Non-Disclosure Agreement and Confidentiality Clause in Employment Contract (Templates Included)

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Date Created: 30 Oct 2020
Last Update: 23 Nov 2020

All businesses have systems, processes, know-how or other proprietary information that help them stand out in the market and that they would like to keep to themselves. When business owners inevitably hire employees, they feel hesitant to share this confidential information with them, unless they can ensure that the employee will not disclose the information.

 

To ensure your proprietary information remains a secret, you should get your employees to agree to confidentiality. This can be done in two ways:

 

1) By including a confidentiality clause in the employee’s employment contract

2) By getting an employee to sign a stand-alone non-disclosure agreement

 

Both these methods achieve the same thing – they ensure your confidential information remains confidential.

 

Should I use a confidentiality clause or non-disclosure agreement?

 

Which method should you choose? Generally speaking, if you are hiring a new employee, you should insert a confidentiality clause in the employee’s employment contract.

 

Only if an employee is already working for the business, and does not have a confidentiality clause in their employment contract, should you ask the employee to sign a stand-alone non-disclosure agreement (“NDA”).

 

Employers prefer the former method because they can guarantee that the employee will maintain confidentiality from the employee’s first day at work. Employment agreements are signed by employees when they first start working. By including a confidentiality clause in the employee’s employment agreement, employers are signalling to employees that the obligation to maintain confidentiality is non-negotiable. If an employee contests the inclusion of the confidentiality provision, an employer can simply refuse to hire the employee. Employers, by having this right to refuse to hire an employee, can guarantee employees are bound to maintain confidentiality.

 

Employers try to avoid the latter method because they cannot guarantee confidentiality in the same way. This is because, if an employee refuses to sign the NDA, the employer does not have the simple solution of refusing to hire the employee. If the employer chooses the fire the employee for refusing to sign the NDA, the employer is likely to fall foul of unfair dismissal laws, and risks having to pay large amounts in compensation to the employee.

 

Which employees should sign a confidentiality agreement?

 

As a general rule of thumb, anyone who works for you who will or may come into contact with confidential information should be bound by either a confidentiality clause or an NDA.

 

What is a confidentiality clause?

 

A ‘confidentiality clause’ is a clause often inserted into employment contracts that imposes an obligation on employees not to disclose proprietary and other specified pieces of information.

 

In essence, it legally obliges the employee not to disclose information of a specified kind that they can expect to be exposed to in the course of their employment. This obligation often is explicitly stated to continue in effect even if the employment agreement comes to an end.

 

This is an exemplar confidentiality clause found in employment contracts:

(1) “The Employee agrees to keep all of the Employer's business secrets confidential at all times during and after the term of the Employee's employment. The Employer's business secrets includes any information regarding the Employer's customers, supplies, finances, research, development, manufacturing processes, or any other technical or business information.

 

(2) The Employee agrees not to make any unauthorized copies of any of the Employer's business secrets or information without the Employer's consent, nor to remove any of the Employer's business secrets or information from the Employer's facilities.”

 

DocPro offers employment agreement templates with comprehensive confidentiality clauses included. Each variation of employment agreement differs based on the party they favour – the employer or employee - and differs to reflect whether share options are granted to employees or not.

 

You can find and select a suitable employment agreement template here: https://docpro.com/cat35/human-resource-employment/employment-contract-joining-letter-offer-letter

 

Non-Disclosure Agreement ("NDA"):

 

1. What is an NDA?

 

A non-disclosure agreement (“NDA”), also called a confidentiality agreement, in the employment context, is a contract between an employer and employee, wherein an employee agrees not to disclose, process or otherwise use confidential information belonging to the company.

 

To provide some more context, there are two types of NDAs: ‘Mutual’ and ‘Unilateral’ NDAs. They differ with respect to which parties are obliged to maintain confidentiality.

 

A ‘mutual NDA’ imposes a mutual obligation of confidentiality on the parties who provide and receive information. 

 

A ‘unilateral NDA’ imposes a unilateral obligation of confidentiality on the party who receives information. No obligation is imposed on the party who provides information.

 

Generally speaking, in an employment relationship, the employer is the only one who shares confidential information. Seeing as the employer is, ordinarily, the only party disclosing confidential information, employers generally request employees to sign unilateral NDAs. Only the employee, the party who receives information, has an obligation to maintain confidentiality.

 

At first sight, it seems that employees also share confidential information with their employers. They share addresses, bank details, phone numbers etc. Shouldn’t this be worthy of confidentiality as well? Shouldn’t this mean an employer and employee should sign a mutual NDA with both being bound to confidentiality?

 

The simple answer is no. Typically, this information – the employee’s addresses, bank details, phone numbers etc - is not protected through NDA with the employer. Rather, the disclosure, processing and general handling of these personal details are regulated by privacy regulations. These regulations differ based on jurisdiction but include the GDPR in the EU and the Privacy Ordinance in Hong Kong. 

 

Key terms in an employment non-disclosure agreement (NDA)

  1. The Parties Involved

Properly identifying the parties to the non-disclosure agreement and reflecting this in a term in the NDA is the first important step.

 

In an employment context, there are going to be two obvious parties: the employer and employee.

 

It is, however, important to assess whether the employee may be required to share confidential information with others in fulfilling their responsibilities. Such ‘others’ may include other companies, such as parent or subsidiary companies, affiliated companies, external consultants, or partners.

 

If the employee is required to share information with ‘others’, the employer must ensure these other parties are obligated to maintain confidentiality too.

 

A good way to control the share of information in this regard is to require the employee to obtain written approval from the employer before sharing confidential information with any ‘others’ in fulfilment of his/her responsibilities. This way the employer can himself/herself judge whether it is necessary to share the information ultimately ensuring the employer has better control of who the information is shared with.

 

  1. Term Of The Agreement

NDAs should also state when the confidentiality obligations come into effect and how long it should last for.

 

In the case of an employment relationship, the NDA should come into effect on the date that the NDA is signed by the employee.  

 

The ending date demands more attention. It is common for confidentiality obligations to remain effective even after the employment relationship has come to an end. How long after the end, however, depends on the industry – in quickly changing industries, confidential information might become quickly outdated – such as within 3-4 months. In slow-changing industries, information may remain relevant for years on end.

 

Employers should thereby assess their industry and determine, based on their own circumstances, how long confidentiality should subsist after the employment relationship has come to an end.

 

As a general rule, we recommend confidentiality should subsist for no less than 3 months and no more than 24 months after the end of the employment relationship.

 

  1. Defining Confidential Information

Including a clear and comprehensive definition of ‘confidential information’ in an NDA is in the interests of both the employer and employee. The employee wants it to be well-defined, so they don’t inadvertently disclose confidential information and breach the terms of the NDA. The employer wants it to be well-defined as a clear definition will allow the employer to set clearer expectations for employees, increasing the likelihood of compliance.

 

Developing a clear, comprehensive definition is difficult, however. This is because of the sheer volume, and variety of confidential information the employer is likely going to disclose to the employee.

 

It is unlikely that all information you give to your employee is confidential. But, which of remaining pieces of information is confidential?  Are only written pieces of information confidential? Or do oral pieces of information count? What about information that is not communicated by writing or orally but by actions – such as work processes and techniques?

 

These questions highlight just some of the difficulties that arise in defining ‘confidential information’.

 

Because of these difficulties, employers often state that all information is confidential. Yet, such a broad definition of confidential information runs the risk of making the entire NDA unenforceable. In many jurisdictions, the definition of ‘confidential information’ should encompass only such information necessary to protect the reasonable interests of the employer.

 

An exemplar definition of ‘Confidential Information’:

 

"Information means any and all information which is now or at any time after the date of this Agreement in the possession of the Discloser, including, but not limited to discoveries, ideas, concepts, know-how, techniques, designs, specifications, drawings, blueprints, tracings, diagrams, models, samples, products, flow charts, data, computer programs, drives, disks, diskettes, tapes, patents, patent applications, copyrighted materials, marketing plans, customer names and other technical, financial or commercial information and intellectual properties, whether in writing, oral or other tangible or intangible forms and is disclosed to the Disclosee pursuant to this Agreement, including without limitation any information or analysis derived from that Information;"

 

  1. Confidentiality Obligations And Confidentiality Procedures 

An NDA should outline the basic confidentiality obligation. This is the employee’s obligation not to disclose confidential information of the company to any person.

 

In addition, to obliging the employee not to disclose confidential information to others, the most comprehensive and effective NDAs impose obligations on employees which reduce the risk of employees making an inadvertent disclosure.

 

Common obligations to this effect include for the employee:

  • Not to copy or summarise in writing any of the confidential information

  • Not to take and store the information at home unnecessarily, or store it virtually in a portable computer, hard-drive or dropbox

  • To keep documents with confidential information, separate from other work or personal documents

  • Keep a record of all confidential information received from the employer and a list of people to whom the employee has given this confidential information

  • Generally, to exercise care in looking after confidential information

  1. Exempted Information

Confidentiality agreements often list situations where an employee is exempt from their confidentiality obligations.

 

Common situations where an employee is exempt from maintaining confidentiality include where the information is publicly available or where an employee already knew the information before disclosure from the employer.

 

In such situations, it is too onerous or pointless to expect an employee to maintain the confidentiality of the information.

 

  1. IP Retention

NDAs often include clauses stating that the intellectual property rights in information or ideas that are disclosed by the employer are retained by the employer.

 

This is important especially for tech-related businesses whose success, especially at the start-up stage, heavily depends upon having full control of their IP.

 

  1. Remedies Term

The remedies term represents an agreement between the employer and employee as to the remedies the employer is entitled to in the event of a dispute.

 

This term often states that damages are difficult to assess and/or inadequate to compensate the employer and preserves the right of employers to pursue more potent ‘equitable remedies’ such as injunctions and specific performance.

 

An injunction, in this context, would be an order by the court requiring the party in breach of a contract not to do something (e.g. an order not to disclose confidential information). Specific performance, in this context, would be an order from a court requiring that the employee abide by the terms of the NDA (e.g. if an employee was threatening to disclose confidential information, the court could order the employee to abide by the terms of the NDA and not disclose the information). 

 

Including an explicit remedies clause in an NDA will help you avoid a lengthy legal dispute as to what remedies you are entitled to, ultimately saving you money and time.

 

A typical ‘remedies term’ is as follows:

 

"The parties acknowledge and agree that:

(a) Damages would not be an adequate remedy for any breach of the provisions of this Agreement;

(b) the Discloser shall be entitled to the remedies of injunction, specific performance and other equitable relief for any threatened or actual breach of the provisions of this Agreement; and

(c) no proof of special damages shall be necessary for the enforcement of this Agreement"

 

  1. Governing Law and Jurisdiction

The governing law and jurisdiction clause become extremely important if things, unfortunately, go haywire.

 

Let’s say your employee is threatening to disclose your confidential information and a legal dispute arises between you two.

 

You (the employer), want to ensure two things:

  • Firstly, that your dispute is resolved according to the laws of the place you are in – your laws. These will also likely be the laws you have relied upon to guide your drafting of the NDA.

  • Secondly, you will want to ensure your dispute is being heard in your town (your jurisdiction) – you don’t want to be travelling far away just to enforce an NDA.

 

You can make sure of both of these things by including a choice of law and jurisdiction clause in your NDA. This will specify that should any dispute arise between you and your employee, it will be heard in accordance with your law, in your town.

 

An example ‘governing law and jurisdiction’ clause is as follows:

 

"This document is governed by and are to be construed in accordance with the laws of England & Wales applicable therein.

Each party irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of England & Wales (and any court of appeal) and waives any right to object to an action being brought in those courts, including on the basis of an inconvenient forum or those courts not having jurisdiction."

 

  1. Return of Information

NDAs often have a term to the effect that all documents containing confidential information and any derivatives should be returned to the employer upon the employer’s written request.

 

This clause often offers extra protection for employers. Should the employer have any doubts with regards to the employee’s management of confidential information, they can demand all the information be returned.

 

Template Non-Disclosure Agreement (NDA): 

 

DocPro offers a unilateral non-disclosure agreement template, reviewed by experienced lawyers. It includes all the terms explained in this article and more. Use our NDA and make sure your confidential information is protected.

 

You can download it NOW for FREE here:  https://docpro.com/doc1666/nda-confidentiality-agreement-for-employment-one-way-unilateral-employer

 

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.

 

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