Confidential information is often primary to the operation of a business. It can include information that is core to the business’ operation – information about its financials or even information about clients. This information can be harmful if it gets in the hands of the wrong people. This is why confidentiality agreements are used by many companies to protect their trade secrets and interests.
This article will give you an overview of confidentiality agreements and their use in the employer-employee relationship.
Disclaimer: Our article is intended to be a summary of the rules around confidentiality agreements. It is in no way intended to constitute legal advice. Seek legal advice in your respective jurisdiction prior to implementing an NDA.
What is a Confidentiality Agreement?
Confidentiality agreements, also called non-disclosure agreements (NDAs), are primarily used to protect confidential information in a business setting. NDAs can be introduced in any relationship. For example, in an employer-employee relationship, a doctor-patient relationship or an attorney-client relationship.
This article mainly focuses on the employer-employee relationship with a particular focus on the employer. If you are an employee, watch the video below explaining how NDAs affect you.
In short, whoever the NDA applies to is prohibited from disclosing specific confidential information as predicated in the NDA.
Most often, NDAs are included as part of the contract of employment, but they can be implemented at any stage in the relationship. For example, at the start of a new job or after a dispute has taken place or has been settled.
Most NDAs take effect from the moment that they are signed, so it’s important to have employees sign them as early as possible so that no confidential information is divulged to them prior to their signing the NDA.
For an NDA to take effect, the employee needs to read, agree, and sign it. Employers can choose to require that a witness to the NDA. This can be useful if the employee later denies affirming the agreement and the witness can be called to give evidence.
Unilateral vs Bilateral vs Multilateral NDA
NDAs can be designed to be unilateral or bilateral. Unilateral NDAs only affect one party to the agreement whereas a bilateral agreement applies to both parties.
In most employment contracts, only a unilateral NDA is required so that the employee does not disclose confidential information. In client relationships, a bilateral NDA may be required where both parties have the potential to disclose confidential information about the other party.
There is also another type of NDA – the multilateral NDA – but it is not as widely used. It is applied when there are more than two parties who have the potential to disclose confidential information. In employment relationships, unilateral NDAs are most common, and multilateral NDAs are rarely applied.
Multilateral may nevertheless come in useful to your business when working on deals with multiple parties who all have the potential to disclose confidential information.
What an NDA Cannot Be Used For?
While NDAs can be used for keeping many types and sources of information confidential, there are a few cases where they cannot be used. NDAs cannot be used to stop employees from:
- Claiming harassment or discrimination
- Reporting a crime
- Reporting inappropriate behaviour
In these situations, it would be inappropriate to use NDAs to suppress information. Where an NDA attempts to silence employees and stop them from whistleblowing or reporting a crime, it will be considered invalid. If an NDA is invalid, it will no longer be binding on the employee.
However, it is legal in most nations to use an NDA to cover up a settlement that arises or follows on from reporting a crime or whistleblowing.
Legal Information Requirements for an NDA
Most countries require clearly drawn up NDAs, so it’s important to include some basic information within the agreement.
Identify the Parties to the NDA
Clearly identify all parties by name and address.
Define what Confidential Information is Protected by the Agreement
Make the definition wide enough so that it will fit all types of confidential information within its limits.
The Meaning of Confidentiality
Outline what confidentiality means within the remit of the agreement. Highlight the limitations of the agreement. Write this clause in plain English without any legal jargon so that all parties can easily understand the need for confidentiality.
Any Exclusions to the NDA
It is important to include any situations in which the NDA will not apply or where it will fail to apply. One such situation is where the law requires disclosure. In such cases, the NDA is overruled by the law of the state.
The NDA should declare all such situations so that the limits of the NDA are clearly written and communicated. If it is not, a court may declare that the NDA is ambiguous and therefore, not binding on your employee.
To meet the criteria of clarity, it would be beneficial to list all parties who can receive the information and what they can do with that information. It would also act as an instruction sheet for your employees as well as third parties who receive such information.
Clearly define the lime limit of the NDA and when it will cease to apply to an employee. Either provide a specific date when it will expire or a specific number of days/months/years from the date that the agreement is signed.
Independent Legal Advice
All parties to the agreement are entitled to independent legal advice. This is to stop any bias from the legal team of the employer. It is recommended that employees get frequent legal advice as the law around confidentiality changes often and the law may differ in their state.
Time Limit on an NDA
It is important that you include a time limit for your NDA to define how long it will remain binding upon the employee. The length should be realistic. Ideally, the employee would be bound for the entirety of the duration of their employment and an additional year or two to ensure that the employee cannot simply quit and reveal the confidential information to a competitor. To back up an NDA, it may be wise to ask your employees to sign non-competes so that they cannot switch over to a competitor and take trade secrets with them.
The time limit for an NDA also cannot be too long – e.g. for life. In such a scenario, were an employee to breach the agreement, then the court may find that the agreement was too restrictive, to begin with and opt to nullify the agreement. So, it’s important that a reasonable time limit be attached to it.
Additionally, time limits can be attached to individual clauses or types of information. This is important for trade secrets as they are often recognised as having no time limitation. This allows the employer to impose confidentiality upon employees for life regarding trade secrets. See here for more information on what it takes for information to qualify as trade secrets.
For other pieces of information, such as the trade secrets of client companies, the same time limit may be attached. However, for other pieces of information which are time-sensitive, it may only be reasonable to enforce confidentiality for as long as it remains sensitive.
Termination of Confidentiality Agreements
A non-disclosure agreement cannot be unilaterally terminated by the employee. The employer must agree to end any such unilateral confidentiality agreement. If the agreement is bilateral or multilateral, then the express agreement of each party to the agreement is required. Furthermore, the agreement of other parties may be required in some circumstances – such as that of the data subject.
Breach of a Confidentiality Agreement
Breach of an NDA can be very serious and the remedies available are proportionately serious. The best option for you as a company is to stop the breach from occurring in the first place. This can be done by obtaining an injunction by way of a court order. This is a legally binding order to prevent the individual from disclosing confidential information.
But if the confidential information has been disclosed by the employee then your options are limited. You cannot simply take back what they have disclosed. Therefore, the most effective and useful tool is to get monetary relief for any damage caused due to the breach. The legal action can be taken under multiple limbs of the law. Some of these are:
- Patent Infringement – the use of or disclosure of a patented product or process without the patent holders permission.
- Copyright Infringement – the unlawful use of or reproduction of copyrighted material such as a piece of writing or music.
- Misappropriation of Trade Secrets – disclosure of a trade secret without express or implied permission of the trader.
- Breach of Fiduciary Duty – when information is divulged outside a legal or ethical relationship. For example, this can be between an employee and an employer or an employee and a client.
The best practice is to include the options for legal action within the NDA itself so that the consequences are clearly laid out for the employee.
You may also opt to use an injunction after confidential information has been disclosed if its effect is far-reaching. For example, this could be when an employee has disclosed information regarding a new product to a competitor. You may then be able to go to court to get an injunction to stop the competitor from bringing that product to market.
Additional Clauses to Include and Address in a Confidentiality Agreement
Type of NDA and Who are the Parties Involved
Include whether it is a unilateral, bilateral, or multilateral contract and explicitly list the parties to the NDA.
Type of Information
Explain the types of information that the NDA covers. For example trade secrets, client details, client business secrets, details of any patent applications, customer lists, and financial information relating to the company or any client.
Time Limit Per Information Type
This should include a list matching the type of information to an appropriate time limit that the information should be kept from being disclosed to a third party.
Exclusions from Confidentiality
This should contain all exclusions to the confidentiality agreement. For example:
- where the information has come to the employee’s attention from a third-party source
- where the employee had knowledge of the information prior to signing the confidentiality agreement
- when the information is widely available to the public
- where the information relates to a crime
- when the information is used for the purposes of whistleblowing
- if the information is subject to a subpoena or court order that requires disclosure
Consequences for Breach
This should outline the consequences that the employee may face where they breach the NDA. Consequences can include:
- Disciplinary action
- Dismissal or suspension without pay
- Legal action – under this section, you may opt to list all the possible forms of legal action that the company can take.
Effective Period of NDA
The clause should outline how long the NDA is effective upon the employee. The general rule of thumb is to add a few years to the date that the employee stops working for the company so that no secrets are immediately disclosed. This also allows the company to rest easy knowing that no confidential information can be sold to competitors without penalty.
Treatment of Confidential Information
Describe how confidential information should be treated within and outside of the workplace. For example, details of encryption methods required when transferring such information should be outlined here. Further information on disclosing such information to third party contractors may also be outlined here.
Additionally, the information should only be used for purposes that the company has outlined beforehand. These may also be listed here.
You may also produce a list of staff that the information can be reproduced in front of – but instead of listing names, their positions may be sufficient.
Application of the Agreement to Third Parties
When the information is disclosed to third parties, the employee should make the third party aware of the need for confidentiality and that they are obliged to do the same. The third party’s obligations regarding disclosure, use and security should be laid out here.
The employee should be reminded and obligated to bring them up to any third party to whom the information is disclosed.
This clause should be used to highlight that you have the option to seek an injunction before the employee commits the breaching act. This allows you to receive a quick and effective remedy to stop the harmful act, instead of merely receiving a monetary remedy after an employee has breached the agreement.
As NDAs are widely used and adapted in many countries with many different rules and regulations, it is wise to choose an explicit jurisdiction in which the NDA is based – usually the same country as where your company is located. This allows for the rules around its creation and application to be explicit and clear.
We’ve done our best to deal with most NDA requirements for employers. Is there anything you think is missing in our guide? Reach out to us at @HarmonizeHQ and let us know.