Employment Confidentiality Agreement Laws

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 What Are Employment Confidentiality Agreement Laws?

Employment confidentiality agreement laws allow employers and employees to enter into contracts governing private, confidential, or sensitive material that will be part of the work arrangement.

Typically, the employer is the party who requires the employee to sign an employee confidentiality agreement to prevent the employee from disclosing any company confidential information. These agreements may include information regarding:

  • Trade secrets;
  • Proprietary information;
  • Strategic plans; or
  • Information about company stock that the employee may acquire during their employment.

A non-disclosure agreement may include a clause requiring an employee not to seek employment with a competitor of their employer for a certain period after they leave the company. Well-written confidentiality agreements between employers and employees should include provisions that state the duration of the agreement or how long the agreement will remain in effect.

When Might Confidentiality Agreements Be Used?

Confidentiality agreements may form part of the employment contract prospective employees sign when hired. In these situations, the employment offered to the prospective employee is a consideration for their agreement to the non-disclosure contract.

In other situations, an employer may request an employee with a confidentiality agreement if the need arises for a later project. In these cases, an employer should offer something of value in exchange for the employee agreeing to the non-disclosure contract, such as a raise, bonus, or promotion.

This would serve the employer’s consideration in exchange for the employee agreeing not to disclose the specified information. In certain situations, an employer asks employees to sign a confidentiality agreement if they are laid off or fired.

This type of agreement may be accompanied by a financial incentive paid to the employee to induce them to sign. This may occur when an employer is terminating an employee who may have cause to sue for discrimination or a similar issue to avoid a lawsuit against the employer.

A confidentiality agreement may also be presented to an individual applying for a management or senior-level position with a company that covers the interview if confidential information may be discussed during the employment interview.

Other situations in which a business may feel the need to seek a non-disclosure agreement may include:

  • Consultants and contractors: Agreements with consultants and contractors may need to include non-disclosure provisions or separate agreements. If confidentiality is a significant concern, an employer may want contractors and consultants to sign confidentiality agreements even during the negotiation phase of projects or assignments;
    • An employer may also want to have confidentiality agreements covering the work products that contractors and consultants may produce;
  • Vendors: A company may want confidentiality agreements with vendors that cover proprietary information regarding:
    • products;
    • parts; and
    • any other related information, and
  • 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 may warrant the use of confidentiality agreements in these transactions.

How Are Confidentiality Agreements Enforced?

Enforcing a confidentiality agreement is similar to the enforcement of any other contract. Both parties to a contract are legally bound to the agreement terms they signed.

If one of the parties breaches the agreement, the non-breaching party can sue for breach of contract. If the non-breaching party wins its lawsuit, the breaching party must pay damages.

Damages are a payment of money paid to the non-breaching party when the breach of a confidentiality agreement causes a financial loss. Equitable remedies may also be available, such as rescission of the contract or an order to the breaching party to perform the contract as promised.

A confidentiality agreement may also contain a clause stating how it will be enforced. For example, the agreement may include a no-litigation clause requiring the parties to use mediation, arbitration, or other alternative dispute resolution measures instead of a lawsuit in a court of law.

Additionally, non-disclosure agreements may include a liquidated damages clause. This type of clause provides a reasonable estimate of the cost of a violation and provides that a violation would require the payment of damages in the amount stated in the clause.

A business may want to include a liquidated damages clause. This is because proving the damages caused by a violation in an exact monetary amount may be challenging.

Injunctive relief is another type of relief that may be provided for in the agreement. This type of relief comes in the form of a court order or injunction that requires the violator not to make any further disclosures of confidential information.

If a court issues this type of order and the order is violated, the individual who violates it may be held in contempt of court.

Do Confidentiality Agreement Laws Vary by State?

Yes, confidentiality agreement laws vary by state. For example, California employment confidentiality agreement laws have highly specific requirements for contracts that govern trade secrets.

In the State of New York, it is recommended that if a business becomes aware of a violation of an agreement by an employee or another individual bound by the agreement, it should send a demand letter to the individual in violation before filing a complaint in court.

A demand letter should advise the violator of the existence of the non-disclosure agreement and its terms and state how the agreement was violated. The letter should also demand the violator’s compliance with the agreement and advise them that the company intends to take all available legal measures to enforce the confidentiality agreement.

The letter may also provide a violator with a specific method of indicating their understanding of the non-disclosure agreement and their need to comply with its terms. This may be done by requesting they sign a copy of the letter and return it to the company in a self-addressed, stamped envelope.

What If I Am Asked to Not Report a Violation?

A confidentiality agreement does have its limits. Employers are not permitted to request that employees keep company law violations confidential.

Employees may face legal consequences if they fail to report illegal activity to the appropriate authorities. A confidentiality agreement that requests an employee not to report law violations will be considered invalid.

State and federal whistleblower laws provide that an employer is not permitted to fire employees who register valid complaints or violations with legal authorities. In other words, employers cannot terminate employees in retaliation for uncovering or reporting illegal activity.

It is important to note that these laws also prohibit employees from filing false or frivolous claims against their employer.

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

If you are considering signing an employment confidentiality agreement, it is important to first consult with an employment lawyer who can review the agreement before you sign it and ensure it is legal and valid. Your lawyer can advise you regarding the agreement and whether you should proceed.

Your lawyer will be able to advise you regarding the effect of the confidentiality agreement or whether you should request changes. Your attorney can assist you with this process and advise you of the best way to request any changes needed.

If you are a business considering using confidentiality or non-disclosure agreements, your lawyer can help you negotiate and draft a confidentiality agreement. If a legal dispute involving the confidentiality agreement arises, your lawyer can represent you.

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