Employee non-disclosure agreements can be a gray area of the law. The idea sounds appealing to employers: they can protect your company’s private information. However, there are limits. In order to create an enforceable NDA, employers must pay close attention to state law.
What is an Employee Non-Disclosure Agreement?
An NDA is a contractual agreement (also known as a “restrictive covenant”) to protect sensitive information. An employer can ask that a new employee sign an NDA to protect legitimate, confidential business interests such as trade secrets and business practices. However, “Creating a monopoly or discouraging employees from leaving the company to pursue other opportunities are not protectable interests.”
Unlike sales and service contracts, NDAs specifically address privacy and confidentiality concerns rather than transactions.
Typically, employers ask employees and independent contractors to sign NDAs before they begin work. Non-disclosure agreements can be used in conjunction with non-compete and non-solicit agreements, or on their own.
Employer/employee NDAs are unilateral agreements, since the employee is not sharing their own confidential information. The offer of employment is the consideration for the agreement.
What Does an NDA Cover?
Employee non-disclosure agreements can protect confidential information. If the employee shares the business’s secrets with a competitor—even accidentally—it can trigger legal ramifications.
They can’t cover information which is already in the public domain, has been ordered to be revealed by a court or a government regulation, or can be discovered after a product is released to the public. NDAs also cannot cover information which the employee already had access to, before signing the agreement. Examples of protected information include:
- Trade secrets
- Intellectual property
- Client/customer lists
- Goodwill
- Knowledge of company business practices
- Profit margins and costs
- Other financial information
- Specialized and unique training that involved substantial expense by the company on behalf of the employee
- Other confidential information
In other words, if an employee would only have access to the sensitive information as part of their employment, an NDA may be appropriate.
Why Do Companies Require an Employee NDA?
In competitive business markets, employers need to protect their sensitive information. Asking an employee to sign an NDA protects the company if the information is accidentally or purposely breached.
Should an employee reveal protected information, the business can pursue legal action. They may request an injunction to stop the employee from revealing anything further. If they’ve already suffered financial damage as a result, they may also be able to recover monetary remedies.
How Enforceable is a Non-Disclosure Agreement?
The enforceability of an NDA depends on its specific contents. There are six elements necessary in any NDA:
- Names of the parties: The agreement must state between which parties the agreement is made. This is typically the name of the business and the employee.
- Definition of confidential information: The agreement should describe which information is considered confidential. This should be tailored to the specific employee, their duties and which sensitive information they’re likely to learn. For instance, restaurant owners may ask their staff to sign an NDA to protect secret recipes. The confidential information must be part of a legitimate business interest.
- Any exceptions or exclusions from confidentiality: If there are any exclusions or exceptions to confidentiality, they must be listed here. In the restaurant example, employees may be allowed to share certain recipes with the public (for example, something posted on the restaurant website), while others are kept private.
- The appropriate uses for the confidential information: Be sure to outline how the confidential information can be used, in the course of employment.
- Time period involved: The time period depends on what kind of sensitive information needs to be protected. Even if the NDA needs to continue indefinitely, there should be provisions for when it ends—such as when the information is revealed to the public.
- Miscellaneous provisions: These can include the applicable state laws, provisions for who pays attorneys’ fees in the event of conflict, potential remedies and more.
If any of these elements are missing, the NDA may not be enforceable.
Employee Non-Disclosure Agreement Best Practices
When drafting an NDA for your company, follow these tips:
- Standardize your NDAs: Whether you use the same NDA template for the entire company or a different one for each department, standardize the language each time. This prevents inconsistencies.
- Know your state law: You need to know what your state considers “legitimate business interests.” Otherwise, all or part of your NDA could be unenforceable.
- Make sure all necessary elements are present: Include each of the six elements above to create an enforceable NDA.
- Try SixFifty’s solutions: Instead of drafting enforceable NDAs every time an employee joins your company, let SixFifty do the hard work for you. Simply answer a few questions about your business, and our proprietary legal software will generate an enforceable agreement tailored to your state law.
If you’re ready to get started or have further questions, schedule a demo with SixFifty today
