Resolution

The NDA should define how a dispute should be resolved when there’s a breach or disagreement regarding the agreement. Will arbitration be used? If attorneys are used, who is responsible for paying the attorney fees?

Creating an NDA + Independent Contractor Agreement

Creating a non-disclosure agreement is one of the best ways to protect your business when hiring an independent contractor. While it may appear trust is at the root of needing or wanting an independent contractor to sign an NDA, it really comes down to protecting the intellectual property and trade secrets that you’ve obtained over the years in your company.

That being said there are 2 types of non-disclosure agreements to be aware of.

Unilateral Non-Disclosure Agreement

A unilateral confidentiality and non-disclosure agreement is used when only one party in a business relationship is sharing work, ideas, or other intellectual property where confidential information disclosed needs to be protected. This type of independent contractor agreement is the most common practice for a small business relationship. Typically, your contractors won’t worry about such information on their end because they’re not sharing sensitive information with you.

Mutual Non-Disclosure Agreement

It’s probably obvious by now, but a mutual non-disclosure agreement comes into play when both you and an independent contractor are sharing proprietary information or confidential information without prior written consent from the other party. Depending on the nature of the working relationship and the work being performed, independent contractors also need to protect their company’s confidential information.

Non-Disclosure Agreement (NDA) Templates

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There are countless digital contractor templates available to help you craft your own NDA. Try to use a template as a starting point that you should review (yes, you actually have to read it) and make sure it works for your needs.

For example, you should personalize the “protected information” section, as well as make sure there’s nothing too onerous for your independent contractor to have to agree to. For example, some contracts give the business the right to search the computer of an independent contractor at any given moment, which might be overkill for you and your workers.

While developing your contractual relationship, it’s also important to remember independent contractors can walk away from your business if they aren’t happy with the NDA or if they don’t want access to the confidential information you’re sharing with them.

Some sample NDA templates can be found at Harvard Business School, NOLO, and Upcounsel.

Review the Entire Agreement

Once you’ve created an independent contractor non-disclosure agreement, assign a time period for review. Allow your contract the necessary time to review it themselves or to have their lawyer or law firm take a look as well.

While you want to legally protect yourself, independent contractors also want to feel protected. Giving them the time to review such information can reduce the chances of a claim that the terms of the independent contractor non-disclosure agreement weren’t understood.

Sign two copies of the same agreement, one for you and one for the independent contractor.

Once both parties sign the independent contractor agreement or NDA then you can begin discussing the confidential information or trade secrets related to your work.

There are instances where independent contractors may have been working for your company already and their duties are changing. This change in work may now involve a trade secret or something considered confidential information. It’s important to identify when a contractor will be working with privileged information and that such confidential information needs to be protected the same way it would be if the contractor was new to the company.

Protection of Confidential Information

It may seem overkill, but months down the road after you hire independent contractors they may not be thinking about the NDA they signed. When you distribute confidential information, write the word “CONFIDENTIAL INFORMATION” in bold letters on the face of the documents, or save working files with “CONFIDENTIAL” in the file name.

Like permanent employees, independent contractors will move on from your business, whether it’s their decision or yours. When contractual relationships end, meet with your independent contractors and remind them of the NDA and their obligations to keep sensitive information private.

The Bottom Line

Review the independent contractor confidentiality agreement carefully. One size does not fit all.

And keep in mind that an NDA is just a document. It doesn’t guarantee that someone won’t steal or misuse your confidential information, but it does give you an opportunity to seek legal recourse if they do. Federal and state laws do offer additional protection, but only if NDAs have been used and signed by an independent contractor and a company.

But if there is an unauthorized disclosure of your trade secrets, you’ll need to decide if it’s going to be worth the time and money to pursue the breach through legal channels.

An NDA is a relatively easy document to produce and should become part of your standard practice when bringing anyone new onboard. However, never rely too heavily on this piece of paper; it’s up to you to use common sense when sharing sensitive details with those around you.

This post was updated in February 2022.



Lisa Craymer
about the author

Senior Content Marketing Manager, FreshBooks Lisa is passionate about small business success, having managed funding programs for hundreds of Canadian start-ups and entrepreneurs. She is presently Senior Content Marketing Manager at FreshBooks.