Employment confidentiality agreement laws permit an employer and an employee to form contracts regarding private, confidential, or sensitive material that will be part of the work arrangement. It is usually the employer who requires the employee to sign a confidentiality agreement in order to prevent the employee from disclosing any company confidential information.

This includes information about trade secrets, proprietary information, strategic plans or information regarding company stock that they may acquire during their employment.

The non-disclosure agreement may include a clause in which the employee agrees not to seek employment with a competitor of the employer company for a specific period after they leave the employment of the company. A well-written confidentiality agreement should include a provision that states the duration of the agreement, or how long it is to remain in effect.

Confidentiality agreements can often form part of the employment contract that a prospective employee signs when they are hired. In this case, the employment offered to the prospective hire is the consideration for their agreement to the non-disclosure contract.

In other instances, the employer may present the employee with a confidentiality agreement as the need arises for later projects. If this is the case, then the employer should offer something of value in exchange for the employee’s agreement to the non-disclosure contract. It could be a bonus, promotion or raise. This remuneration would serve as the employer’s consideration given in exchange for the employee’s agreement not to disclose specified information.

In some cases, the employer asks an employee to sign a confidentiality agreement when they are laid off or fired. The agreement may come with a financial incentive paid to the employee to induce them to sign it. This can happen when an employer is terminating the employment of someone who might have cause to sue for discrimination or the like in order to avoid a lawsuit against the employer.

Confidentiality agreements might even be presented to a person applying for a management or senior level position in a company to cover the interview, because confidential information may be discussed as part of the interview process.

Still other situations in which a company may feel the need to seek non-disclosure agreements include the following:

  • Consultants and Contractors: Agreements with consultants and contractors may need to include non-disclosure provisions or even separate agreements. If confidentiality is an especially significant concern, the employer may want contractors and consultants to sign confidentiality agreements even during the negotiation phase of assignments or projects. An employer may want to have confidentiality agreements covering the work products that contractors and consultants may produce;
  • Vendors: A company may want to enter into confidentiality agreements with its vendors that cover proprietary information about products, parts and any other related information;
  • Lawyers and Other Professionals Involved in Stock Offerings: Situations involving stock offerings, mergers and acquisitions, due diligence research and other dealings in which confidential information is shared could warrant the use of confidentiality agreements in these transactions.

How Are Confidentiality Agreements Enforced?

Enforcing a confidentiality agreement is essentially the same as enforcing any other contract. Both parties are legally bound to the terms of the agreement once they sign it. If one or the other breaches the agreement, the non-breaching party can sue for breach of contract.

If the non-breaching party prevails in their lawsuit, the breaching party would have to pay an award of damages. Damages would be a payment of money, if the breach causes a financial loss. Other so-called equitable remedies might be rescission of the contract or an order to the party in breach to perform the contract as promised.

In addition, the agreement may include a clause indicating how it is to be enforced. For instance, the confidentiality agreement may include a no-litigation clause, meaning that the parties have to resort to mediation, arbitration or some other alternative dispute resolution measures instead of a lawsuit in a court of law.

In addition, a non-disclosure agreement may include a “liquidated damages” clause. This is a clause that states a reasonable estimate of the cost of a violation and provides that a violation would entail payment of damages in the amount stated in the clause. A company might want to include a liquidated damages clause, because proving the amount of damage caused by a violation in exact monetary terms could be challenging.

Another form of relief that could be specified in the agreement would be injunctive relief. This would be a court order, or injunction, that would command the violator not to make further disclosures of confidential information. If a court issues such an order and it is violated, the person who violates it could be held in contempt of court with all of the attendant penalties.

Confidentiality agreement laws differ from state to state. For instance, California employment confidentiality agreement laws have highly specific requirements for contracts covering trade secrets. In New York state, it is recommended that if a company learns of a violation of the agreement by the employee or another person who is bound by the agreement, the company should send a demand letter to the person in violation before rushing off to court to file a complaint.

The demand letter should remind the violator of the existence of the non-disclosure agreement and of its terms and state the manner in which the agreement has been violated. It should demand the violator’s compliance with the agreement and alert them to the fact that the company intends to take all available legal measures to enforce the agreement.

The letter might also provide the violator with a specific means of indicating their understanding of the non-disclosure agreement and the need for them to comply with its terms, perhaps by signing a copy of the letter and returning it to the company in a self-addressed, stamped envelope.

What If I am Asked to Not Report a Violation?

Confidentiality agreements do have their limits, however. An employer can never ask an employee to keep company violations of law confidential. In fact, the employee may face legal consequences if they fail to report a company’s violations of law or illegal activity to the appropriate authorities. Thus, a confidentiality agreement that asks an employee not to report violations of the law is invalid.

There are both state and federal whistleblower laws which dictate that an employer cannot fire an employee who registers a valid complaint or violation with legal authorities. That is, an employer cannot fire an employee out of retaliation for uncovering or reporting illegal activity. These laws, however, also prohibit employees from filing false or frivolous claims against employers.

Do I Need a Lawyer for Help with an Employment Confidentiality Agreement?

The internet is littered with templates for confidentiality agreements. If confidentiality or non-disclosure agreements are important to your business, a better approach would be to hire an experienced employment lawyer for help in negotiating and drafting a confidentiality agreement. Your attorney can provide you with legal advice on the agreement, and can also review your operations to see where non-disclosure agreements might be necessary. Your attorney can represent you in court if you face a legal dispute.

If you have been asked to sign a non-disclosure or confidentiality agreement, an experienced employment lawyer can review the agreement and advise you about its effect and whether you should propose changes. It is a good idea to have an experienced lawyer review the agreement and protect your interests.