Comparing Employees and Contractors

“And I'll keep it confidential

It's secrets, confidential.”

from Confidential by Pet Shop Boys

In some conversations with business owners, they emphasize the importance of employees over contractors, particularly in sales, in order to safeguard their confidential business information. But are W2 employees truly better at keeping proprietary business information secret than 1099 contractors?

Approximately 33% of the US workforce is bound by non-disclosure agreements (NDAs), which have been on the rise as companies grow increasingly concerned about competition and their reputation. Here are four reasons to have your employees sign an NDA:

1. Protect Important Confidential Information: When employees leave, they often carry information with them, even if it's just in their heads. An NDA legally binds them to keep your confidential information secure, even after leaving your company.

2. Psychological Deterrence: The fear of legal repercussions can deter employees from misusing your confidential information.

3. Clarify IP Ownership Rights: To prevent misunderstandings, it's best to include proprietary rights clauses in the NDA to ensure any intellectual property rights automatically transfer to you.

4. Clarify What Needs to Stay Confidential: Employees may not always understand what information is considered confidential. An NDA helps clarify this.

In summary, using an NDA as a condition of employment is a wise business move.

But what about 1099 contractors? Independent contractors work for multiple clients, possibly even competitors. They may start their own companies that compete with your business. And they often work remotely and during non-traditional hours, making it riskier for confidential information to be mishandled.

So, it's equally important to ensure that the Service Agreement with a contractor contains a robust Confidentiality clause very similar to an NDA. It should specify that the contractor and their representatives must not use, disclose, or communicate any proprietary information. And that this confidentiality clause remains in effect even after the contract ends. Additionally, it's advisable to define what information is considered proprietary and include a Work Product Ownership clause.

This binding agreement ensures that contractors are legally obligated to maintain discretion even after the contract concludes.

Now, back to the question: Are W2 employees better at keeping proprietary business information confidential than 1099 contractors? Here are a couple of data points:

• Trade secret litigation in federal courts has been on the rise. The number of trade secret cases doubled between 1988 and 1995, then doubled again between 1995 and 2004, and doubled once more by 2017.

• Workforce mobility, technological advances, and digitization are expected to drive further trade secret-related litigation in labor and employment matters.

• In 2008, 9% of alleged misappropriators in Federal Court were third parties, while 59% were employees or former employees.

• In 2020, plaintiffs received favorable rulings 68% of the time, while defendants/counterclaimants received favorable rulings in only 24% of cases, with split decisions occurring in the remaining 8%.

• In 2020, alleged misappropriators who were also employees had a slightly higher success rate and a lower failure rate compared to third-party misappropriators, though these differences were not statistically significant.

In short, no clear evidence suggests that one form of human resource engagement is more trustworthy than the other. With a sound legal framework in place, both employees and contractors can be held accountable for maintaining confidentiality.

Talk to us to find out how we structure our Service Agreements to protect your confidential business information.

And just to be sure, here is the disclaimer: This article is not a substitute for professional legal advice. This article does not create an attorney-client relationship, nor is it a solicitation to offer legal advice.

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