Securing Your Business Secrets: The Importance of Non-Disclosure Agreements and Confidentiality Clauses in Employment Contracts

All businesses have systems, processes, know-how or other proprietary information that help them stand out and that they want to keep confidential. To ensure that this proprietary information remains a secret, employers should make their employees agree to confidentiality. This can be done in two ways: inserting a confidentiality clause into the employment contract or getting the employee to sign a non-disclosure agreement. Confidentiality clauses are clauses inserted into employment contracts that obligate the employee to not disclose certain pieces of information. Non-disclosure agreements are agreements where the employee agrees to not disclose certain pieces of information.

Both these methods seek to ensure that your confidential information remains confidential.

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

If you are hiring a new employee, you should insert a confidentiality clause in the employee’s employment contract.

Only if the employee is already working for the business, and there was no confidentiality clause in their employment contract, should you ask the employee to sign a stand-alone non-disclosure agreement (“NDA”).

Employers prefer the former because the clause guarantees that the employee will maintain confidentiality from the employee’s first day at work – as employment agreements are signed when they first start working. By including a confidentiality clause in the employee’s employment agreement, employers are signaling 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. By having this right to refuse to hire an employee, employers can guarantee that employees are bound to maintain confidentiality.

Employers often dislike using an NDA because it cannot guarantee confidentiality to the same degree. This is because if an employee refuses to sign the NDA, the employer cannot simply refuse to hire the employee. If the employer chooses the fire the employee for refusing to sign the NDA, the employer will likely fall foul of unfair dismissal laws, and risk having to pay large amounts in compensation to the employee.

Which employees should sign a confidentiality agreement?

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

What is a confidentiality clause?

A ‘confidentiality clause’ is a clause inserted into employment contracts. It imposes the obligation on employees to not disclose proprietary and/or other specified pieces of information.

It legally obliges the employee to not disclose information of a specified kind to which they will likely be exposed in the course of their employment. This obligation will often have a continued effect even if the employment agreement comes to an end.

This is an example of the typical confidentiality clause 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 include 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.”

We have created employment agreement templates with comprehensive confidentiality clauses included for your use. 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. 

Non-Disclosure Agreement ("NDA"):

1. What is an NDA?

In the employment context, a non-disclosure agreement (“NDA”) or a confidentiality agreement is a contract between an employer and employee where the employee agrees to not disclose or use confidential information belonging to the company.

There are two types of NDAs: ‘Mutual’ and ‘Unilateral’ NDAs. They differ as 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.

In an employment relationship, the employer is the only one who shares confidential information. Seeing as the employer is the only party disclosing confidential information, employers generally request employees to sign unilateral NDAs. Only the employee, the party who receives information, must 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) cannot be protected through an NDA with the employer. The disclosure, processing, and general handling of these personal details are regulated by privacy regulations instead. 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

Proper identification of 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 always two parties: the employer and the employee.

It is, however, important to evaluate whether the employee may be required to share confidential information with others in fulfilling their responsibilities. ‘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 fulfillment of his/her responsibilities. This way the employer can judge whether it is necessary to share the information and can determine who the information should be shared with.

2. Term Of The Agreement

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

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 is very important here. 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 – is 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 therefore assess their industry and determine, based on their circumstances, how long confidentiality should continue after the employment relationship has halted. 

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.

3. Defining Confidential Information

Including a clear and comprehensive definition of ‘confidential information in an NDA is in the best 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.

Not all the information you give to your employee is confidential. But which information is confidential? Are only written pieces of information confidential, or does information communicated through speech 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 a few of the difficulties that arise in defining ‘confidential information.

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

An exemplar definition of ‘Confidential Information’:

"Information means any 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 Disclosure pursuant to this Agreement, including without limitation any information or analysis derived from that Information;"

4. Confidentiality Obligations And Confidentiality Procedures 

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

In addition to obliging the employee to not disclose confidential information to others, the best NDAs impose obligations on employees that seek to reduce the risk of employees making an inadvertent disclosure.

Common obligations to this effect include: 

• 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

 5. Exempted Information

Confidentiality agreements often list circumstances or situations in which an employee would be exempt from their confidentiality obligations.

Common situations where an employee is exempt from maintaining confidentiality include where the information is publicly available or if 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.

6. IP Retention

NDAs often include clauses stating that the intellectual property rights in information or ideas 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.

7. Remedies Term

The remedies term represents an agreement between the employer and employee as to the remedies the employer is entitled to in face 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, on the other hand, would be an order from a court requiring the employee to 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 regarding what remedies you are entitled to, 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"

8. Governing Law and Jurisdiction

The governing law and jurisdiction clause becomes extremely important if things 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:

• First, your dispute is resolved according to the laws of the place you are in. 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 traveling far away just to enforce an NDA.

You can make sure of both 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 following your law, in your town.

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

"This document is governed by and is to be construed by 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 based on an inconvenient forum or those courts not having jurisdiction."

9. Return of Information

NDAs often contain 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 offers extra protection for employers. Should the employer have any doubts regarding the employee’s management of confidential information, they can demand all the information be returned.

Template Non-Disclosure Agreement (NDA): 

We have created 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.