A Brief Introduction About the Employee Confidentiality Agreement
What Is a Confidentiality Agreement?
This is an agreement between an employer and an employee where the employee is prohibited from disclosing any confidential information which the employee has access to with third parties.
The Purpose of an employee confidentiality Agreement is to prevent leakage of confidential information by employees with third parties, which has an adverse financial impact on the company. There are two types of employee confidentiality agreements, which include a unilateral NDA (where one party accepts non-disclosure) and mutual NDA (where both parties agree not to share each other’s information).
What Is an Employee Confidentiality Agreement?
This is an agreement between an employer and an employee. The agreement is made to ensure that information shared for a specific purpose during and after a certain period after leaving employment. The agreement states that employees cannot profit from confidential information that they have access to while they are employed. The employee is bound by this agreement not to work for a competitor company. The employer protects its business interest through this agreement.
Who Takes the Employee Confidentiality Agreement? – People Involved
A basic confidentiality agreement is a legal contract between 2 parties according to which information shared for a certain purpose should not be disclosed to a third party. In an employment contract, the employer and the employee are the parties to the agreement. The agreement ensures that confidential data is not shared by the employee for a profit.
Purpose of the Employee Confidentiality Agreement – Why Do You Need It?
Employees have access to confidential information and trade secrets during their term of employment. They might receive this information while interacting with vendors, customers, or as an employee of the company. The information includes proprietary knowledge, product information, trade secrets, or other information which might benefit a competitor or a third party.
Without an agreement, the employee could share this information with a third party for financial gain. The employer would not only suffer a massive loss in profits, but they would not be able to take any legal action against the employer.
When there is a business confidentiality agreement, the individual or entity responsible for handling specific information such as a commerce secret and agrees not to disclose this information to others without proper authorization, in case of a mutual confidentiality agreement, there are two companies involved who are supplying protected information. Both parties agree not to share the information they receive from each other.
When these agreements are drafted in writing, the employee has a contractual obligation not to disclose the confidential information which they had access to as a result of employment. If the employee breaches the contract, the employer can take legal action and the employee will be bound to pay for any damages, including lost profits.
Contents of the Employee Confidentiality Agreement – Inclusions
This agreement can be prepared by referring to a confidentiality agreement template. The template can be modified to the needs of both parties.
The following information should be included in such agreements:
- Names of the parties to the agreement: The employer and employee, their address and contact information
- Type of information: The specific nature of the information which the agreement is protecting
- Reason for access: The reason for which the employee has received this information, including designation
- Exclusions to the agreement: Information which the employee receives before the agreement, through a third party, public knowledge, information that needs to be provided to the government or information acquired independently
- Receiving party’s obligations: This would include the confidential information not correctly used, disclosure provisions, and non-disclosure agreement. A provision stating that the recipient is barred from working in the same industry also might be included
- Term or tenure: The start and end date of the agreement need to be mentioned. It may be a specific term or occurrence of an event
- Injunctive clause: The disclosing party can stop the recipient from breaching the agreement through an order from the court or injunction
- Jurisdiction: The applicable laws of the state which govern the agreement
- Severability: If a part of the agreement is invalid, the other parts are enforceable by law
- Integration: This agreement supersedes any previous agreement
- Ownership of confidential material
- The right of the recipient to ideas or getting into deals
- Dispute resolution: How should disputes be resolved
- Remedies for violation of the agreement
How to Draft the Employee Confidentiality Agreement?
While drafting an employee confidentiality Agreement, a template and be referred to. Any amendments or modifications can be made to the template.
Here are the points to be considered:
- Eligibility to participate: The parties to the agreement, the employer and employee, must be over the age of 18. They should be mentally sound and should not be under the influence of alcohol or other drugs
- Consideration for the contract: In the case of these agreements, there is a recipient and provider of confidential information. The employer would be the provider, and the employee the recipient
- Terms of the contract: The terms of the contract should be fair and entered in good faith. There should be no deception or fraud
- Dispute resolution clause: The process of settling disputes including use of arbitration or litigation, payment of attorney fees and the legal jurisdiction
- Termination of the clause: If the contract is prematurely terminated before the expiry of the contract, then the notice period to be served by either party
- Adherence to law: The agreement should have been drafted by the applicable laws of the state
- Signatures and dates: The last page of the contract should be reserved for the signatures of both parties with dates. This signifies acceptance of the terms and conditions by them
The key terms of the agreement are:
- Rights and responsibilities of both parties
- Nature of the confidential information
- Governing law
- Consideration paid
- Termination of clause
As far as the Employee Confidentiality agreement is concerned, the employee should negotiate the information which does not come under the confidentiality clause. This is after the employer has shared the draft agreement with the employee and the employee has accepted the same. This would include the exceptions to the agreement. After the employee gives a counteroffer, the parties can come to a mutual understanding, and the agreement can be signed.
Benefits & Drawbacks of the Employee Confidentiality Agreement
The benefits of an Employee Confidentiality Agreement are:
- Protection of interest: The interest of both parties to the contract are protected. The employer is protected against leakage of confidential information to third parties. The employee can only be accused of breach of contract only if certain clauses are violated
- Competitive advantage: The employer can remain competitive since their trade secrets are safe due to this agreement
- Legal recourse: The employer can take legal action against the employee if there is a breach of any clause in the agreement and recover damages including lost profits
- Injunctive action: The employer can use an injunction to prevent an employee from sharing the information through court order or injunction
The drawbacks of an Employee Confidentiality Agreement are:
- Loss of profits: The employer is at risk of losing confidential information due to the employee sharing the data. This will result in loss of revenues for the employer
- No legal remedy: The employer cannot take the employee to court as there was no confidentiality clause
- An unfair gain for the employee: The employee can share the confidential information relating to the company and make a profit
- Difficulty in hiring: The employer would face a problem hiring new employees since they would be at risk of confidential information being shared with third parties by employees
What Happens in Case of Violation?
If you look at a simple confidentiality agreement sample, you will get to know the terms and conditions to be followed by both the employer and the employee.
Here are the remedies for violation of the terms of an agreement:
- Money damages: The employer will receive a certain amount of money as compensation for financial losses caused by the violation by the employee. There are two types of breach, partial breach and total breach. In the case of a partial breach, the employer might be compensated for the cost of hiring a new employee. In the case of a total breach, the employer has to be given compensation which would include the contract amount and loss of profits
- Restitution: The injured party is restored to the position that they were in before the contract was signed. The employer has to be returned any money or property that was given to the employee during the contract
- Rescission: When a contract is set aside due to any party made to enter the contract through fraud or error. This remedy is applicable when the employee is not competent to contract.
- Reformation: When the court feels that the contract is unfair, they will draw up a fresh contract under this remedy
- Specific performance: The employee has to fulfill their contractual obligations and monetary compensation is not acceptable
An Employee Confidentiality Agreement is an official contract that prevents proprietary information from being shared with third parties by the employees.
The agreement ensures that the employee understands the classification of confidential information and abides by it. If there is a violation of the confidentiality clause by the employee, there will be legal action taken by the employer, depending on whether the breach was total or partial. There are clauses that should be included in such agreements. The dispute resolution clause(1) ensures that the process of settlement of a dispute is clearly stated and the sharing of costs for the resolution.
If the parties to the contract feel they want to exit the contract, they can do so through the termination clause. However, they need to provide a certain amount of days as a notice, which is specified in the agreement to terminate the contract. If the employer wants to stop the employee before the violation can take place, an injunctive clause needs to be added. Both parties to the agreement should go through all the terms and conditions.