Confidentiality and Noncompete Agreement for Employees or Independent Contractors

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General Purpose. This agreement--which is between "principal" and either an employee or an independent contractor (also called a consultant)--allows the principal to bind the agent to either or both of two restrictive clauses: (a) a confidentiality or nondisclosure agreement or (b) noncompete agreement.

Confidentiality. A confidentiality agreement, also known as a nondisclosure agreement, is generally used in two settings: (a) as part of an employment or independent contractor agreement and (b) as a prelude to discussions between two parties exploring the possibility of transacting business. This form address the first situation--i.e., the employment or independent contractor context--and is further discussed below. The following are links to others MedLawPlus.comŽ forms that contain confidentiality agreements:

1. Employment Agreement
2. Independent Contractor Agreement
3. Confidentiality Agreement for Potential Business Relationships
4. Letter of Intent (used once the parties have reached agreement relative to an asset or business sale)

This form contains confidentiality and non-competition clauses but is not a complete employment or independent agreement.

1. In the employment context, confidentiality agreements protect the principal against an employee or independent contractor's improper disclosure or use of the company's sensitive information and materials that are not known to the general public. Examples of such information would be customer lists, pricing information, methods for obtaining new business, production processes, other trade secrets, and internal company financial information. This is the purpose the form you are currently working with addresses.
   
2. In the case of confidentiality agreements signed prior to exploratory business discussions, the purpose of the confidentiality agreement is to allow each side to divulge confidential information to the other for purposes of discussing the sale of assets, joint ventures, or other business arrangements. In the agreement, each side makes promises to the other regarding safeguarding of confidential information and agrees to return the information / materials upon request of the disclosing party. We have a separate form that addresses this purpose entitled "Confidentiality Agreement, Potential Business Relationship".

Noncompete Agreements. A noncompete agreement is generally used in two settings: (a) as part of an employment or independent contractor agreement and (b) as a side agreement to the sale of a business. As the name implies, generally a "noncompete agreement" is one where a second party agrees not to compete with the first party for a fixed period of time. There are shades of prohibited activity under the umbrella of "noncompetition" and our form attempt to cover all three: (1) solicitation of business from current or past customers of the first party, (2) prohibit against even engaging in business within the same product lines and business territories in which the first party operates (i.e., covers future potential customers of first party), and (3) solicitation of employees of the first party to work for a competing business enterprise.

1. California. Although noncompete agreements (that are properly drawn with reasonable limits) are generally enforceable in all states, California is the exception where noncompetes are generally void. California Business and Professions Code Section 16600 provides: "Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Link. The enumerated, narrow exceptions are: (a) sale of a business, (b) partnership dissolution, and (c) disassociation of a partner. Link. Additional information on California Noncompetes.
2. Georgia. Under Georgia law, noncompetition agreements that prohibit employees from accepting unsolicited business from former clients after separation from service are unenforceable. Palmer & Cay, Inc. v. Marsh & McLennan Companies, 404 F.3d 1297 (11th Cir. 2005). Link.
3. Texas "Under Texas statutory law, to be enforceable, a [noncompete] must be 'ancillary' to an otherwise enforceable contract. See Tex. Bus. & Com. Code Ann. §15.50(a). An at-will employment relationship is not sufficient to support such a covenant. C.S.C.S., Inc. v. Carter (Tex. App. 2003). Thus, Texas employers typically couple a [noncompete] with a confidentiality agreement. In doing so, the determination of whether the covenant is ancillary to the confidentiality agreement is dependent upon 'the moment the agreement is made; the issue is whether, at the time the agreement is made, there exists other mutually binding promises to which the covenant not to compete is ancillary or part and parcel.' Sheshunoff Mgt. Servs., L.P. v. Johnson (Tex. App. 2003)." Link.
4. Missouri Noncompetes. Missouri courts will not enforce a noncompete agreement against an at-will employee who is terminated by the employer without cause.
5. Independent Contractors and Noncompetes. If you wish your contractor to have "independent contractor" status for tax purposes so that you are not liable for employment tax withholding and social security taxes, it is probably not wise to include a non-competition clause in the agreement. First, noncompletes for independent contractors would not be enforceable in many states. Second, this increases the control you have over the contractor in the eyes of the IRS. Please consult with your tax accountant or attorney to make sure your it is OK for you to enter into a noncompetition agreement with your independent contractor before doing so. Also, it is harder for a business to enforce a noncompete against and independent contractor than employee as the protectible business interest generally is smaller.
6. You should be aware that the courts do not look favorably upon noncompetition agreements as they run against the grain of our American notion of free enterprise. However, if the contract is drawn tightly and is not overly burdensome upon the employee or the other party to the agreement, the courts of the majority of states will enforce the contract. This is why our form limits your choices for the length of noncompetition to two years. Court have enforced contracts for longer periods; however, the shorter the time period, the better your chance for enforcement.

Tax Status as Independent Contractor. We suggest you consult your tax accountant or attorney for a determination of whether the individual you are hiring as a contractor is properly classified as an "indenpendent contractor" for tax purposes. Use of this form does not ensure classification of worker as "independent contractor". For more information about the issue of "independent contractor" v. "employee", the following is a link to the Internal Revenue Service's most important ruling on this subject: IRS Revenue Ruling 87-41

If you do wish to set a level of compensation for the independent contractor in your agreement, then you should use our Independent Contractor Agreement.

We also have an employment agreement that covers compensation as well as confidentiality and noncompete issues: Employment Agreement

Links to additional information relative to confidentiality agreements:

David V. Radack, Understanding Confidentiality Agreements; and

Non-disclosure Agreements, About.com.

Links to additional information relative to noncompete agreements:

Employee Noncompete agreements by SmartAgreements.com; and

Noncompete Agreements by Lycos Small Business.