It’s common for employers, both in Washington State and elsewhere, to have their employees sign non-disclosure agreements (also known as NDAs or confidentiality agreements).
Related: 9 Contracts Your Business Should (But May Not) Have
The purpose of these agreements, which may take the form of either a clause in an employment contract or a stand-alone agreement, is to protect an employer’s confidential information and trade secrets.
As with most contracts, when it comes to creating an employee non-disclosure agreement, there’s the right way and then there’s the risky way.
This post will put you on the path toward doing this the right way.
Identify Only What Needs To Be Confidential
The starting point for creating an employee non-disclosure agreement is to identify what information is protected.
If you’re an employer, you’ll be tempted to define “confidential information” as broadly as you can. The way some employers do this, particularly startups, is to find a template and then copy and paste all the protected information listed. The result is often a laundry list of abstractions that can cover an entire page.
The problem with doing this, as you might imagine, is that courts may view overly broad definitions as unreasonable, jeopardizing enforcement of the agreement.
To avoid this, you need to make a realistic assessment of what you want to protect and then, with the help of your attorney, create a customized list of information and trade secrets that are important for your company to protect from disclosure. This list can still be broad, particularly if you legitimately have a lot of proprietary information, but you should be able to justify its breadth because you might have to down the road.
Clarify Circumstances For Disclosure
The point of a non-disclosure agreement is to avoid undesired disclosure of confidential information, not all disclosure.
For instance, you might not want a non-disclosure agreement to prevent an employee from sharing confidential information with a third-party that’s working closely with your company and needs that information to properly serve you.
That’s why it’s important to spell out the circumstances under which disclosure is or is not appropriate, including how, when, and to whom disclosure may be made.
You’ll also need to create exemptions where disclosure may be legally required, examples of which include disclosure to the SEC or other government agencies.
Specify Ongoing Nature of Obligation
Most employers will want a non-disclosure agreement to apply not only during the term of employment, but also once the employee moves on.
To ensure that the confidentiality obligation endures beyond the end of employment, you should explicitly state that the employee’s non-disclosure obligation survives the end of employment.
On rare occasion, non-disclosure agreements will limit survival to a period of years after employment has ended, particularly when there is a concern the agreement won’t be enforced if it’s interminable; however this is the exception to the general rule of having no time limitation.
Provide Adequate Consideration
For a non-disclosure agreement to be enforceable, it has to be supported by adequate consideration.
Consideration is a contractual concept. While difficult to define precisely, it’s essentially the benefit of the bargain. A common example of consideration is the money to be paid under a contract.
Fortunately, an offer of employment is itself adequate consideration to support an employee non-disclosure agreement. So consideration shouldn’t be an issue so long as you’re having an employee enter into a non-disclosure agreement at the start of their employment.
If, however, the non-disclosure agreement is being entered after the employment relationship has begun, depending on the state, you may need additional consideration to support the agreement.
Note: Washington requires additional consideration to support a non-disclosure agreement entered into after employment has begun.
Examples of additional consideration include things like a pay raise, promotion, or bonus.
Comply With Federal Laws
There are two federal laws in particular you should ensure compliance with: the Defend Trade Secrets Act (“DTSA”) and National Labor Relations Act (“NLRA”).
To comply with the DTSA, you must provide a notice in the non-disclosure agreement of an employee’s immunity from liability for certain types of disclosure. Ask your attorney for more details surrounding this notice.
To comply with the NLRA, you should avoid preventing employees from discussing with other employees or certain third parties the terms of their employment. Ask your attorney for more details surrounding the requirements of the NLRA.
Takeaways
You may not want to go through the time and money to create a custom non-disclosure agreement But it’s typically a one-time expense, as you can re-use the same agreement for subsequent hires. And if you have valuable confidential information to protect, you can’t afford to have it disclosed to a competitor.
