Safeguard Your Business’s Sensitive Information With an Employee Confidentiality Agreement

You’ve worked hard to build your business. Although you might not want to share your business secrets, you probably need to when you hire employees. To prevent employees from revealing sensitive information that could jeopardize your business, you might have them sign an employee confidentiality agreement.

Businesses use employee confidentiality agreements to protect their innovative ideas, effective processes, unique products, or customer information. With a confidentiality agreement, you can train employees on the ins and outs of your business and still protect your company’s most private information.

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What is an employee confidentiality agreement?

An employee confidentiality agreement, or non-disclosure agreement (NDA), is a contract that prevents the employee from revealing confidential information about a business. Employee confidentiality agreements can’t be broad—they must list specific information that employees are not allowed to disclose.

The purpose of confidentiality agreement is to protect business information you share with employees from being shared with people outside of the contract for a designated period. For a confidentiality agreement to take effect, your employee must sign it.

Non-disclosure agreements cannot be used to prevent employees from speaking up about unethical or illegal activities.

You can also create confidentiality agreements when you work with other parties, like independent contractors, vendors, or investors.

Confidentiality agreements can be mutual or unilateral. In a mutual confidentiality agreement, two parties reveal sensitive information. In a unilateral non-disclosure agreement, only one party discloses confidential information to another party. Employee confidentiality agreements are generally one sided, unless you are also obtaining confidential information from the employee.

Are confidentiality agreements enforceable? Each state sets its own law regarding confidentiality agreement enforcement. Check with your state for more information.

Other types of confidentiality agreements include noncompete and nonsolicitation agreements. However, you can add non-compete or non-solicitation agreements as clauses in your NDA.

Employee Non-disclosure agreement vs. non-compete agreement

Non-disclosure agreements protect specific information about your business from being shared. On the other hand, non-compete agreements prevent employees from working for or becoming competitors for a certain amount of time.

You might restrict employees from taking on similar positions or working for a competing business.

Not all states (e.g., California) enforce non-compete agreements. Before drafting a non-compete agreement, make sure you understand your state’s laws.

Non-disclosure agreement vs. non-solicitation agreement

A non-solicitation agreement prevents terminated employees from taking your business’s customers, employees, or other contacts, either for themselves or for another company. For example, a terminated employee cannot try to take your client list or attempt to take clients with them.

Unlike the employee non-disclosure agreement, which prevents the sharing of confidential information, the non-solicitation agreement says that employees won’t solicit or use protected information.

Check your state’s laws on enforcing non-solicitation agreements before creating one.

Parts of an employee confidentiality agreement

Employee confidentiality agreements vary. However, the contract should contain the same standard information and require the employee’s signature.

Your confidentiality agreement should answer the following general questions.

Who is involved?

In the confidentiality agreement, list the disclosing party (you) and receiving party (employee). The employee must sign and date the confidentiality agreement, too.

What information is confidential?

Confidentiality agreements must be narrow. Don’t try to make every little thing in your business confidential, or the contract will be invalid. List out exactly what is classified information. And, discuss whether confidential information is written or verbal communication.

What information is not confidential?

Your employee confidentiality agreement should also talk about what information is not considered confidential. For example, the confidential agreement cannot cover information that is public knowledge or already known by the employee.

When does the agreement go into effect, and for how long?

Generally, the NDA goes into effect the day the employee signs it. You must also specify how long the employee confidentiality agreement lasts. Non-disclosure agreements typically continue between two-five years.

What happens if the employee breaks the terms of the agreement?

Your agreement should explain what will happen if the employee shares confidential information, such as suing the employee or enforcing penalties.

Employee confidentiality agreement best practices

If you want to establish a confidentiality agreement, consider consulting a lawyer. Because the contract is binding, you should be sure the language you use is correct. And, the employee confidentiality agreement must meet your state laws.

Go over the confidentiality agreement with your employee. Some of the wording might be confusing, so make sure to discuss what information is confidential, the duration of the contract, and the consequences of breaking the agreement.

Store a copy of the confidentiality agreement in your records. Make sure the agreement is in a safe, secure location. You might consider uploading a copy to your HR software or storing it in a locked filing cabinet. Also, give a copy of the form to your employee.

Include information about the confidentiality agreement in your employee handbook. You can reiterate what information the confidentiality agreement protects. That way, employees can easily access and understand the contents of the NDA.

As part of your employee termination checklist, remind the employee who signed an NDA about the confidential information. Provide an additional copy of the confidentiality agreement before the employee leaves your business.

Remind employees about their confidential information responsibilities in your employee handbook. And once you’ve created your employee handbook, store it and distribute it to your employees using Patriot’s online HR software. Pair it with our online payroll software to simplify your employer responsibilities. Get both for free today!  

This article has been updated from its original publication date of August 15, 2012. 

This is not intended as legal advice; for more information, please click here.

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