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What's the Big Deal with Confidentiality Agreements for Employees?

Sometimes, organizations have proprietary or confidential information that, if shared with the competition, could cause the company to lose its competitive edge. An employee confidentiality agreement can be used to legally protect that information against unwanted disclosure.

Companies that use independent contractors instead of, or in addition to, employees also need to protect their information from misuse or inappropriate disclosure and should require those individuals to sign an independent contractor confidentiality agreement. The two types of confidentiality agreements are substantially similar, although they are designed for different audiences.

What Information can an Employee Confidentiality Agreement Protect?

The information included in, and protected by, employee confidentiality agreements is up to each employer to determine. These types of legal documents often include provisions designed to protect:

  • the company's financial information,
  • customer lists and information about customers' business history with the company,
  • products in development,
  • business strategies,
  • patent rights, and
  • intellectual property rights (i.e. anything the employee develops or conceives while employed belongs to the employing company).

Companies using confidentiality agreements for employees or independent contractors should ensure that their agreements are tailored for, and are specifically designed to protect, their specific company information. Blanket confidentiality agreements that are overly broad may not be enforceable.

For How Long Is an Employee Confidentiality Agreement Valid?

Generally speaking, employee confidentiality agreements protect the information specified in the agreement until that information is common knowledge or is otherwise public information, or until the employee or contractor is released from their obligation to maintain confidentiality.

The agreement might also specify a time period during which the company will take action if the employee violates the agreement and discloses protected information.

What Is Included in a Typical Employee Confidentiality Agreement?

To be effective, employee confidentiality agreements should be structured to include certain key provisions. However, the good news is that they do not need to be long, drawn-out documents full of confusing legalese.

The ideal employee confidentiality agreement will be specific to the organization requiring and creating it. However, there are some common provisions in many of these agreements:

  • Parties – The agreement should clearly identify all of the parties to the agreement. Generally, this is the employing company and the employer, although sometimes a parent company or subsidiary will also be included in an agreement if there is an overlap of information.
  • Consideration – In order to make any type of contract valid, each party must "get" something out of it. Most employee confidentiality agreements include language like "for good consideration." The employee gets to start (or continue) working for the employer, and the employer gets the employee's promise not to disclose proprietary information.
  • Protected information – Employee confidentiality agreements should clearly describe what information is protected under the agreement. This section should be tailored to the company's needs rather than simply stating, "All information of XYZ Company."
  • Exceptions – Employee confidentiality agreements should also outline different scenarios in which sharing company information is not prohibited. For example, a typical agreement might state that the employee may share information that has already been made public by someone else or if the employee is legally required to provide the information.
  • Return of property – It is critical that employees understand that, after the end of their employment, they must return all work papers, work product, notes, customer files and records, physical material, and hardware. This may seem intuitive and basic, but spelling it out in the employee confidentiality agreement can help protect company information and resources.
  • Ongoing obligation – The employee confidentiality agreement should specifically state that an employee's obligation to maintain confidentiality does not end when their employment ends.
  • Remedies – The legal and equitable remedies section of an employee confidentiality agreement should state what actions are available to the employer if the employee violates the terms of the agreement. This section should explain that the employer will seek remedies through court actions to protect their proprietary information from misuse or inappropriate disclosure.
  • Governing law – Employers can choose which state's laws will govern disputes. The agreement should specify that choice; generally, this is the state where the business's principal offices are located or its state of incorporation/formation. Note that this provision does not allow companies to choose where (in what jurisdiction) disputes will be heard, but it does describe what laws should be applied.
  • Waiver – Employee confidentiality agreements often contain a provision that allows the company to waive its contractual rights under the agreement to give to the employee to disclose certain company information in a separate writing.

Why Employee Confidentiality Agreements Should Be Specific

When it comes to the information to be protected, which is the heart of any employee confidentiality agreement, it is important to be as specific as possible. Employers should ensure their agreements describe the protected information rather than simply saying, "All information about XYZ Company."

An agreement that is considered too broad may be struck down by the courts and voided. Similarly, an agreement that includes provisions that are overly restrictive may be unenforceable.


Who Should Sign Confidentiality Agreements?

While employee confidentiality agreements are typically used for a company's existing employees (and independent contractor agreements are used by the company's contractors), some organizations also require candidates to sign confidentiality agreements during the job interview and hiring process for management or executive-level positions.

Similarly, there may also be situations where consultants or third-party vendors should be asked to sign confidentiality agreements before engaging in work for the company or on its behalf.

Deciding When to Implement Employee Confidentiality Agreements

Ideally, companies would have every employee sign an employee confidentiality agreement up front, as a condition of hiring. However, in reality, most companies that choose to implement employee confidentiality agreements do so after they have been in business for months or even years.

Asking long-time employees to sign a new confidentiality agreement as a requirement of continued employment may be viewed as a negative by the employee, who can feel that the employer no longer trusts them or that the employer is suddenly changing the terms of the employer-employee relationship. Employers should understand that they may lose valuable employees who are not willing to sign new employee confidentiality agreements. Some employers choose to roll out confidentiality agreements for existing employees in conjunction with a promotion, bonus, or pay raise.

Illegality

In some states, it is illegal for an employer to fire an existing employee for refusing to sign a confidentiality agreement. Employers who find themselves in that situation may wish to consult a specialist before taking action.

Things Employers Should Know/Do When Implementing Employee Confidentiality Agreements

An employer implementing an employee confidentiality agreement should follow these best practices to avoid potential later claims that the agreement was not an arm's length agreement.

Time

Give potential new hires and existing employees enough time to review the employee confidentiality agreement before signing. Ideally, this would be at least several days. Providing time for review gives the employee or candidate an opportunity to ask clarifying questions or to have the agreement reviewed by their own legal counsel.

An employer who requires an immediate signature on a confidentiality agreement may later find themselves struggling to defend and enforce the agreement's provisions against an employee who claims they did not have time to read or understand what they were signing.

Copies

Another best practice is to sign and countersign two copies of the agreement, so both the employer and the employee retain signed originals. In the alternative, employees should promptly receive a paper or digital photocopy of the signed and countersigned agreement for their records.

Records

Employers should keep the signed agreements on file, in each employee's human resources personnel file. This will make it easier to locate the agreement at a later date, should it be necessary to enforce it.

Reminders

Make your policy regarding confidentiality and privacy accessible to all employees and contractors.

In addition, a best practice is to remind employees of their obligations under the confidentiality agreement periodically. This can be a good topic to cover during annual employee meetings. When confidential or proprietary information is distributed to employees, it should be clearly marked as such so there is no question or dispute about it later.

Warnings

Many organizations have policies and practices in place to help them avoid having to later enforce their employee confidentiality agreements. One of those practices is to send a formal letter to each employee who leaves the organization (or independent contractor whose work for the company is finished), officially reminding them of their contractual responsibility. It can be helpful to include a photocopy of the signed agreement with this letter.

In addition to, or instead of, mailing a letter and a copy of the signed agreement, some companies include this discussion during every exit interview.

Adjust as needed

A company's need for employee confidentiality agreements will change over time, just as the business itself changes and evolves. It is important to review the language contained in the agreement periodically, and to make changes as necessary so it continues to be adequate and effective to protect proprietary information.

It is also common for different types of employees, with different roles and responsibilities for the company, to have access to different levels of confidential information. Some organizations have multiple current versions of employee confidentiality agreements with each version tailored to a different subset of the employee population.

A Word of Caution

Organizations that maintain different versions of their employee confidentiality agreements must exercise caution to ensure employees/candidates are asked to sign the right agreement. Having an employee sign something that does not pertain to them or to their job responsibilities is not much better than not using an employee confidentiality agreement at all.

Comparing Different Types of Employee Agreements

The terms "confidentiality agreement" and "non-disclosure agreement" (sometimes abbreviated as NDA) are actually often used interchangeably.

Some companies also require their employees to sign "non-compete agreements." Where an employee confidentiality agreement says that an employee is prohibited from sharing, using, or disclosing the company's proprietary information and trade secrets, a non-compete agreement says that employees may not work for a competitor in any location where their current employer conducts business for a period of time after the end of their employment relationship. These agreements are designed to protect an employer's competitive edge and to avoid losing customers when employees leave the organization.

Employers should be aware that non-compete agreements may be unenforceable in certain states.

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