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What's the Big Deal with Non-Disclosure Agreements for Employees?

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

What Information can an Employee Non-Disclosure Agreement Protect?

The information included in, and protected by, employee non-disclosure 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 non-disclosure 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 Non-Disclosure Agreement Valid?

Generally speaking, employee non-disclosure 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 Non-Disclosure Agreement?

To be effective, employee non-disclosure 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 non-disclosure agreement will be specific to the organisation 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 non-disclosure 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 non-disclosure 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 non-disclosure 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 non-disclosure agreement can help protect company information and resources.
  • Ongoing obligation – The employee non-disclosure 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 non-disclosure 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 country's laws will govern disputes. Generally, this is the country where the business's principal offices are located or its place of incorporation/formation.
  • Waiver – Employee non-disclosure 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 Non-Disclosure Agreements Should Be Specific

When it comes to the information to be protected, which is at the heart of any employee non-disclosure 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 Non-Disclosure Agreements?

While employee non-disclosure agreements are typically used for a company's existing employees (and independent contractor non-disclosure agreements are used by the company's contractors), some organisations also require candidates to sign NDAs 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 non-disclosure agreements before engaging in work for the company or on its behalf.

Deciding When to Implement Employee Non-Disclosure Agreements

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

Asking long-time employees to sign a new non-disclosure 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 non-disclosure agreements. Some employers choose to roll out non-disclosure agreements for existing employees in conjunction with a promotion, bonus or pay raise.

Things Employers Should Know/Do When Implementing Employee NDAs

An employer implementing an employee non-disclosure 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 non-disclosure 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 non-disclosure agreement may later find themselves struggling to defend and enforce the NDA'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 periodically remind employees of their obligations under the non-disclosure agreement. 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 organisations have policies and practices in place to help them avoid having to later enforce their employee non-disclosure agreements. One of those practices is to send a formal letter to each employee who leaves the organisation (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 non-disclosure 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 organisations have multiple current versions of employee non-disclosure agreements with each version tailored to a different subset of the employee population.

A Word of Caution

Organisations that maintain different versions of their employee non-disclosure 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 non-disclosure agreement at all.

Comparing Different Types of Employee Agreements

The terms "confidentiality agreement" and "non-disclosure agreement" are actually often used interchangeably.

Some companies also require their employees to sign non-compete agreements. Whereas an employee non-disclosure 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 avoid losing customers when employees leave the organisation.

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