Who Is More Trustworthy?

 

“And I'll keep it confidential

It's secrets, confidential.” 

from Confidential by Pet Shop Boys

 

In a recent conversation with a founder, she shared that it was important to her that certain positions like her VP of Sales be W2's employees, given the confidential business info they would know and have access to.

She shared this thought in the context of a conversation about engaging a contractor. This got me thinking:

Are W2 employees better at keeping proprietary business information confidential than 1099 contractors?

Nearly 33% of the US workforce is bound to their company by a non-disclosure agreement (NDA). NDAs force employees to be silent about anything from trade secrets to sexual harassment. And they have been growing in number as companies become increasingly worried about competition and reputation.

Most commonly, a unilateral NDA is signed as a condition of employment, as part of a severance package, or as part of a settlement agreement.

As a founder or business owner, consider these four reasons as provided by EveryNDA to sign a Non-Disclosure Agreement with your employees:

1.     Possible loss of important confidential information - Every time an employee leaves, they are undoubtedly taking information with them, even if it’s only in their heads. The NDA places a legal obligation on the employee to keep your confidential information secret and not misuse it during a defined period of time, even after they leave your company.

2.     Psychological deterrent effect - An employee is less likely to steal your confidential information if they are aware that they could be sued. The psychological deterrent effect alone can be extremely effective in protecting your secrets.

3.     Clarify intellectual property ownership rights (IP) - To avoid any misunderstandings and vagueness, it’s best practice to get the employee to sign an NDA with proprietary rights clauses to ensure that any IP ownership that arises is automatically transferred to you.

4.     Clarify to employees what needs to be kept confidential - It may seem obvious to you as an employer, but it's often not as clear to an employee what information within the company is considered confidential. They don't have the bird's eye view and vision that you have as the head of the company.

All in all, it makes good business sense to use an NDA as a condition of employment.

How about a 1099 contractor?

Over time independent contractors work for a greater number of clients and might actually do work for a competitor at some point. They are also engaged in their own business efforts, and at times begin their own companies, which may end up competing with their clients or become employees of existing competitors. They often work remotely, at night, and on weekends when confidential information may be left lying around.

So, it also makes good business sense to ensure that the Service Contract signed with a contractor contains a unilateral clause on Confidentiality that is essentially equal to the NDA with an employee. Something along the lines of:

“Contractor and its employees, agents, and/or representatives shall not at any time, or in any manner, either directly or indirectly, use for personal benefit, or divulge, disclose, and/or communicate in any manner, any information that is proprietary to Client…

Contractor and its employees, agents, and/or representatives shall protect such information and treat it as strictly confidential. This provision shall continue to be effective after the term and/or termination of the Contract…

Any oral or written waiver by Client of these confidentiality obligations, which allows Contractor to disclose Client’s confidential information to a third-party shall be limited to a single occurrence tied to the specific information disclosed to the specific third-party, and the confidentiality clause will continue to be in effect for all other occurrences…

Upon the termination of the Contract, Contractor shall return to Client all records, notes, documentation, and/or other items that were used, created, and/or and controlled by Contractor during the Term of the Contract...”

This can be further enhanced by describing in more detail and with examples what information the client considers to be proprietary, as well as with a clause around Work Product Ownership, or IP.

This binds the independent contractor to secrecy and has legal ramifications should the contractor intentionally or inadvertently disclose privileged information. The idea that a contractor will be held liable for disclosure even if not intentional serves to strike home the importance for the contractor to maintain discretion long after the contract has ended.

So back to the question:

Are W2 employees better at keeping proprietary business information confidential than 1099 contractors?

• Trade secret litigation in federal courts is growing exponentially. Data show that trade secret cases doubled in the seven years from 1988 to 1995, doubled again in the nine years from 1995 to 2004, and doubled again by 2017.

• Expanding workforce mobility, as well as technological advances and the digitization of information, are expected to continue to drive the increased trade secret-related litigation associated with labor and employment matters.

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

• In 2020, of the cases that ultimately resulted in a verdict, plaintiffs received a favorable ruling 68% of the time, while defendants/counterclaimants received a favorable ruling in only 24% of cases, with split decisions occurring in the other 8%.

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

In short, there really is no evidence that suggests that one form of human resource engagement is more or less trustworthy than another. With a legal framework, the ground rules, the specifics, and the reinforcement of maintaining confidentiality are in place for both, the employee and the contractor.

How about Sales?

To close this article, here is an interesting perspective specific to sales functions by Stout:

“Many cases over the past number of years have involved the departure or termination of sales personnel. This is an area ripe for theft of trade secret claims because these employees are responsible for revenue generation and have often spent years, if not decades cultivating, maintaining, and growing customer relationships.

Should these employees depart for a competitor or be terminated based on at-will employment or for cause and subsequently join a competitor, the potential for companies to experience damages due to the theft of trade secrets significantly increases. This would include items, such as customer lists and contacts, volumes, pricing, and supplier information, among others, that could possibly result in the company experiencing loss of business and/or price erosion, as well as other damages.

As a result, more companies are proactively pursuing claims to protect their marketplace position and customer base, as any such departure has the potential to cause a substantive reduction in revenue and profits. Thus, companies are actively pursuing trade secret claims as soon as it becomes apparent that former employees have breached their confidentiality agreements and/or restrictive covenants.

Often, these companies also want to set a tone for the employed workforce, indicating that a disregard for their employment agreements will not be tolerated.”

Talk to us to find out how we structure our Service Agreements and how our executives can help grow your business.

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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Workplace Fairness – Non-Disclosure Agreements

EveryNDA – 4 Reasons to Sign an NDA with Employees

Stimmel Law – Confidentiality Agreement for Independent Contractors

David S. Almeling, et al. A Statistical Analysis of Trade Secret Litigations in Federal Courts

Stout – Trends in Trade Secret Litigation Report 2020

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